Lidell & Co, Inc. V.

CIR

Facts:
Liddell & Co. Inc., is a domestic corporation establish in the Philippines on February 1, 1946, with an authorized capital of P100,000 divided into 1000 share at
P100 each. Of this authorized capital, 196 shares valued at P19,600 were subscribed and paid by Frank Liddell while the other four shares were in the name of
Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at one shares each. Its purpose was to engage in the business of importing and retailing
Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

On December 20, 1948, the Liddell Motors, Inc.seperate and distinct from Lidell & Co. Inc., was organized and registered with the Securities and Exchange
Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as follows: Irene Liddell wife of Frank Liddell 19,996
shares and Messrs. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each. At about the end of the year 1948, Messrs. Manzano,
Kurz and Kernot resigned from their respective positions in the Retail Dept. of Liddell & Co. and they were taken in and employed by Liddell Motors, Inc.: Kurz as
Manager-Treasurer, Manzano as General Sales Manager for cars and Kernot as General Sales Manager for trucks. Beginning January, 1949, Liddell & Co.
stopped retailing cars and trucks; it conveyed them instead to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. Since then,
Liddell & Co. paid sales taxes on the basis of its sales to Liddell Motors Inc. considering said sales as its original sales.

Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc. the Collector of Internal Revenue determined that the latter was but an alter ego of
Liddell & Co. Wherefore, he concluded, that for sales tax purposes, those sales made by Liddell Motors, Inc. to the public were considered as the original sales of
Liddell & Co. Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax deficiency, including surcharges, in the amount of
P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, was made the
basis without deducting from the selling price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc.

Issues:

(a)Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical corporations, the latter being merely .the alter ego of the former;

(b) Whether or not, granting the identical nature of the corporations, the assessment of tax liability, including the surcharge thereon by the Court of Tax Appeals, is
correct.

Ruling:

B. Identity of the two corporations: On the question whether or not Liddell Motors, Inc. is the alter ego of Liddell & Co. Inc., we are fully convinced that Liddell & Co.
is wholly owned by Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to Frank Liddell. The 20% paid-up subscription with which
the company began its business was paid by him. The subsequent subscriptions to the capital stock were made by him and paid with his own money.

These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the authority to designate in the future the employee who could receive earnings of
the corporation; to apportion among the stock holders the share in the profits; (2) that all certificates of stock in the names of the employees should be deposited
with Frank Liddell duly indorsed in blank by the employees concerned; (3) that each employee was required to sign an agreement with the corporation to the effect
that, upon his death or upon his retirement or separation for any cause whatsoever from the corporation, the said corporation should, within a period of sixty days
therefor, have the absolute and exclusive option to purchase and acquire the whole of the stock interest of the employees so dying, resigning, retiring or
separating.

These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the original his complete control over the corporation.

Under the law in force at the time of its incorporation the sales tax on original sales of cars was progressive, i.e. 10% of the selling price of the car if it did not
exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. This progressive rate of the sales tax naturally would tempt the taxpayer to
employ a way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability.

Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax; the
price of the car was P4,133,000.23, the tax paid being P413.22, at 10%. And when this car was later sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro
for P5500, no more sales tax was paid.11 In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors,
Inc. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of P5,087.68 would have been the net selling price of Liddell
& Co., Inc. to the general public (had Liddell Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due. In this transaction,
P349.68 in the form of taxes was evaded. All the other transactions (numerous) examined in this light will inevitably reveal that the Government coffers had been
deprived of a sizeable amount of taxes.

We repeat: to allow a taxpayer to deny tax liability on the ground that the sales were made through an other and distinct corporation when it is proved that the latter
is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws.
C. Tax liability computation: On the imposition of the 50% surcharge by reason of fraud, we see that the transactions between Liddell Motors Inc. and Liddell &
Co., Inc. have always been embodied in proper documents, constantly subject to inspection by the tax authorities. Liddell & Co., Inc. have always made a full
report of its income and receipts in its income tax returns. Liddell & Co., Inc. is declared liable only for the amount of P426,811.67 with 25% surcharge for late
payment and 6% interest thereon from the time the judgment becomes final.