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RepublicofthePhilippines
SUPREMECOURT
Manila

ENBANC

G.R.No.L9687June30,1961

LIDDELL&CO.,INC.,petitionerappellant,
vs.
THECOLLECTOROFINTERNALREVENUE,respondentappellee.

Ozaeta,LichaucoandPicazoforpetitionerappellant.
OfficeoftheSolicitorGeneralforrespondentappellee.

BENGZON,C.J.:

Statement.ThisisanappealfromthedecisionoftheCourtofTaxAppealsimposingataxdeficiencyliabilityof
P1,317,629.61onLiddell&Co.,Inc.

SaidCompanylistsdownseveralissueswhichmaybeboiledtothefollowing:

(a) Whether or not Judge Umali of the Tax Court below could validly participate in the making of the
decision

(b)WhetherornotLiddell&Co.Inc.,andtheLiddellMotors,Inc.are(practically)identicalcorporations,the
latterbeingmerely.thealteregooftheformer

(c)Whetherornot,grantingtheidenticalnatureofthecorporations,theassessmentoftaxliability,including
thesurchargethereonbytheCourtofTaxAppeals,iscorrect.

Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving the right to present
additionalevidence.

Saidundisputedfactsaresubstantiallyasfollows:

The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) 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.Ofthisauthorizedcapital,196sharesvaluedatP19,600weresubscribedandpaidbyFrankLiddell
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
OldsmobileandChevroletpassengercarsandGMCandChevrolettrucks..

OnJanuary31,1947,withthelimitedpaidincapitalofP20,000,Liddell&Co.wasabletodeclarea90%
stockdividendafterwhichdeclarationon,FrankLiddellsholdingintheCompanyincreasedto1,960shares
andtheemployees,CharlesKurzE.J.Darras,AngelManzanoandJulianSerranoat10shareeach.The
declarationofstockdividendwasfollowedbyaresolutionincreasingtheauthorizedcapitalofthecompany
to P1,000.000 which the Securities & Exchange Commission approved on March 3, 1947. Upon such
approval, Frank Liddell subscribed to 3,000 additional shares, for which he paid into the corporation
P300,000sothathehadinhisownname4,960shares.

On May 24, 1957, Frank Liddell, on one hand and Messrs. Kurz, Darras, Manzano and Serrano on the
other, executed an agreement (Exhibit A) which was further supplemented by two other agreements
(ExhibitsBandC)datedMay24,1947andJune3,1948,whereinFrankLiddelltransferred(OnJune7,
1948)tovariousemployeesofLiddell&Co.sharesofstock.

AttheannualmeetingofstockholdersofLiddell&Co.heldonMarch9,1948,a100%stockdividendwas
declared, thereby increasing the issued capital stock of aid corporation from P1,000.000 to P 3,000,000
which increase was duly approved by the Securities and Exchange Commission on June 7, 1948. Frank
Liddell subscribed to and paid 20% of the increase of P400,000. He paid 25% thereof in the amount of
 P100,000 and the balance of P3,000,000 was merely debited to Frank LiddellDrawing Account and
creditedtoSubscribedCapitalStockonDecember11,1948.

On March 8, 1949, stock dividends were again issued by Liddell & Co. and in accordance with the
agreements,ExhibitsA,B,andC,thestocksofsaidcompanystoodasfollows:

No.of
Name Amount PerCent
Shares
FrankLiddell 13,688 P1,368,800 72.00%
IreneLiddell 1 100 .01%
MercedesVecin 1 100 .01%
CharlesKurz 1,225 122,500 6.45%
E.J.Darras 1,225 122,500 6.45%
AngelManzano 1,150 115,000 6.06%
JulianSerrano 710 71,000 3.74%
E.Hasim 500 50,000 2.64%
G.W.Kernot 500 50,000 2.64%
19,000 P1,900,000 100.00%

OnNovember15,1948,inaccordancewitharesolutionofaspecialmeetingoftheBoardofDirectorsofLiddell&
Co.,stockdividendswereagaindeclared.Asaresultofsaiddeclarationandinaccordancewiththeagreements,
Exhibits,A,B,andC,thestockholdingsinthecompanyappearedtobe:

No.of
Name Amount PerCent
Shares
FrankLiddell 19,738 P1,973,800 65.791%
IreneLiddell 1 100 .003%
MercedesVecin 1 100 .003%
CharlesKurz 2,215 221,500 7.381%
E.J.Darras 2,215 221,500 7.381%
AngelManzano 1,810 181,000 6.031%
JulianSerrano 1,700 170,000 5.670%
E.Hasim 830 83,000 2.770%
G.W.Kernot 1,490 149,000 4.970%
30,000 P3,000,000 100.000%

On the basis of the agreement Exhibit A, (May, 1947) "40%" of the earnings available for dividends accrued to
FrankLiddellalthoughatthetimeoftheexecutionofaidinstrument,FrankLiddellownedallofthesharesinsaid
corporation.45%accruedtotheemployees,partiestheretoKurz121/2%Darras121/2%A.Manzano121/2%
andJulianSerrano71/2%.TheagreementExhibitAwasalsomaderetroactiveto1946.FrankLiddellreserved
therighttoreapportionthe45%dividendspertainingtotheemployeesinthefutureforthepurposeofincluding
suchotherfaithfulandefficientemployeesashemaysubsequentlydesignate.(Asamatteroffact,FrankLiddell
didsodesignatetwoadditionalemployeesnamely:E.HasimandG.W.Kernot).Itwasforsuchinclusionoffuture
faithfulemployeesthatExhibitsB1andCwereexecuted.AsperExhibitC,datedMay13,1948,the45%given
by Frank Liddell to his employees was reapportioned as follows: C. Kurz 12,% E. J. Darras 12% A.
Manzanol2%J.Serrano31/2%G.W.Kernot2%.

ExhibitBcontainstheemployees'definitionindetailofthemannerbywhichtheysoughttopreventtheirshare
holdingsfrombeingtransferredtootherswhomaybecompletestrangerstothebusinessonLiddell&Co.

From1946untilNovember22,1948whenthepurposeclauseoftheArticlesofIncorporationofLiddell&Co.Inc.,
was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. was
engagedinbusinessasanimporterandatthesametimeretailerofOldsmobileandChevroletpassengercars
andGMCandChevrolettrucks.

OnDecember20,1948,theLiddellMotors,Inc.wasorganizedandregisteredwiththeSecuritiesandExchange
Commission with an authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as
follows:IreneLiddellwifeofFrankLiddell19,996sharesandMessrs.MarcialP.Lichauco,E.K.Bromwell,V.E.
delRosarioandEsmeniaSilva,1shareeach.

Atabouttheendoftheyear1948,Messrs.Manzano,KurzandKernotresignedfromtheirrespectivepositionsin
theRetailDept.ofLiddell&Co.andtheyweretakeninandemployedbyLiddellMotors,Inc.:KurzasManager
Treasurer,ManzanoasGeneralSalesManagerforcarsandKernotasGeneralSalesManagerfortrucks.

Beginning January, 1949, Liddell & Co. stopped retailing cars and trucks it conveyed them instead to Liddell
Motors,Inc.whichinturnsoldthevehiclestothepublicwithasteepmarkup.Sincethen,Liddell&Co.paidsales
taxesonthebasisofitssalestoLiddellMotorsInc.consideringsaidsalesasitsoriginalsales.

UponreviewofthetransactionsbetweenLiddell&Co.andLiddellMotors,Inc.theCollectorofInternalRevenue
determined that the latter was but an alter ego of Liddell & Co. Wherefore, he concluded, that for sales tax
purposes,thosesalesmadebyLiddellMotors,Inc.tothepublicwereconsideredastheoriginalsalesofLiddell&
Co.Accordingly,theCollectorofInternalRevenueassessedagainstLiddell&Co.asalestaxdeficiency,including
surcharges,intheamountofP1,317,629.61.Inthecomputation,thegrosssellingpriceofLiddellMotors,Inc.to
thegeneralpublicfromJanuary1,1949toSeptember15,1950,wasmadethebasiswithoutdeductingfromthe
sellingprice,thetaxesalreadypaidbyLiddell&Co.initssalestotheLiddellMotorsInc.

TheCourtofTaxAppealsupheldthepositiontakenbytheCollectorofInternalRevenue.

A.JudgeUmali:AppellanturgesthedisqualificationonofJudgeRomanM.Umalitoparticipateinthedecisionof
theinstantcasebecausehewasChiefoftheLawDivision,thenActingDeputyCollectorandlaterChiefCounsel
of the Bureau of Internal Revenue during the time when the assessment in question was made.1 In refusing to
disqualifyhimselfdespiteadmissionthathadheldtheaforementionedoffices,JudgeUmalistatedthathehadnot
inanywayparticipated,norexpressedanydefiniteopinion,onanyquestionraisedbythepartieswhenthiscase
waspresentedforresolutionbeforethesaidbureau.Furthermore,aftercarefulinspectionoftherecordsofthe
Bureau,he(JudgeUmaliaswellastheothermembersofthecourtbelow),hadnotfoundanyindicationthathe
had expressed any opinion or made any decision that would tend to disqualify him from participating in the
considerationofthecaseintheTaxCourt.

Atthisjuncture,itiswelltoconsiderthatpetitionerdidnotquestionthetruthofJudgeUmali'sstatements.Inview
thereof, this Tribunal is not inclined to disqualify said judge. Moreover, in furtherance of the presumption of the
judge's moral sense of responsibility this Court has adopted, and now here repeats, the ruling that the mere
participationofajudgeinpriorproceedingsrelatingtothesubjectinthecapacityofanadministrativeofficialdoes
notnecessarilydisqualifyhimfromactingasjudge.2

Appellant also contends that Judge Umali signed the said decision contrary to the provision of Section 13,
RepublicActNo.11253thatwhereasthecasewassubmittedfordecisionoftheCourtofTaxAppealsonJuly12,
1955,andthedecisionofAssociateJudgeLucianoandJudgeNablewerebothsignedonAugust11,1955(that
is,onthelastdayofthe30dayperiodprovidedforinSection13,RepublicActNo.1125),JudgeUmalisignedthe
decisionAugust31,1955or20daysafterthelapseofthe30dayperiodallottedbylaw.

ByanalogyitmaybesaidthatinasmuchasinRepublicActNo.1125(lawcreatingtheCourtofTaxAppeals)like
the law governing the procedure in the court of Industrial Relations, there is no provision invalidating decisions
renderedafterthelapseof30days,therequirementofSection13,RepublicActNo.1125shouldbeconstruedas
directory.4

Besides as pointed out by appellee, the third paragraph of Section 13 of Republic Act No. 1125 (quoted in the
margin)5confirmsthisviewbecauseinprovidingfortwothirtydayperiods,thelawmeansthatdecisionmaystill
berenderedwithinthesecondperiodofthirtydays(JudgeUmalisignedhisdecisionwithinthatperiod).

B.Identityofthetwocorporations:OnthequestionwhetherornotLiddellMotors,Inc.isthealteregoofLiddell&
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% paidup subscription with which the
companybeganitsbusinesswaspaidbyhim.Thesubsequentsubscriptionstothecapitalstockweremadeby
himandpaidwithhisownmoney.

ThesestipulationsandconditionsappearinExhibitA:(1)thatFrankLiddellhadtheauthoritytodesignateinthe
future the employee who could receive earnings of the corporation to apportion among the stock holders the
shareintheprofits(2)thatallcertificatesofstockinthenamesoftheemployeesshouldbedepositedwithFrank
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
causewhatsoeverfromthecorporation,thesaidcorporationshould,withinaperiodofsixtydaystherefor,have
the absolute and exclusive option to purchase and acquire the whole of the stock interest of the employees so
dying,resigning,retiringorseparating.
These stipulations in our opinion attest to the fact that Frank Liddell also owned it. He supplied the original his
completecontroloverthecorporation.

AstoLiddellMotors,Inc.wearefullypersuadedthatFrankLiddellalsoownedit.Hesuppliedtheoriginalcapital
funds.6ItisnotproventhathiswifeIrene,ostensiblythesoleincorporatorofLiddellMotors,Inc.hadmoneyof
herowntopayforherP20,000initialsubscription.7HerincomeintheUnitedStatesintheyears1943and1944
and the savings therefrom could not be enough to cover the amount of subscription, much less to operate an
expensivetradeliketheretailofmotorvehicles.TheallegedsaleofherpropertyinOregonmighthavebeentrue,
butthemoneyreceivedtherefromwasnevershowntohavebeensavedordepositedsoastobestillavailableat
thetimeoftheorganizationoftheLiddellMotors,Inc.

TheevidenceathandalsoshowsthatIreneLiddellhadscantparticipationintheaffairsofLiddellMotors,Inc.She
couldhardlybesaidtopossessbusinessexperience.Theincometaxformsrecordnoindependentincomeofher
own.Asamatteroffact,thechecksthatrepresentedhersalaryandbonusfromLiddellMotors,Inc.foundtheir
way into the personal account of Frank Liddell. Her frequent absences from the country negate any active
participationintheaffairsoftheMotorscompany.

Therearequiteaseriesofconspicuouscircumstancesthatmilitateagainsttheseparateanddistinctpersonality
ofLiddellMotors,Inc.fromLiddell&Co.8WenoticethatthebulkofthebusinessofLiddell&Co.waschanneled
throughLiddellMotors,Inc.Ontheotherhand,LiddellMotors,Inc.pursuednoactivitiesexcepttosecurecars,
trucks,andsparepartsfromLiddell&Co.Inc.andthensellthemtothegeneralpublic.Thesesalesofvehiclesby
Liddell&Co.toLiddellMotors,Inc.forthemostpartwereshowntohavetakenplaceonthesamedaythatLiddell
Motors,Inc.soldsuchvehiclestothepublic.Wemayevensaythatthecarsandtrucksmerelytouchedthehands
ofLiddellMotors,Inc.asamatterofformality.

During the first six months of 1949, Liddell & Co. issued ten (10) checks payable to Frank Liddell which were
deposited by Frank Liddell in his personal account with the Philippine National Bank. During this time also, he
issuedinfavorofLiddellMotors,Inc.six(6)checksdrawnagainsthispersonalaccountwiththesamebank.The
checksissuedbyFrankLiddelltotheLiddellMotors,Inc.weresignificantlyforthemostpartissuedonthesame
daywhenLiddell&Co.Inc.issuedthechecksforFrankLiddell9andforthesameamounts.

It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single
stockholderisnotofitselfsufficientgroundfordisregardingseparatecorporateentities.Authorities10supportthe
rule that it is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a
specificactivity,andsuchactivitymaycoexistwithotherprivateactivitiesofthestockholder.Ifthecorporationisa
substantialone,conductedlawfullyandwithoutfraudonanother,itsseparateidentityistoberespected.

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by
FrankLiddelldirectlyorindirectlyisnotbyitselfsufficienttojustifythedisregardoftheseparatecorporateidentity
of one from the other. There is, however, in this instant case, a peculiar consequence of the organization and
activitiesofLiddellMotors,Inc.

Underthelawinforceatthetimeofitsincorporationthesalestaxonoriginalsalesofcars(sections184,185and
186oftheNationalInternalRevenueCode),wasprogressive,i.e.10%ofthesellingpriceofthecarifitdidnot
exceedP5000,and15%ofthepriceifmorethanP5000butnotmorethanP7000,etc.Thisprogressiverateof
thesalestaxnaturallywouldtemptthetaxpayertoemployawayofreducingthepriceofthefirstsale.AndLiddell
Motors,Inc.wasthemediumcreatedbyLiddell&Co.toreducethepriceandthetaxliability.

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,nomoresalestaxwaspaid.11InthispriceofP5500wasincludedtheP413.32representingtaxespaidby
Liddell&Co.Inc.inthesaletoLiddellMotors,Inc.DeductingP413.32representingtaxespaidbyLiddell&Co.,
Inc.thepriceofP5500,thebalanceofP5,087.68wouldhavebeenthenetsellingpriceofLiddell&Co.,Inc.tothe
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
sizeableamountoftaxes.

As opined in the case of Gregory v. Helvering,12 "the legal right of a taxpayer to decrease the amount of what
otherwisewouldbehistaxes,oraltogetheravoidthembymeanswhichthelawpermits,cannotbedoubted."But,
asheldinanothercase,13"whereacorporationisadummy,isunrealorashamandservesnobusinesspurpose
andisintendedonlyasablind,thecorporateformmaybeignoredforthelawcannotcountenanceaformthatis
baldandamischievousfiction."
Consistentlywiththisview,theUnitedStatesSupremeCourt14heldthat"ataxpayermaygainadvantageofdoing
businessthruacorporationifhepleases,buttherevenueofficersinpropercases,maydisregardtheseparate
corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take the
benefitsofthetransactionsasthepersonaccordinglytaxable."

Thus,werepeat:toallowataxpayertodenytaxliabilityonthegroundthatthesalesweremadethroughanother
anddistinctcorporationwhenitisprovedthatthelatterisvirtuallyownedbytheformerorthattheyarepractically
oneandthesameistosanctionacircumventionofourtaxlaws.15

C. Tax liability computation: In the Yutivo case16 the same question involving the computation of the alleged
deficiency sales tax has been raised. In accordance with our ruling in said case we hold as correctly stated by
JudgeNableinhisconcurringanddissentingopiniononthiscase,thatthedeficiencysalestaxshouldbebased
onthesellingpriceobtainedbyLiddellMotors,Inc.tothepublicAFTERDEDUCTINGTHETAXALREADYPAID
BYLIDDELL&CO.,INC.initssalestoLiddellMotors,Inc.

Ontheimpositionofthe50%surchargebyreasonoffraud,weseethatthetransactionsbetweenLiddellMotors
Inc.andLiddell&Co.,Inc.havealwaysbeenembodiedinproperdocuments,constantlysubjecttoinspectionby
thetaxauthorities.Liddell&Co.,Inc.havealwaysmadeafullreportofitsincomeandreceiptsinitsincometax
returns.

ParaphrasingourdecisionintheYutivocase,wemaynowsay,infilingitsreturnonthebasisofitssalestoLiddell
Motors,Inc.andnotonthosebythelattertothepublic,itcannotbeheldthattheLiddell&Co.,Inc.deliberately
made a false return for the purpose of defrauding the government of its revenue, and should suffer a 50%
surcharge.Butpenaltyforlatepayment(25%)shouldbeimposed.

Inviewoftheforegoing,thedecisionappealedfromisherebymodified:Liddell&Co.,Inc.isdeclaredliableonly
fortheamountofP426,811.67with25%surchargeforlatepaymentand6%interestthereonfromthetimethe
judgmentbecomesfinal.

Asitappearsthat,duringthependencyofthislitigationappellantpaidunderprotesttotheGovernmentthetotal
amountassessedbytheCollector,thelatterisherebyrequiredtoreturntheexcesstothepetitioner.Nocosts.

Padilla,Labrador,Concepcion,Reyes,J.B.L.,Barrera,Paredes,Dizon,DeLeonandNatividad,JJ.,concur.

Footnotes

1Section5,Rep.ActNo.1125:"JudgesofthesaidCourtshallbedisqualifiedfromsittinginanycaseon
the same grounds provided under Rule One Hundred Twentysix of the Rules of Court for the
disqualificationofjudicialoffices."

2Gov'tofthePhil.v.HeirsofAbella,49Phil.374.

3See.13,RepublicActNo.1125.Decision.CasesbroughtbeforetheCourtshallbedecidedwithinthirty
daysafterthesubmissionthereoffordecision.

4SeecaseofPermanentConcreteProducts,Inc.,andSantiagov.JuanFrivalden,L14179,September10,
1960.
5"IfnodecisionisrenderedbytheCourtwithinthirtydaysfromthedateacaseissubmittedfordecision,
thepartyadverselyaffectedbysaidruling,orderordecision,mayfilewithsaidCourtanoticeofintentionto
appeal,andif,withinthirtydaysfromthefilingofsaidnotice,nodecisionhasasyetbeenrenderedbythe
Court,theaggrievedpartymayfiledirectlywiththeSupremeCourtanappealfromsaiddecision,rulingor
order,notwithstandingtheforegoingprovisionsofthissection."(Emphasisours).

6Infactitwaspaidbyherhusband'spersonalcheck.

7Theotherfourownedonlyoneshareeach.

8Appellee'sbriefdescribesseveral.Wementiononlyafew.

9SeeExhibits2to17.

10 Burnet, Commissioner v. Clarke, 287 U.S. 410, 53 S. Ct. 207, 77 L. Ed. 397 Burnet, Commissioner v.
CommonwealthImprovementCo.,287U.S.415,53S.Ct.198,77L.ed.
 11Atthispricesalestaxof15%wouldhaverepresentedP825.00.

12293U.S.465,7L.ed.596,599,55S.Ct.

13Higginsv.Smith,1940,308U.S.406,84L.ed.

14Higginsv.Smith(supra).

15Cf.Koppelv.Yatco,77Phil.496.16YutivoSonsHardwareCo.v.TheCollectorofInternalRevenue,L
13203,January28,1961.

16Yutivo&SonHardwareCo.vs.TheCollectorofInternalRevenue,110Phil.,750.

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