Commissioner of Internal Revenue vs. Norton and Harrison Company

The separate corporate identity of a corporation may be disregarded, and the corporate veil pierced, where one corporation is merely an adjunct, business conduit, or alter ego of another, particularly where the subsidiary serves as a shield for tax evasion or circumvention of tax laws. Ownership of all the stocks of a corporation by another does not by itself justify disregarding their separate personalities, but where the parent corporation so controls the subsidiary that they are practically one and the same, the fiction of separate corporate entities should be disregarded for sales tax purposes.

Norton and Harrison Company is a corporation organized in 1911 to buy and sell goods at wholesale and retail, act as agent of manufacturers, and conduct a general mercantile establishment in the Philippines. Jackbilt Manufacturing Company was organized on February 16, 1948, primarily for making, producing, and manufacturing concrete blocks. On July 27, 1948, the two corporations entered into a distributorship agreement denominated as an "agency for marketing" Jackbilt products, under which Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. On June 10, 1949, Norton acquired by purchase all the outstanding shares of stock of Jackbilt, a fact that became central to the tax dispute that followed.

Norton and Harrison Company, a corporation organized in 1911, and Jackbilt Manufacturing Company, organized on February 16, 1948 for the purpose of manufacturing concrete blocks, entered into an agreement dated July 27, 1948, whereby Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. Under this agreement, whenever an order for concrete blocks was received by Norton from a customer, the order was transmitted to Jackbilt, which delivered the merchandise directly to the customer. Payment for the goods was made to Norton, which in turn paid Jackbilt the amount charged the customer less a certain amount as Norton's compensation or profit. For example, in the sale of 420 pieces of concrete blocks to American Builders on April 1, 1952, the purchaser paid Norton P189.00, out of which Norton paid Jackbilt P168.00, the difference being Norton's compensation. As per Jackbilt's records, the transaction was considered a sale to Norton. This procedure continued until May 1, 1953, when the agency agreement was terminated and replaced by a management agreement providing that Norton would sell concrete blocks for Jackbilt for a fixed monthly fee of P2,000.00, later increased to P5,000.00.

On June 10, 1949, during the existence of the distribution or agency agreement, Norton acquired by purchase all the outstanding shares of stock of Jackbilt. After conducting an investigation, the Commissioner of Internal Revenue assessed Norton for deficiency sales tax and surcharges in the amount of P32,662.90, covering the period from July 1, 1949 to May 31, 1953, treating Norton's sales to the public as the original sales subject to tax rather than the transactions from Jackbilt to Norton.

The Commissioner contended that since Jackbilt was owned and controlled by Norton, Jackbilt's corporate personality should be disregarded for sales tax purposes, and the sale of Jackbilt blocks to the public should be considered the original sales from which the sales tax should be computed. Norton contended otherwise, arguing that the transaction subject to tax was the sale from Jackbilt to Norton.

The Court found sufficient grounds to support the theory that the separate identities of the two companies should be disregarded, citing the following circumstances: (a) Norton owned all the outstanding stocks of Jackbilt — of the 15,000 authorized shares on March 31, 1958, 14,993 shares belonged to Norton and one each to seven others; (b) Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers of the board for both companies — James E. Norton was President, Treasurer, Director, and Stockholder of Norton and occupied the same positions in Jackbilt; (c) Norton financed Jackbilt's operations, as shown by loans obtained from the RFC and Bank of America used in Jackbilt's expansion program, with unpaid advances amounting to P757,652.45 as of May 31, 1956, which were offset by shares of stock issued to Norton; (d) Norton treated Jackbilt employees as its own, paying their salaries and giving them the same privileges as Norton employees; (e) compensation given to board members of Jackbilt indicated that Jackbilt was merely a department of Norton — the income tax return of Norton for 1954 showed that its President and Treasurer received P56,929.95 from Norton but only P150.00 from Jackbilt. The offices of both corporations were located in the same compound, and payments were effected by Norton of accounts for Jackbilt and vice versa.

Norton, while not denying the setup, tried to explain that the control over Jackbilt's affairs was not made to evade payment of taxes, that the loans were necessary for Jackbilt's expansion, that the transactions were pursued in the regular course of business, and that the corporations had separate boards, cash assets, cashiers, official receipts, bank accounts, income tax returns, and balance sheets. The Court found these explanations insufficient, concluding that an over-all appraisal of the circumstances yielded to the conclusion that Jackbilt was merely an adjunct, business conduit, or alter ego of Norton and that the fiction of corporate entities, separate and distinct from each other, should be disregarded.

• Disregard of Corporate Personality: The Commissioner of Internal Revenue contended that since Jackbilt was owned and controlled by Norton and Harrison, the corporate personality of Jackbilt should be disregarded for sales tax purposes, and the sale of Jackbilt blocks to the public must be considered as the original sales from which the sales tax should be computed.
• Merger of Corporations: The Commissioner posed the proposition that the acquisition of all the stocks of Jackbilt by Norton merged the two corporations into a single corporation.
• Basis of Tax Computation: The Commissioner argued that the basis of the computation of the deficiency sales tax should be the sale of the blocks to the public and not to Norton.

• Original Sale by Jackbilt: Norton and Harrison contended that the transaction subject to tax is the sale from Jackbilt to Norton, not Norton's sales to the public.
• No Tax Evasion Intent: Norton argued that the control over Jackbilt's affairs was not made in order to evade payment of taxes and that the loans obtained were necessary for the expansion of Jackbilt's business, which would ultimately benefit both corporations.
• Regular Business Practices: Norton maintained that the transactions and practices between the two corporations were not unusual or extraordinary but were pursued in the regular course of business and trade.
• Separate Corporate Existence: Norton argued that there could be no confusion in the setup of the two corporations because they had separate boards, entirely and strictly separate cash assets, distinct cashiers and official receipts, different bank accounts, separate income tax returns, and separate balance sheets and profit and loss statements.

• Piercing the Corporate Veil: Whether the acquisition of all the stocks of Jackbilt by Norton and Harrison Company merged the two corporations into a single corporation or otherwise justified disregarding their separate corporate personalities.
• Basis of Sales Tax Computation: Whether the basis of the computation of the deficiency sales tax should be the sale of the concrete blocks to the public and not the sale from Jackbilt to Norton.

• Piercing the Corporate Veil: Yes. The separate corporate identities of Norton and Jackbilt were properly disregarded. While ownership of all the stocks of a corporation by another does not necessarily justify disregarding their distinct personalities, the totality of circumstances in this case — complete stock ownership, common directors and officers, financing of operations, and treatment of employees — established that Jackbilt was merely an adjunct, business conduit, or alter ego of Norton.
• Basis of Sales Tax Computation: Yes. The basis of the deficiency sales tax computation should be the sale of the blocks to the public. Since Jackbilt's corporate personality was disregarded, the sales of Jackbilt blocks to the public were considered the original sales subject to the 7% sales tax under Section 186 of the National Internal Revenue Code, and Norton, as the corporation actually conducting the business, was liable for the tax.

• Piercing the Corporate Veil: The Court acknowledged the settled rule that ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and is not by itself a sufficient ground for disregarding their distinct personalities, citing Liddell & Co., Inc. vs. Collector of Internal Revenue. However, the Court found sufficient grounds in this case to support the theory that the separate identities of the two companies should be disregarded. The Court enumerated the circumstances: (a) Norton owned all the outstanding stocks of Jackbilt, with 14,993 of 15,000 authorized shares belonging to Norton; (b) Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers of the board for both companies; (c) Norton financed Jackbilt's operations, with unpaid advances amounting to P757,652.45 as of May 31, 1956, offset by shares of stock issued to Norton; (d) Norton treated Jackbilt employees as its own, paying their salaries and giving them the same privileges; (e) compensation given to board members of Jackbilt indicated that Jackbilt was merely a department of Norton. The Court concluded that an over-all appraisal of the circumstances yielded to the conclusion that Jackbilt was merely an adjunct, business conduit, or alter ego of Norton and that the fiction of corporate entities, separate and distinct from each other, should be disregarded. The Court applied the doctrine of piercing the veil of corporate fiction, citing the principle that where a corporation is a dummy, is unreal or a sham, and serves no business purpose and is intended only as a blind, the corporate form may be ignored, for the law cannot countenance a form that is bald and a mischievous fiction. The Court also noted the advantages to Norton in maintaining a semblance of separate entities: if the income of Norton were considered separate from the income of Jackbilt, each would declare such earnings separately for income tax purposes and thus pay lesser income tax, whereas the combined taxable income would subject Norton to a higher tax.
• Basis of Sales Tax Computation: The Court applied Section 186 of the National Internal Revenue Code, which imposes a percentage tax of 7% on every original sale of goods, wares, or merchandise, based on the gross selling price. The term "original sale" was defined as the first sale by every manufacturer, producer, or importer under Section 5 of Commonwealth Act No. 503. Since Jackbilt's corporate personality was disregarded and the two corporations were treated as one, the sales of concrete blocks to the public constituted the original sales subject to the sales tax. The Court cited Yutivo Sons Hardware Co. vs. Court of Tax Appeals, where a similar ruling was made where circumstances of unity of corporate identities were shown and which were identical to those obtaining in the case under consideration. The Court held that 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 tax laws.

• Doctrine of Piercing the Veil of Corporate Fiction — The doctrine allows courts to disregard the separate legal personality of a corporation where it is used as a shield for fraud, tax evasion, or to circumvent the law. The Court applied this doctrine where Jackbilt was found to be merely an adjunct, business conduit, or alter ego of Norton, based on complete stock ownership, common directors and officers, financing of operations, and treatment of employees as common to both corporations. The Court held that where a corporation is a dummy, is unreal or a sham, and serves no business purpose and is intended only as a blind, the corporate form may be ignored, for the law cannot countenance a form that is bald and a mischievous fiction.
• Original Sale Doctrine — Under Section 186 of the National Internal Revenue Code, a percentage tax of 7% is imposed on every original sale of goods, wares, or merchandise, based on the gross selling price. The term "original sale" is defined as the first sale by every manufacturer, producer, or importer under Section 5 of Commonwealth Act No. 503. Subsequent sales by persons other than the manufacturer, producer, or importer are not subject to the sales tax. In this case, because Jackbilt's corporate personality was disregarded, the sales of concrete blocks to the public were treated as the original sales subject to tax.
• Alter Ego Doctrine — A corporation may be considered the alter ego of another where the parent corporation so controls the subsidiary that they are practically one and the same. The Court found that Jackbilt was merely an adjunct, business conduit, or alter ego of Norton based on the totality of circumstances, including complete stock ownership, common officers and directors, financing of operations, and the treatment of employees and compensation as common to both.

• "There are quite a series of conspicuous circumstances that militates against the separate and distinct personality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of the business of Liddell & Co. was channel Red 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." — This quotation from Liddell & Co., Inc. v. Collector of Internal Revenue illustrates the type of circumstances that justify disregarding separate corporate personalities, which the Court found analogous to the present case.
• "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fictions." — This passage articulates the core principle of the doctrine of piercing the veil of corporate fiction, which the Court applied to disregard Jackbilt's separate corporate personality.
• "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." — This statement captures the Court's rationale for disregarding the corporate fiction in tax cases where the subsidiary is virtually owned by the parent corporation or where they are practically one and the same.

• Liddell & Co., Inc. vs. Collector of Internal Revenue, L-9687, June 30, 1961 — Controlling precedent cited for the rule that ownership of all the stocks of a corporation by another does not necessarily justify disregarding their distinct personalities, but also for the proposition that where a corporation is a dummy, unreal, or a sham serving no business purpose, the corporate form may be ignored. The Court distinguished this case by finding sufficient additional circumstances to support disregarding the corporate personalities.
• Yutivo Sons Hardware Co. vs. Court of Tax Appeals, L-13203, January 28, 1961 — Followed as a similar ruling where circumstances of unity of corporate identities were shown and which were identical to those obtaining in the case under consideration, involving a subsidiary created for the purpose of selling vehicles at retail.
• Gregory vs. Helvering — Cited for the proposition that while a taxpayer has the legal right to decrease the amount of what would otherwise be his taxes by means which the law permits, the corporate form may be ignored where it is a dummy, unreal, or a sham intended only as a blind.

• Section 186, National Internal Revenue Code — Imposes a percentage tax of 7% on every original sale of goods, wares, or merchandise, based on the gross selling price. The Court applied this provision to hold Norton liable for the deficiency sales tax on the sales of concrete blocks to the public, treating these as the original sales because Jackbilt's corporate personality was disregarded.
• Section 5, Commonwealth Act No. 503 — Defines the term "original sale" as the first sale by every manufacturer, producer, or importer. The Court applied this definition to determine that the sales of concrete blocks to the public constituted the original sales subject to the sales tax, since Jackbilt's separate corporate personality was disregarded.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala, and Makalintal, JJ., concurred.

N/A — The case text does not include any dissenting opinion from the Supreme Court. The partial dissent mentioned was from Presiding Judge Nable of the Court of Tax Appeals, who dissented from the majority's ruling that Norton was not liable, arguing instead that Jackbilt's corporate personality should be disregarded — a position the Supreme Court ultimately adopted.