Yutivo Digest

YUTIVO SONS HARDWARE CO.
VS COURT OF TAX APPEALS
Facts: Yutivo Sons Hardware Co. is a domestic corporation engaged in the importation and sale of
hardware supplies and equipment. It bought a number of cars and trucks from General Motors Overseas
Corporation, 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. Southern Motors, Inc. was organized to engage in the business of selling cars, trucks and spare
parts. Its shares were subscribed in five equal proportions by the descendants of the founders of Yutivo.
When GM withdrew from the Philippines, 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. GM 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 taxes based on its sales to Yutivo, the latter,
as importer, paid sales tax 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. Yutivo was
investigated by the CIR and was assessed deficiency sales tax plus surcharge. The CIR claimed 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. Yutivo alleged the following before the Court of Tax Appeals: (1) 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 that 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 the CIR. The CTA ruled in favor of CIR and ruled
that the creation of SM is for Yutivo to evade taxes, as it is owned and controlled by Yutivo and is a mere
subsidiary, branch, adjunct conduit, instrumentality or alter ego of the latter.
Issue: Whether or not SM has a personality separate and distinct from Yutivo.
Held: 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. When the corporation is the "mere alter ego or business conduit
of a person, it may be disregarded." However, SM was not organized purposely as a tax evasion device.
Moreover, it runs counter to the fact that there was no tax to evade. 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. The SC however agreed 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. 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.

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YUTIVO SONS HARDWARE CO.

VS COURT OF TAX APPEALS

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