G.R. No. L-13203. January 28, 1961
YUTIVO SONS HARDWARE COMPANY, PETITIONER VS. COURT OF TAX APPEALS AND COLLECTOR OF INTERNAL REVENUE, RESPONDENTS.
GUTIERREZ DAVID, J.:
ordering petitioner to pay to respondent Collector of Internal Revenue
the sum of P1,266,176.73 as sales tax deficiency for the third quarter
of 1947 to the fourth quarter of 1960, inclusive, plus 75% surcharge
thereon, equivalent to P949.632.54, or a sum total of P2,215,809.27,
plus costs of the suit.
From the stipulation of facts and
the evidence adduced by both parties, it appears that petitioner Yutivo
Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic
corporation, organized under the laws of the Philippines, with
principal office at 404 Dasmarinas St., Manila. Incorporated in 1916,
it was engaged, prior to the last world war, in the importation and
sale of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of cars and
trucks from General Motors Overseas Corporation (hereafter referred to
as GM for short), an American corporation licensed to do business in
the Philippines. As importer, GM paid sales tax prescribed by sections
184, 185 and 186 of the Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on original sales, Yutivo
paid no further sales tax on its sales to the public.
On
June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM)
was organized to engaged in the business of selling cars, trucks and
spare parts. Its original authorized capital stock was P1,000,000
divided into 10,000 shares with a par value of P100 each.
At
the time of its incorporation 2,500 shares worth P250,000 appear to
have been subscribed in 5 equal proportions by Yu Khe Thai, Yu Khe
Siong, Hu Khe Jin, Yu Eng Poh, and Washington Sycip. The first three
named subscribers are brothers, being sons of Yu Tiong Yee, one of
Yutivo’s founders. The latter two are respectively sons of Yu Tiong Sin
and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the
Philippines in the middle of 1947, the cars and trucks purchased by
Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to
the public in the Visayas and Mindanao.
When GM decided to
withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and (trucks appointed Yutivo as importer for
the Visayas and Mindanao, and Yutivo continued its previous arrangement
of selling exclusively to SM. In the same way that GM used to pay sales
taxed based on its sales to Yutivo, the latter, as importer, paid sales
tax prescribed on the basis of its selling price to SM, and since such
sales tax, as already stated, is collected only once on original sales,
SM paid no sales tax on its sales to the public.
On November
7, 1950, after several months of investigation by revenue officers
started in July, 1948, the Collector of Internal Revenue made an
assessment upon Yutivo and demanded from the latter P1,804,769.05 as
deficiency sales tax plus surcharge covering the period from the third
quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to
December 31, 1949, claiming that the taxable sales were the retail
sales by SM to the public and not the sales at wholesale made by Yutivo
to the latter inasmuch as SM and Yutivo were one and the same
corporation, the former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a reinvestigation of
the case having been made by the agents of the Bureau of Internal
Revenue, the respondent. Collector in his letter dated November 15,
1952 countermanded his demand for sales tax deficiency on the ground
that “after several investigations conducted into the matter no
sufficient evidence, could be gathered to sustain the assessment of
this Office based on the theory that Southern Motors is a mere
instrumentality or subsidiary of Yutivo.” The withdrawal was subject,
however, to the general power of review by the now defunct Board of Tax
Appeals. The Secretary of Finance to whom the papers relative to the
case were endorsed, apparently not agreeing with the withdrawal of the
assessment, returned them to the respondent Collector for
reinvestigation.
After another investigation, the respondent
Collector, in a letter to petitioner dated December 18, 1954,
redetermined that the aforementioned tax assessment was lawfully due
the government and in addition assessed deficiency sales tax due from
petitioner for the four quarters of 1950; the respondents’ last demand
was in the total sum of P2,215,809.27 detailed as follows:
Sales Tax75%
Surcharge
Amount DueAssessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr. 1947 to 4th Qrtr. 1949 inclusive
P1,031,296.60
P773,472.45
P1,804,769.05
Additional Assessment for period from 1st to 4th Qrtr. 1950,inclusive
P234,880.13
P176,160.09
P411,040.22
This
second assessment was contested by the petitioner Yutivo before the
Court of Tax Appeals, alleging that there is no valid ground to
disregard the corporate personality of SM and to hold that it is an
adjunct of petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax already paid by
Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) that the surcharge
has been erroneously imposed by respondent. Finding against Yutivo and
sustaining the respondent Collector’s theory that there was no
legitimate or bona fide purpose in the organization of SM—the
apparent objective of its organization being to evade the payment of
taxes—and that it was owned (or the majority of the stocks thereof are
owned) and controlled by Yutivo and is a mere subsidiary, branch,
adjunct conduit, instrumentality or alter ego of the latter, the Court
of Tax Appeals—with Judge Roman Umali not taking part—disregarded its
separate corporate existence and on April 27, 1957, rendered the
decision now complained of. Of the two Judges who signed the decision,
one voted for the modification of the computation of the sales tax as
determined by the respondent Collector in his decision so as to give
allowance for the reduction of the tax already paid (resulting in the
reduction of the assessment to P820,509.91 exclusive of surcharges),
while the other voted for affirmance. The dispositive part of the
decision, however, affirmed the assessment made by the Collector.
Reconsideration of this decision having been denied, Yutivo brought the
case to this Court thru the present petition for review.
It
is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders
and from other corporations to which it may be connected. However,
“when the notion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime,” the law will regard the
corporation as an association of persons, or in the case of two
corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil., 496, citing I Fletcher Cyclopedia of Corporation, Perm. Ed., pp. 135-136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247; 255 per Sanborn,
J.) Another rule is that, when the corporation is the “mere alter ego
or business conduit of a person, it may be disregarded.” (Koppel
[Phil.], Inc. vs. Yatco, supra.)
After going
over the voluminous record of the present case, we are inclined to rule
that the Court of Tax Appeals was not justified in finding that SM was
organized for no other purpose than to defraud the Government of its
lawful revenues. In the first place, this corporation was organized in
June, 1946 when it could not have caused Yutivo any tax savings. From
that date up to June 30, 1947, or a period of more than one year, GM
was the importer of the cars and trucks sold to Yutivo, which, in turn
resold them to SM. During that period, it is not disputed that GM, as
importer, was the one solely liable for sales taxes. Neither Yutivo nor
SM was subject to the sales taxes on their sales of cars and trucks.
The sales tax liability of Yutivo did not arise until July 1, 1947 when
it became the importer and simply continued its practice of selling to
SM. The decision, therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the fact that there
was no tax to evade.
Making the observation from a newspaper
clipping (Exh. ‘T”) that “as early as 1945 it was known that GM was
preparing to leave the Philippines and terminate its business of
importing vehicles,” the court below speculated that Yutivo anticipated
the withdrawal of GM from business in the Philippines in June, 1947.
This observation, which was made only in the resolution on the motion
for reconsideration, however, finds no basis in the record. On the
other hand, GM had been an importer of cars in the Philippines even
before the war and had but recently resumed its operation in the
Philippines in 1946 under an ambitious plan to expand its operation by
establishing an assembly plant here, so that it could not have been
expected to make so drastic a turnabout of not merely abandoning the
assembly plant project but also totally ceasing to do business as an
importer. Moreover the newspaper clipping Exh. “T”, was published on
March 24, 1947, and merely reported a rumored plan that GM would
abandon the assembly plant project in the Philippines. There was no
mention of the cessation of business by GM which must not be confused
with the abandonment of the assembly plant project. Even as respect the
assembly plant, the newspaper clipping was quite explicit in saying
that the Acting Manager refused to confirm the rumor as late as March
24, 1947, almost a year after SM was organized.
At this
juncture, it should be stated that the intention to minimize taxes,
when used in the context of fraud, must be proved to exist by clear and
convincing evidence amounting to more than mere preponderance, and
cannot be justified by a. mere speculation. This is because fraud is
never lightly to be presumed. (Vitelli & Sons vs. U.S., 250 U.S. 355; Duffin vs. Lucas, 55 F [2d] 786; Budd vs. Commr., 43 F [2d] 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F [2d] 374; Schoenfield Bros. Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr., 36 BTA 833; Kerbaugh vs. Commr., 74 F [2d] 749; Maddas vs. Commr., 114 F [2d] 548; Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 F [2d] 93; Richard vs. Commr., 15 BTA 316; Rea Gano vs. Commr., 19 BTA 518.) (See also Baiter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities; Arroyo vs.
Granada, et al., 18 Phil., 484.) Fraud is never imputed and the courts
never sustain findings of fraud upon circumstances which, at the most,
create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F [2d] 769; Dalone vs. Commr., 100 F [2d] 507.)
In the second place, SM was organized and it operated, under
circumstance that belied any intention to evade sales taxes. “Tax
evasion” is a term that connotes fraud thru the use of pretenses and
forbidden devices to lessen or defeat taxes. The transactions between
Yutivo and SM, however, have always been in the open, embodied in
private and public documents, constantly subject to inspection by the
tax authorities. As a matter of fact, after Yutivo became the importer
of GM cars and trucks for Visayas and Mindanao, it merely continued the
method of distribution that it had initiated long before GM withdrew
from the Philippines.
On the other hand, if tax saving was
the only justification for the organization of SM, such justification
certainly ceased with the passage of Republic Act No. 594 on February
16, 1951, governing payment of advance sales tax by the importer based
on the landed cost of the imported article, increased by mark-ups of
25%, 50% 100%, depending on whether the imported article is taxed under
sections 186, 185 and 184, respectively, of the Tax Code. Under
Republic Act No. 594, the amount at which the article is sold is
immaterial to the amount of the sales tax. And yet after the passage of
that Act, SM continued to exist up to the present and operates as it
did many years past in the promotion and pursuit of the business
purposes for which it was organized.
In the third place,
sections 184 to 186 of the said Code provide that the sales tax shall
be collected “once only on every original sale, barter, exchange * * *
to be paid by the manufacturer, producer or importer.” The use of the
word “original” and the express provision that the tax was collectible
“once only” evidently has made the provisions susceptible of different
interpretations. In this connection, it should be stated that a
taxpayer has the legal right to decrease the amount of what otherwise
would be his taxes or altogether avoid them by means which the law
permits, (U.S. vs. Isham, 17 Wall. 496, 596; Gregory vs. Helvering, 293 U.S. 469; Comm. vs. Tower, 327 U.S. 280; Lawton vs. Comm. 194 F [2] 380). Any legal means used by the taxpayer to reduce taxes are all right (Benny vs.
Comm. 25 T. Cl. 78). A man may, therefore, perform an act that he
honestly believes to be sufficient to exempt him from taxes. He does
not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs. Comm.,
2 T. Cl. 531, it was held that though an incorrect position in law had
been taken by the corporation there was no suppression of the facts,
and a fraud penalty was not justified.
The evidence for the
Collector, in our opinion, falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the respondent
Collector himself showed a great deal of doubt or hesitancy as to the
existence of fraud. He even doubted the validity of his first
assessment dated November 7, 1950. It must be remembered that the fraud
which respondent Collector imputed to Yutivo must be related to its
filing of sales tax returns for less taxes than were legally due. The
allegation of fraud, however, cannot be sustained “without showing that
Yutivo, in filing said returns, did so fully knowing that the taxes
called for therein were less than what were legally due. Considering
that respondent Collector himself with the aid of his legal staff, and
after some two years of investigation and study eluded in 1952 that
Yutivo’s sales tax returns were correct—only to reverse himself after
another two years—it would seem harsh and unfair for him to say in 1854
that Yutivo fully knew in October 1947 that its sales tax returns were
inaccurate.
On this point, one other consideration would
show that the intent to save taxes could not have existed in the minds
of the organizers of SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is usually billed separately
as such in the sales invoice. As pointed out by petitioner Yutivo, had
not SM handled the retail, the additional tax that would have been
payable by it, could have been easily passed off to the consumer,
especially since the period covered by the assessment was a “seller’s
market” due to the post-war scarcity up to late 1948, and the
imposition of controls in late 1949.
It is true that the
arrastre charges constitute expenses of Yutivo and its non-inclusion in
the selling price by Yutivo cost the Government P4.00 per vehicle, but
said non-inclusion was explained to have been due to an inadvertent
accounting omission, and could hardly be considered as proof of willful
channelling and fraudulent evasion of sales tax. Mere understatement of
tax in itself does not prove fraud. (James Nicholson, 82 BTA 377,
affirmed 90 F [2] 978, cited in Merten’s Sec. 55.11 p. 21.) The amount
involved, moreover is extremely small inducement for Yutivo to go thru
all the trouble of organizing SM. Besides, the non-inclusion of these
small arrastre charge in the sales tax returns of Yutivo is clearly
shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-7190, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was
actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling
the vehicles at retail and maintaining stores for spare parts as well
as service repair shops. It is not disputed that the petitioner, which
is engaged principally in hardware supplies and equipment, is
completely controlled by the Yutivo, Young or Yu family. The founders
of the corporation are closely related to each other either by blood or
affinity, and most of its stockholders are members of the Yu (Yutivo or
Young) family. It is, likewise, admitted that SM was organized by the
leading stockholders of Yutivo headed by Yu Khe Thai. At the time of
its incorporation, 2,500 shares worth P250,000.00 appear to have been
subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu
Khe Jin, Yu Eng Poh and Washington Sycip. The first three named
subscribers are brothers, being the sons of Yu Thai Yee, one of
Yutivo’s founders. Yu Eng Poh and Washington Sycip are respectively
sons of Yu Tiong Sing and Albino Sycip who are co-founders of Yutivo.
According to the Articles of Incorporation of the said subscriptions,
the amount of P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The additional
subscriptions to the capital stock of SM and subsequent transfers
thereof were paid by Yutivo itself. The payments were made, however,
without any transfer of funds from Yutivo to SM. Yutivo simply charged
the accounts of the subscribers for the amount allegedly advanced by
Yutivo in payment of the shares. Whether a charge was to be made
against the accounts of the subscribers or said subscribers were to
subscribe shares appears to constitute a unilateral act on the part of
Yutivo, there being no showing that the former initiated the
subscription.
The transactions were made solely by and
between SM and Yutivo. In effect, it was Yutivo who undertook the
subscription of shares, employing the persons named or “charged” with
corresponding account as nominal stockholders. Of course, Yu Khe Thai,
Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the principal officers
and constituted the majority of the board of Directors of both Yutivo
and SM, their subscriptions could readily or easily be that of
Yutivo’s. Moreover, these persons were related to each other as
brothers or first cousins. There was every reason for them to agree in
order to protect their common interest in Yutivo and SM.
The
issued capital stock of SM was increased by additional subscriptions
made by various persons, but except Ng Sam Bok and David Sycip,
“payments” thereof were effected by merely debiting or charging the
accounts of said stockholders and crediting the corresponding amounts
in favor of SM, without actually transferring cash from Yutivo. Again,
in this instance, the “payments” were effected by the mere unilateral
act of Yutivo. Yutivo, by virtue of its control over the individual
accounts of the persons charged, would necessarily exercise
preferential rights and control, directly or indirectly, over the
shares, it being the party which really undertook to pay or underwrite
payment thereof.
The shareholders in SM are mere nominal
stockholders holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were stockholders bona fide,
Yutivo was at all times in control of the majority of the stock of SM
and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their
shareholdings, but the transfers were made to their immediate
relatives, either to their respective spouses and children or sometimes
brothers or sisters. Yutivo’s shares in SM were transferred to
immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes
in stock ownership in both corporations, the Board of Directors and
officers of both corporations remained unchanged and Messrs. Yu Khe
Thai, Yu Khe Siong, Yu Khe Jin and Yu Eng Poh (all of the Yu or Young
family) continued to constitute the majority in both boards. All these,
as observed by the Court of Tax Appeals, merely serve to corroborate
the fact that there was a common ownership and interest in the two
corporations.
SM is under the management and control of Yutivo by virtue of a
management contract entered into between the two parties. In fact, the
controlling majority of the Board of Directors of Yutivo is also the
controlling majority of the Board of Directors of SM. At the same time
the principal officers of both corporations are identical. In addition
both corporations have a common comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo’s president, Yu Khe Thai. There is
therefore no doubt that by virtue of such control, the business,
financial and management policies of both corporations could be
directed towards common ends.
Another aspect relative to
Yutivo’s control over SM operations relates to its cash transactions.
All cash assests of SM were handled by Yutivo and all cash transactions
of SM were actually maintained thru Yutivo. Any and all receipts of
cash by SM including its branches were transmitted or transferred
immediately and directly to Yutivo in Manila upon receipt thereof.
Likewise, all expenses, purchases or other obligations incurred by SM
are referred to Yutivo which in turn prepares the corresponding
disbursement vouchers and payments in relation thereto, the payment
being made out of the cash deposits of SM with Yutivo, if any, or in
the absence thereof which occurs generally, a corresponding charge is
made against the account of SM in Yutivo’s books. The payments for and
charged against SM are made by Yutivo as a matter of course arid
without need of any further request, the latter would advanced all such
cash requirements for the benefit of SM. Any and all payments and cash
vouchers are made on Yutivo stationery and made under authority of
Yutivo’s corporate officers, without any copy thereof being furnished
to SM. All detailed records such as cash disbursements, such as
expenses, purchases, etc. for the account of SM, are kept by Yutivo and
SM merely keeps a summary record thereof on the basis of information
received from Yutivo.
All the above plainly show that cash
or funds of SM, including those of its branches which are directly
remitted to Yutivo, are placed in the custody and control of Yutivo,
and subject to withdrawal only by Yutivo. SM’s resources being under
Yutivo’s control, the former’s operations and existence became
dependent upon the latter.
Consideration of various other
circumstances, especially when taken together, indicates that Yutivo
treated SM merely as its department or adjunct. For one thing, the
accounting system maintained by Yutivo shows that it maintained a high
degree of control over SM accounts. All transactions between Yutivo and
SM are recorded and effected by mere debit or credit entries against
the reciprocal account maintained in their respective books of accounts
and indicate the dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or
independently show that SM is a branch or department of Yutivo. Even
the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat
Yutivo-Manila as their “Head-Office” or “Home Office” as shown by their
letter of remittances or other correspondences. These correspondences
were actually received by Yutivo and the reference to Yutivo as the
head or home office is obvious from the fact that all cash collections
of the SM’s branches are remitted directly to Yutivo. Added to this
fact, is that SM may freely use forms or stationery of Yutivo.
The fact that SM is a mere department or adjunct of Yutivo is made more
patent by the fact that arrastre charges paid for the “operation of
receiving, conveying, and loading or unloading” of imported cars and
trucks on piers and wharves, were charged against SM. Overtime charges
for the unloading of cars and trucks as requested by Yutivo and
incurred as part of its acquisition cost thereof, were likewise charged
against and treated as expenses of SM. If Yutivo were the importer,
these arrastre and overtime charges were Yutivo’s expenses in importing
goods and not SM’s. But since those charges were made against SM, it
plainly appears that Yutivo has sole authority to allocate its expenses
even as against SM in the sense that the latter is a mere adjunct,
branch or department of the former.
Proceeding to another
aspect of the relation of the parties, the management fees due from SM
to Yutivo were taken up as expenses of SM and credited to the account
of Yutivo. If it were to be assumed that the two organizations are
separate juridical entities, the corresponding receipts or receivables
should have been treated as income on the part of Yutivo. But such
management fees were recorded as “Reserve for Bonus” and were therefore
a liability reserve and not an income account. This reserve for bonus
were subsequently distributed directly to and credited in favor of the
employees and directors of Yutivo, thereby clearly showing that the
management fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the
business of SM and actually extended all the credit to the latter not
only in the form of starting capital but also in the form of credits
extended for the cars and vehicles allegedly sold by Yutivo to SM as
well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus the increases in the capital stock
were made in advances or “Guarantee” payments by Yutivo and credited in
favor of SM. The funds of SM were all merged in the cash fund of
Yutivo. At all times Yutivo thru officers and directors common to it
and SM, exercised full control over the cash funds, politics,
expenditures and obligations of the latter.
Southern Motors
being but a mere instrumentality or adjunct of Yutivo, the Court of Tax
Appeals correctly disregarded the technical defense of separate
corporate entity in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or
authority to issue the disputed assessment by reason of prescription.
The contention, in our opinion, cannot be sustained. It will be noted
that the first assessment was made on November 7, 1950 for deficiency
sales tax from 1947 to 1949. The corresponding returns filed by
petitioner covering the said period was made at the earliest on October
1 as regards the third quarter of 1947, so that it cannot be claimed
that the assessment was not made within the five-year period prescribed
in section 331 of the Tax Code invoked by petitioner. The assessment,
it is admitted, was withdrawn by the Collector on November 15, 1952 due
to insufficiency of evidence, but the withdrawal was made subject to
the approval of the Secretary of Finance and the Board of Tax Appeals,
pursuant to the provisions of section 9 of Executive Order No. 401-A,
series of 1951. The decision of the previous Collector counter-manding
the assessment of November 7, 1950 was forwarded to the Board of Tax
Appeals through the Secretary of Finance but that official, apparently
disagreeing with the decision, sent it back for re-investigation.
Consequently, the assessment of November 7, 1950 cannot be considered
to have been finally withdrawn. That the assessment was subsequently
reiterated in the decision of respondent Collector on December 16, 1954
did not alter the fact that it was made seasonably. In this connection,
it would appear that a warrant of distraint and levy has been issued on
March 28, 1951 in relation with this case and by virtue thereof the
properties of Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up to the
present, which shows that the assessment of November 7, 1950 has always
been valid and subsisting.
Anent the deficiency sales tax
for 1950, considering that the assessment thereof was made on December
16, 1954, the same was assessed well within the prescribed five-year
period.
Petitioner argues that the original assessment of
November 7, 1950 did not extend the prescriptive period on assessment.
The argument is untenable, for, as already seen, the assessment was
never finally withdrawn, since it was not approved by the Secretary of
Finance or of the Board of Tax Appeals. The authority of the Secretary
to act upon the assessment cannot be questioned, for he is expressly
granted such authority under section 9 of Executive Order No. 401-A and
under section 79 (c) of the Revised Administrative Code, he has “direct
control, direction and supervision over all bureaus and offices under
his jurisdiction and may, any provision of existing law to the contrary
notwithstanding, repeal or modify the decision of the chief of said
Bureaus or offices when advisable in, the public interest.”
It should here also be stated that the assessment in question was
consistently protested by petitioner, making several requests for
reinvestigation thereof. Under the circumstances, petitioner may be
considered to have waived the defense of prescription.
“Estoppel
has been employed to prevent the application of the statute of
limitations against the government in certain instances in which the
taxpayer has taken some affirmative action to prevent the collection of
the tax within the statutory period. It is generally held that a
taxpayer is estopped to repudiate waivers of the statute of limitations
upon which the government relied. The cases frequently involve
dissolved corporations. If no waiver has been given, the cases usually
show some conduct directed to a postponement of collection, such, for
example, as some variety of request to apply an over assessment. The
taxpayer has ‘benefited’ and ‘is not in a position to contest’ his tax
liability. A definite representation of implied authority may be
involved, and in many cases the taxpayer has received the ‘benefit’ of
being, saved from the inconvenience, if not hardship of immediate
collection.“Conceivably even in these cases a fully
informed Commissioner may err to the sorrow of the revenues, but
generally speaking, the cases present a strong combination of equities
against the taxpayer, and few will seriously quarrel with their
application of the doctrine of estoppel.” (Mertens Law of Federal
Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series
of 1951 requiring the approval of the Secretary of Finance and the
Board of Tax Appeals in cases involving an original assessment of more
than P5,000—refers only to compromises and refunds of taxes, but not to
total withdrawal of the assessment. The contention is without merit. A
careful examination of the provisions of both sections 8 and 9 of
Executive Order No. 401-A, series of 1951, reveals the procedure
prescribed therein is intended as a check or control upon the powers of
the Collector of Internal Revenue in respect to assessment and refunds
of taxes. If it be conceded that a decision of the Collector of
Internal Revenue on partial remission of taxes is subject to review by
the Secretary of Finance and the Board of Tax Appeals, then with more
reason should the power of the Collector to withdraw totally an
assessment be subject to such review.
We find merit,
however, in petitioner’s contention that the Court of Tax Appeals erred
in the imposition of the 50% fraud surcharge. As already shown in the
early part of this decision, no element of fraud is present.
Pursuant to Section 133 of the National Internal Revenue Code the 50%
surcharge should be added to the deficiency sales tax “in case a false
or fraudulent return is willfully made.” Although the sales made by SM
are in substance by Yutivo this does not necessarily establish fraud
nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. vs.
Commissioner of Internal Revenue (August 9, 1943, 2 T.C. 531, 541-549)
is in point. The petitioner Court Holding Co. was a corporation
consisting of only two stockholders, to wit: Minnie Miller and her
husband Louis Miller. The only assets of this husband and wife
corporation consisted of an apartment building which had been acquired
for a very low price at a judicial sale. Louis Miller, the husband who
directed the company’s business, verbally agreed to sell this property
to Abe C. Fine and Margaret Fine, husband and wife, for the sum of
$54,000.00, payable in various installments. He received $1,000.00 as
down payment. The sale of this property for the price mentioned would
have netted the corporation a handsome profit on which a large,
corporate income tax would have to be paid. On the afternoon of
February 23, 1940, when the Millers and the Fines got together for the
execution of the document of sale, the Millers announced that their
attorney had called their attention to the large corporate tax which
would have to be paid if the sale was made by the corporation itself.
So instead of proceeding with the sale as planned, the Millers approved
a resolution to declare a dividend to themselves “payable in the assets
of the corporation, in complete liquidation and surrender of all the
outstanding corporate stock.” The building, which as above stated was
the only property of the corporation, was then transferred to Mr. and
Mrs. Miller who in turn sold it to Mr. and Mrs. Fine, for exactly the
same price and under the same terms as had been previously agreed upon
between the corporation and the Fines.
The return filed by
the Court Holding Co, with the respondent Commissioner of Internal
Revenue reported no taxable gain as having” been received from the sale
of its assets. The Millers, of course, reported a long term capital
gain on the exchange of their corporate stock with the corporate
property. The commissioner of Internal Revenue contended that the
liquidating dividend to stockholders had no purpose other than that of
tax avoidance and that, therefore, the sale by the Millers to the Fines
of the corporation’s property was in substance a sale by the
corporation itself, for which the corporation is subject to the taxable
profit thereon. In requiring the corporation to pay the taxable profit
on account of the sale, the Commissioner of Internal Revenue, imposed a
surcharged of 25% for delinquency, plus an additional surcharge as
fraud penalties.
The U.S. Court of Tax Appeals held that the
sale by the Millers was for no other purpose than to avoid the tax and
was, in substance, a sale by the Court Holding Co., and that,
therefore, the said corporation should be liable for the assessed
taxable profit thereon. The Court of Tax Appeals also sustained the
Commissioner of Internal Revenue on the delinquency penalty of 25%.
However, the Court of Tax Appeals disapproved the fraud penalties,
holding that an attempt to void a tax does not necessarily establish
fraud; that it is a settled principles that a taxpayer may diminish his
tax liability by means which the law permits; that if the petitioner,
the Court Holding Co., was of the opinion that the method by which it
attempted to effect the sale in question was legally sufficient to
avoid the imposition of a tax upon it, its adoption of that method is
not subject to censure; and that in taking a position with respect to a
question of law, the substance of which was disclosed by the statement
indorsed on its return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the decision of
the Court of Tax Appeals:
“* * * The
respondent’s answer alleges that the petitioner’s failure to report as
income the taxable profit on the real estate sale was fraudulent and
with intent to evade the tax. The petitioner filed a reply denying
fraud and averring that the loss reported on its return was correct to
the best of its knowledge and belief. We think the respondent has not
sustained the burden of proving a fraudulent intent. We have concluded
that the sale of the petitioner’s property was in substance a sale by
the petitioner, and that the liquidating dividend to stockholders had
no purpose other than that of tax avoidance. But the attempt to avoid
tax does not necessarily establish fraud. It is a settled principle
that a tax payer may diminish his liability by any means which the law
permits. United States vs. Isham, 17 Wall. 496; Gregory vs. Helvering, supra;
Chisholm vs. Commissioner, 79 Fed. (2d) 14. If the petitioner here was
of the opinion that the method by which it attempted to effect the sale
in question was legally sufficient to avoid the imposition of tax upon
it, its adoption of that method is not subject to censure. Petitioner
took a position with respect to a question of law, the substance of
which was disclosed by the statement endorsed on its return. We can not
say, under the record before us, that that position was taken
fraudulently. The determination of the fraud penalties is reversed.”
When GM was the importer and Yutivo, the wholesaler, of the cars and
trucks, the sales tax was paid only once and on the original sales by
the former and neither the latter nor SM paid taxes on their subsequent
sales. Yutivo might have, therefore, honestly believed that the payment
by it, as importer, of the sales tax was enough as in the case of GM.
Consequently, in filing its return on the basis of its sales to SM and
not on those by the latter to the public, it cannot be said that Yutivo
deliberately made a false return for the purpose of defrauding the
government of its revenues which will justify the imposition of the
surcharge penalty.
We likewise find meritorious the
contention that the Tax Court erred in computing the alleged deficiency
sales tax on the selling price of SM without previously deducting
therefrom the sales tax due thereon. The sales tax provisions (secs.
184-186, Tax Code) impose a tax on original sales measured by “gross
selling price” or “gross value in money.” These terms, as interpreted
by the respondent Collector, do not include the amount of the sales
tax, if invoiced separately. Thus General Circular No. 431 of the
Bureau of Internal Revenue dated July 29, 1939, which implements
sections 184-186 of the Tax Code provides:
“*
* * Gross selling price’ or ‘gross value in money’ of the articles
sold, bartered, exchanged, or transferred as the term is used in the
aforecited sections (sections 184, 185 and 186) of the National
Internal Revenue Code, is the total amount of money or its equivalent
which the purchaser pays to the vendor to receive or get the goods.
However, if a manufacturer producer, or importer, in fixing the gross
selling price of an article sold by him has included an amount intended
to cover the sales tax in the gross selling price of the articles, the
sales tax shall be based on the gross selling price less the amount
intended to cover the tax, if the same is billed to the purchaser as a
separate item.
General Circular No. 440 of the same Bureau reads:
“Amount
intended to cover the tax must be billed as a separate item so as not
to pay a tax on the tax.—On sales made after the third quarter of 1939,
the amount intended to cover the sales tax must be billed to the
purchaser as separate items in the invoices in order that the deduction
thereof from the gross selling price may be allowed in the computation
of the merchants’ percentage tax on the sales. Unless billed to the
purchaser as a separate item in the invoice, the amount intended to
cover the sales tax shall be considered as part of the gross selling
price of the articles sold, and deductions thereof will not be
allowed.” (Cited in Dalupan, Nat. Int. Rev. Code, Annoted, Vol. II, pp.
52-53.)
Yutivo complied with the above
circulars on its sales to SM, and as separately billed, the sales taxes
did not form part of the “gross selling price” as the measure of the
tax. Since Yutivo has previously billed the sales tax separately in its
sales invoices to SM. General Circulars Nos. 431 and 440 should be
deemed to have been complied with. Respondent Collector’s method of
computation, as opined by Judge Nable in the decision complained of—
“*
* * is unfair, because * * (it is) practically imposing a tax on a tax
already paid. Besides, the adoption of the procedure would in certain
cases elevate the bracket under which the tax is based. The late
payment is already penalized, thru the imposition of surcharges; by
adopting the theory of the Collector, we will be creating an additional
penalty not contemplated by law.”
If the
taxes based on the sales of SM are computed in accordance with Gen.
Circulars Nos. 431 and 440, the total deficiency sales taxes, exclusive
of the 25 % and 50% surcharges for the late payment and for fraud,
would amount only to P820,549.91 as shown in the following computation:
Sales Tax
Computed under Gen.
Cir. Nos. 431 and 440Less Taxes Paid by Yutivo
Deficiency tax still due
P820,549.91
This is the exact amount which, according to Presiding Judge Nable of
the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or
acted in excess of its jurisdiction in promulgating judgment for the
affirmance of the decision of respondent Collector by less than the
statutory requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating the Court of
Tax Appeals, provides that “Any two judges of the Court of Tax Appeals
shall constitute a quorum, and the concurrence of two judges shall be
necessary to promulgate any decision thereof. * * * .” It is on record
that the present case was heard by two judges of the lower court. And
while Judge Nable expressed his opinion on the issue of whether or not
the amount of the sales tax should be excluded from the gross selling
price in computing the deficiency sales tax due from the petitioner,
the opinion, apparently, is merely an expression of his general or
“private sentiment” on the particular issue, for he concurred in the
dispositive part of the decision. At any rate, assuming that there is
no valid decision for lack or concurrence of two judges, the case was
submitted for decision to the court below on March 28, 1957 and under
section 13 of Republic Act 1125, cases brought before said court shall
be decided within 30 days after submission thereof. “If no decision is
rendered by the Court within thirty days from the date a case is
submitted for decision, the party adversely affected by said ruling,
order or decision may file with said Court a notice of his intention to
appeal to the Supreme Court, and if no decision has as yet been
rendered by the Court, the aggrieved party may file directly with the
Supreme Court an appeal from said ruling, order or decision,
notwithstanding the foregoing provisions of this section.” The case
having been brought before us on appeal, the question raised by
petitioner has become purely academic.
In view of the
foregoing, the decision of the Court of Tax Appeals under review is
hereby modified in that petitioner shall be ordered to pay to
respondent the sum of P820,549.91, plus 25% surcharge thereon for late
payment. So ordered without costs.
Bengzon, Labrador, Concepcion, Reyes, J. B. L., Barrera, and Paredes, JJ., concur.