THE COLLECTOR OF INTERNAL REVENUE, PETITIONER, VS. CANTILAN LUMBER COMPANY, RESPONDENT.

Collector of Internal Revenue versus Cantilan Lumber Company

The Case

This is a petition for review brought by the Collector of Internal Revenue against Cantilan Lumber Company, a domestic corporation, to reverse the decision of the Court of Tax Appeals which had held the corporation not liable for compensating tax on machinery and equipment purchased from the United States Government. The case matters because it fixes two rules a reviewee must carry: the compensating tax attaches to the person who purchased or received the article from without the Philippines, and not to whoever later holds title; and a corporation that takes over an entire business, assets and liabilities together, assumes the unpaid tax liability of the dissolved partnership, so that distraint against its own property is lawful.

Procedural History

The Collector demanded payment of compensating tax from the partnership as early as May 1947, and later, in September 1954, assessed the increased amount against the corporation. After the Collector denied the corporation's written request to cancel the assessment and lift the warrant of distraint and levy, the corporation filed a petition for review with the Court of Tax Appeals. The Court of Tax Appeals reversed the Collector: it held that the partnership, not the corporation, was the purchaser liable for the tax, and it set aside the distraint of the corporation's personal property. The Collector then elevated the matter to the Supreme Court by petition for review, and the Supreme Court set aside the decision of the Court of Tax Appeals.

Facts

On June 17, 1946, the partnership Cantilan Lumber Company, composed of Nelson E. Kellogg and Alonso M. Villalba, contracted with the United States Government, through the Manila Engineer District, to supply a minimum of 2,400,000 board feet of timber. To enable the partnership to perform, the Government promised to furnish the necessary machinery, equipment, and supplies at prices to be agreed upon. During the fourth quarter of 1946 and the first quarter of 1947, the Government delivered sawmill machinery, trucks, tractors, a generator, a welder arc, and materials with a total value of 262,857 pesos and 78 centavos. On May 31, 1947, the Collector demanded 13,142 pesos and 89 centavos as compensating tax. Further deliveries raised the value to 455,078 pesos and 62 centavos, reduced to 430,785 pesos and 28 centavos after certain equipment was returned, and on September 14, 1954, the Collector assessed 21,539 pesos and 36 centavos, which superseded the earlier demand.

Meanwhile the partnership dissolved as of August 12, 1948. By agreement, Kellogg bought out Villalba's entire interest for 80,000 pesos and undertook to pay all debts and liabilities of the firm except income taxes, which were to be shared equally. On October 29, 1948, the corporation Cantilan Lumber Company was organized for the express purpose of taking over the entire lumber business previously operated by the partnership. By deed of sale dated December 7, 1948, Kellogg conveyed to the corporation the whole business, including the contract with the United States Government, and the corporation agreed to discharge all lawful debts and liabilities of Kellogg in relation to the lumber business as shown by the books as of August 12, 1948. Kellogg was an original director, owner of forty percent of the subscribed capital stock, and general manager.

When demand was made, the business interposed the defense that the machinery was still owned by the United States Government. In a letter dated October 21, 1954, the corporation's general manager acknowledged the demand and asked that the matter be held in abeyance until Washington could be heard from, so that the corporation could determine the final amount of compensating tax for which it may be liable. Title to the machinery was in fact transferred to the corporation on May 11, 1954. On November 18, 1955, the Deputy Provincial Treasurer of Surigao, on the Collector's instruction, seized a sawmill and a power plant valued at 59,000 pesos under a warrant of distraint and levy issued on December 6, 1954.

Issues

• Whether or not the respondent corporation is liable for the compensating tax on the machinery and equipment purchased and received by the partnership from the United States Government.
• Whether or not the distraint and levy upon the corporation's property to satisfy the tax was valid.

Applicable Provisions

Section 318 of the National Internal Revenue Code, on the power to distrain, provides:

Section 318. The remedy by distraint shall be as follows: Upon the failure of the person owing any delinquent tax or delinquent revenue to pay the same at the time required, the Collector of Internal Revenue or his deputy may seize and sell any personal property belonging to such person, or any property of any kind whatsoever owned by him, sufficient to satisfy the tax or revenue and the expenses of the sale.

This provision bears on the case because the power to distrain reaches only the property of the person owing the delinquent tax, so the validity of the seizure turns on whether the corporation itself is the delinquent taxpayer.

Section 832, paragraph c, of the same Code, on the period of limitation, provides:

Section 832. Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return is made, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

This provision bears on the case because the Court measured the distraint against the five-year period and found it timely.

Ruling

On the first issue, the Court ruled for the Collector. The Court of Tax Appeals had reasoned that the compensating tax accrues only upon complete transfer of title, so that the partnership, which had not fully paid, was the taxpayer. The Supreme Court rejected this and held that the corporation is liable. The liability of the partnership for the compensating tax was an existing liability, demand having been made since May 31, 1947, more than a year before the reorganization. The transfers from the partnership to Kellogg, and from Kellogg to the corporation, covered the totality of the entire business, including all assets and liabilities, and the compensating tax was not excepted from the assumption as the income tax was. The corporation's own letter of October 21, 1954, asking that the matter be held in abeyance so it could determine the amount of tax for which it may be liable, showed assumption rather than disclaimer. Kellogg's position as director, majority stockholder, and general manager confirmed knowledge of the obligation. The Court agreed with the tax court's observation that the corporation was not an innocent purchaser, having acquired the articles with knowledge of the partnership's tax obligation.

On the second issue, the Court also ruled for the Collector. Since the corporation is liable and delinquent, the distraint of its property on November 18, 1955, under Section 318, was justified. The distraint was made one year and four days from the last assessment of September 14, 1954, well within the five-year period of Section 832, paragraph c. The Court set aside the decision of the Court of Tax Appeals.

Doctrine

First, the compensating tax is imposed on the person who purchased or received the taxable article from without the Philippines; absolute transfer of title is not required for the tax to accrue, and nonpayment of the full price does not change who purchased and received. Second, a corporation that acquires the totality of a business, assets and liabilities together, and expressly assumes the liabilities of the transferor, assumes an existing compensating tax liability that was not excepted from the assumption; knowledge through a director and general manager who was the prior owner reinforces the assumption. Third, under Section 318, distraint lies only against the property of the person owing the delinquent tax, so once the corporation is itself the delinquent taxpayer, seizure of its property is lawful, provided it is made within the five-year period of Section 832, paragraph c.

Disposition

The Collector won: the Supreme Court set aside the decision of the Court of Tax Appeals, upheld the assessment of compensating tax against the corporation, and sustained the distraint and levy upon its property, without pronouncement as to costs.

Remember This

Memorize the line that the compensating tax falls on him who purchased or received the article from without the Philippines, not on him who later holds title. Examiners use this case to test successor liability for taxes in corporate takeovers and the limits of distraint under Section 318.