LIDELL & CO., INC VS CIR CASE DIGEST

G.R. No. L-9687 June 30, 1961
LIDDELL & CO., INC., petitioner-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

CORPORATION LAW; ALTER EGO

FACTS:

Liddell & Co. Inc., is a domestic corporation establish in the Philippines, its purpose was to engage in the business of importing and retailing Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

When the purpose clause of the Articles of Incorporation of Liddell & Co. Inc., was amended so as to limit its business activities to importations of automobiles and trucks, Liddell & Co. was engaged in business as an importer and at the same time retailer of Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet trucks.

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.

ISSUE:

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

HELD:

YES. 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.

As to Liddell Motors, Inc. Frank Liddell also owned it. He supplied the original capital funds. It is not proven that his wife Irene, ostensibly the sole incorporator of Liddell Motors, Inc. had money of her own to pay for initial subscription. Her income in the United States and the savings therefrom could not be enough to cover the amount of subscription, much less to operate an expensive trade like the retail of motor vehicles. The alleged sale of her property in Oregon might have been true, but the money received therefrom was never shown to have been saved or deposited so as to be still available at the time of the organization of the Liddell Motors, Inc.

Bulk of the business of Liddell & Co. was channeled through Liddell Motors, Inc. On the other hand, Liddell Motors, Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co. Inc. and then sell them to the general public.

Liddell Motors, Inc. was the medium created by Liddell & Co. to reduce the price and the tax liability. The court illustrate that:

A car sold by Liddell & Co. Inc. to Liddell Motors, Inc. 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. for P5500, no more sales tax was paid. 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.

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.

WROCKLEY