University of the Philippines College of Law

3D

Topic Exchange of Property for Shares of Stock

Case No. 2 SCRA 632 / June 30, 1961
Case Name LIDDELL & CO., INC. v. COLLECTOR
Ponente BENGZON, j.

DOCTRINE

To allow a taxpayer to deny tax liability on the ground that the sales were made through another 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.

RELEVANT FACTS (TBH di ko makita yung relation ng case na to sa topic)

The petitioner, Liddell & Co. Inc., is a domestic corporation established in the Philippines with an
authorized capital of P100,000 divided into 1000 shares at P100 each. Of this authorized capital, 196
shares valued at P19,600 were subscribed and paid by Frank Liddell while the other four shares were in
the name of Charles Kurz, E. J. Darras, Angel Manzano and Julian Serrano at one share each. Its purpose
was to engage in the business of importing and retailing Oldsmobile and Chevrolet passenger cars and
GMC and Chevrolet trucks.

On January 31, 1947, with the limited paid-in capital of P20,000, Liddell & Co. was able to declare a 90%
stock dividend after which declaration, Frank Liddell’s holdings in the company increased to 1,960 shares
and the employees, Charles Kurz, E.J. Darras, Angel Manzano and Julian Serrano at 10 shares each. The
declaration of stock dividend was followed by a resolution increasing the authorized capital of the
company to P1,000,000 which the SEC approved. Upon such approval, Frank Liddell subscribed to 3,000
additional shares, for which he paid into the corporation P300,000 so that he had in his own name 4,960
shares.

On May 24, 1947, Frank Liddell and Messrs. Kurz, Darras, Manzano and Serrano executed an agreement
(Exhibit A) which was further supplemented by two other agreements (Exhibits B and C) wherein Frank
Liddell transferred to various employees of Liddell & Co. shares of stock. Further stock dividends were
also issued.

On December 20, 1948, the Liddell Motors, Inc. was organized. Soon thereafter, Manzano, Kurz and
Kernot resigned from their respective positions in the Retail Dept. of Liddell & Co. and they were taken
in and employed by Liddell Motors, Inc. Beginning January, 1949, 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.

Afterwards, the CIR determined that Liddell Motors, Inc. 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. Accordingly, the Collector of Internal Revenue assessed
against Liddell & Co. a sales tax deficiency, including surcharges, in the amount of P1,317,629.61.
 University of the Philippines College of Law
3D

ISSUE

W/N Liddell & Co. Inc., and the Liddell Motors Inc. are (practically) identical corporations, the latter being
merely the alter ego of the former.

RATIO DECIDENDI

Issue
W/N Liddell & Co. Inc., and
the Liddell Motors Inc. are
(practically) identical
corporations, the latter
being merely the alter ego
of the former.
Ratio
YES.
1. 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.

2. 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 P5,500, no more
sales tax was paid. In this price of P5,500 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 P5,500, 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.

3. To allow a taxpayer to deny tax liability on the ground that the sales
were made through another 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.

RULING

In view of the foregoing, the decision appealed from is hereby modified: Liddell & Co., Inc. is declared
liable only for the amount of P426,811.67 with 25% surcharge for late payment and 6% interest thereon
from the time the judgment becomes final.