Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 85416 July 24, 1990
FRANCISCO V. DEL ROSARIO, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONARDO V.
ATIENZA, respondents.

On February 12, 1988, the POEA issued a resolution, the dispositive portion of
which read:
WHEREFORE, premises considered, let an alias writ of
Execution be issued and the handling sheriff is ordered to
execute against the properties of Mr. Francisco V. del -Rosario
and if insufficient, against the cash and/or surety bond of Bonding
Company concerned for the full satisfaction of the judgment
awarded.
Petitioner appealed to the NLRC. On September 23, 1988, the NLRC dismissed the
appeal. On October 21, 1988, petitioner's motion for reconsideration was denied.

Lourdes T. Pagayatan for private respondent.

Thus, this petition was filed on October 28, 1988, alleging that the NLRC gravely
abused its discretion. On November 10, 1988 the Court issued a temporary
restraining order enjoining the enforcement of the NLRC's decision dated
September 23, 1988 and resolution dated October 21, 1988. The petition was given
due course on June 14, 1989.

CORTES, J.:

After considering the undisputed facts and the arguments raised in the pleadings,
the Court finds grave abuse of discretion on the part of the NLRC.

Jardeleza, Sobrevias, Diaz, Hayudini & Bodegon Law Offices for petitioner.

In POEA Case No. 85-06-0394, the Philippine Overseas Employment

Administration (POEA) promulgated a decision on February 4, 1986 dismissing the
complaint for money claims for lack of merit. The decision was appealed to the
National Labor Relations Commission (NLRC), which on April 30, 1987 reversed the
POEA decision and ordered Philsa Construction and Trading Co., Inc. (the recruiter)
and Arieb Enterprises (the foreign employer) to jointly and severally pay private
respondent the peso equivalent of $16,039.00, as salary differentials, and
$2,420.03, as vacation leave benefits. The case was elevated to the Supreme
Court, but the petition was dismissed on August 31, 1987 and entry of judgment
was made on September 24, 1987.
A writ of execution was issued by the POEA but it was returned unsatisfied as
Philsa was no longer operating and was financially incapable of satisfying the
judgment. Private respondent moved for the issuance of an alias writ against the
officers of Philsa. This motion was opposed by the officers, led by petitioner, the
president and general manager of the corporation.

The action of the NLRC affirming the issuance of an alias writ of execution against
petitioner, on the theory that the corporate personality of Philsa should be
disregarded, was founded primarily on the following findings of the POEA
xxx xxx xxx
6. Per the certification issued by the Licensing Division of this
Office, it appears that Philsa Construction & Trading Co., Inc.,
with office address at 126 Pioneer St., Mandaluyong, Metro
Manila, represented by Mr. Francisco V. del Rosario, President
and General Manager, was formerly a registered construction
contractor whose authority was originally issued on July 21, 1978
but was already delisted from the list of agencies/entities on
August 15, 1986 for inactivity;
7. Per another certification issued by the Licensing Division of this
Office, it also appears that another corporation, Philsa
International Placement & Services Corp., composed of

practically the same set of incorporators/stockholders, was

registered as a licensed private employment agency whose
license was issued on November 5, 1981, represented by the
same Mr. Francisco V. del Rosario as its President/ General
Manager.

(1) Private respondent filed his complaint with the POEA on June
4, 1985;

and an application of the ruling of the Court in A.C. Ransom Labor Union-CCLU v.
NLRC, G.R. No. 69494, June 10, 1986, 142 SCRA 269.

(3) The POEA dismissed private respondent's complaint on

February 4, 1986;

However, we find that the NLRC's reliance on the findings of the POEA and the
ruling in A. C. Ransom is totally misplaced.

(4) Philsa was delisted for inactivity on August 15, 1986; *

1. Under the law a corporation is bestowed juridical personality, separate and

distinct from its stockholders [Civil Code, Art. 44; Corporation Code, sec. 2]. But
when the juridical personality of the corporation is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the corporation shall be
considered as a mere association of persons [Koppel (Phil.), Inc. v. Yatco, 77 Phil.
496 (1946), citing 1 Fletcher, Cyclopedia of Corporations, 135-136; see also Palay,
Inc. v. Clave, G.R. No. 56076, September 21, 1983, 124 SCRA 638], and its
responsible officers and/or stockholders shall be held individually liable [Namarco v.
Associated Finance Co., Inc., G.R. No. L-20886, April 27, 1967, 19 SCRA 962]. For
the same reasons, a corporation shall be liable for the obligations of a stockholder
[Palacio v. Fely Transportation Company, G.R. No. L-15121, August 31, 1962, 5
SCRA 1011; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, G.R. No.
L-20502, February 26, 1965, 13 SCRA 290], or a corporation and its successor-ininterest shall be considered as one and the liability of the former shall attach to the
latter [Koppel v. Yatco, supra; Liddell & Co. v. Collector of Internal Revenue, G.R.
No. L-9687, June 30, 1961, 2 SCRA 632].
But for the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
In this regard we find the NLRC's decision wanting. The conclusion that Philsa
allowed its license to expire so as to evade payment of private respondent's claim is
not supported by the facts. Philsa's corporate personality therefore remains
inviolable.
Consider the following undisputed facts:

(2) The last renewal of Philsa's license expired on October 12,

1985;

(5) The dismissal of the complaint was appealed to the NLRC and
it was only on April 30, 1987 that the judgment awarding
differentials and benefits to private respondent was rendered.
Thus, at the time Philsa allowed its license to lapse in 1985 and even at the time it
was delisted in 1986, there was yet no judgment in favor of private respondent. An
intent to evade payment of his claims cannot therefore be implied from the
expiration of Philsa's license and its delisting.
Neither will the organization of Philsa International Placement and Services Corp.
and its registration with the POEA as a private employment agency imply fraud
since it was organized and registered in 1981, several years before private
respondent filed his complaint with the POEA in 1985. The creation of the second
corporation could not therefore have been in anticipation of private respondent's
money claims and the consequent adverse judgment against Philsa
Likewise, substantial identity of the incorporators of the two corporations does not
necessarily imply fraud.
The circumstances of this case distinguish it from those in earlier decisions of the
Court in labor cases where the veil of corporate fiction was pierced.
In La Campana Coffee Factory, Inc. v. Kaisahan ng Manggagawa sa La Campana
(KKM) 93 Phil. 160 (1953), La Campana Coffee Factory, Inc. and La Campana
Gaugau Packing were substantially owned by the same person. They had one
office, one management, and a single payroll for both businesses. The laborers of
the gaugaufactory and the coffee factory were also interchangeable, i.e., the
workers in one factory worked also in the other factory.

In Claparols v. Court of Industrial Relations, G.R. No. L-30822, July 31, 1975, 65
SCRA 613, the Claparols Steel and Nail Plant, which was ordered to pay its workers
backwages, ceased operations on June 30, 1957 and was succeeded on the next
day, July 1, 1957 by the Claparols Steel Corporation. Both corporations were
substantially owned and controlled by the same person and there was no break or
cessation in operations. Moreover, all the assets of the steel and nail plant were
transferred to the new corporation.

At this juncture, the Court finds it appropriate to point out that a judgment against a
recruiter should initially be enforced against the cash and surety bonds filed with the
POEA. As provided in the POEA Rules and Regulations
... The bonds shall answer for all valid and legal claims arising
from violations of the conditions for the grant and use of the
license or authority and contracts of employment. The bonds shall
likewise guarantee compliance with the provisions of the Labor
Code and its implementing rules and regulations relating to
recruitment and placement, the rules of the Administration and
relevant issuances of the Ministry and all liabilities which the
Administration may impose. ... [Rule II, see. 4.]

2. As earlier stated, we also find that, contrary to the NLRC'S holding, the ruling
in A. C. Ransom is inapplicable to this case. In A. C. Ransom, the Court said:
... In the instant case, it would appear that RANSOM, in 1969,
foreseeing the possibility or probability of payment of back wages
to the 22 strikers, organized ROSARIO to replace RANSOM, with
the latter to be eventually phased out if the 22 strikers win their
case. RANSOM actually ceased operations on May 1, 1973, after
the December 19, 1972 Decision of the Court of Industrial
Relations was promulgated against RANSOM. [At p. 274.]
The distinguishing marks of fraud were therefore clearly apparent in A. C. Ransom.
A new corporation was created, owned by the same family, engaging in the same
business and operating in the same compound.
Thus, considering that the non-payment of the workers was a continuing situation,
the Court adjudged its President, the "responsible officer" of the corporation,
personally liable for the backwages awarded, he being the chief operation officer or
"manager" who could be held criminally liable for violations of Republic Act No. 602
(the old Minimum Wage Law.)
In the case now before us, not only has there been a failure to establish fraud, but it
has also not been shown that petitioner is the corporate officer responsible for
private respondent's predicament. It must be emphasized that the claim for
differentials and benefits was actually directed against the foreign employer. Philsa
became liable only because of its undertaking to be jointly and severally bound with
the foreign employer, an undertaking required by the rules of the POEA [Rule II,
sec. 1(d) (3)], together with the filing of cash and surety bonds [Rule 11, sec. 4], in
order to ensure that overseas workers shall find satisfaction for awards in their
favor.

Quite evidently, these bonds do not answer for a single specific liability, but for all
sorts of liabilities of the recruiter to the worker and to the POEA. Moreover, the
obligations guaranteed by the bonds are continuing. Thus, the bonds are subject to
replenishment when they are garnished, and failure to replenish shall cause the
suspension or cancellation of the recruiter's license [Rule II, sec. 19]. Furthermore,
a cash bond shall be refunded to a recruiter who surrenders his license only upon
posting of a surety bond of similar amount valid for three (3) years [Rule II, sec. 20].
All these, to ensure recovery from the recruiter.
It is therefore surprising why the POEA ordered execution "against the properties of
Mr. Francisco V. del Rosarioand if insufficient, against the cash and/or surety bond
of Bonding Company concerned for the till satisfaction of the judgment awarded" in
complete disregard of the scheme outlined in the POEA Rules and Regulations. On
this score alone, the NLRC should not have affirmed the POEA.
WHEREFORE, the petition is GRANTED and the decision and resolution of the
NLRC, dated September 23, 1988 and October 21, 1988, respectively, in POEA
Case No. 85-06-0394 are SET ASIDE. The temporary restraining order issued by
the Court on November 10, 1988 is MADE PERMANENT.
SO ORDERED.

Fisher, DeWitt, Perkins and Brady for appellant.

Ross and Lawrence for appellee.
STATEMENT

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-20214

March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.

For a number of years prior to the times alleged in the complaint, the plaintiff was in
the employ of the International Banking Corporation of Manila, and it is conceded
that he is a competent and experienced business man. July 31, 1916, C. D. Willits
and I. L. Patterson were partners doing business in San Francisco, California, under
the name of Willits & Patterson. The plaintiff was then in San Francisco, and as a
result of negotiations the plaintiff and the firm entered into a written contract, known
in the record as Exhibit A, by which the plaintiff was employed as the agent of the
firm in the Philippine Islands for certain purposes for the period of five years at a
minimum salary of $200 per month and travelling expenses. The plaintiff returned to
Manila and entered on the discharge of his duties under the contract. As a result of
plaintiff's employment and the world war conditions, the business of the firm in the
Philippines very rapidly increased and grew beyond the fondest hopes of either
party. A dispute arose between the plaintiff and the firm as to the construction of
Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile
Patterson retired from the firm and Willits became the sole owner of its assets. For
convenience of operation and to serve his own purpose, Willits organized a
corporation under the laws of California with its principal office at San Francisco, in
and by which he subscribed for, and became the exclusive owner of all the capital
stock except a few shares for organization purposes only, and the name of the firm
was used as the name of the corporation. A short time after that Willits came to
Manila and organized a corporation here known as Willits & Patterson, Ltd., in and
to which he again subscribed for all of the capital stock except the nominal shares
necessary to qualify the directors. In legal effect, the San Francisco corporation took
over and acquired all of the assets and liabilities of the Manila corporation. At the
time that Willits was in Manila and while to all intents and purposes he was the sole
owner of the stock of corporations, there was a conference between him and the
plaintiff over the disputed construction of Exhibit A. As a result of which another
instrument, known in the record as Exhibit B, was prepared in the form of a letter
which the plaintiff addressed to Willits at Manila on November 10, 1919, the
purpose of which was to more clearly define and specify the compensation which
the plaintiff was to receive for his services. Willits received and confirmed this letter
by signing the name of Willits & Patterson, By C.d. Willits. At the time both
corporations were legally organized, and there is nothing in the corporate minutes
to show that Exhibit B was ever formally ratified or approved by either corporation.
After its organization, the Manila corporation employed a regular accountant whose
duty it was to audit the accounts of the company and render financial statements
both for the use of the local banks and the local and parent corporations at San
Francisco. From time to time and in the ordinary course of business such
statements of account were prepared by the accountant and duly forwarded to the
home office, and among other things was a statement of July 31, 1921, showing
that there was due and owing the plaintiff under Exhibit B the sum of P106,277.50.
A short time previous to that date, the San Francisco corporation became involved

in financial trouble, and all of its assets were turned over to a "creditors' committee."
When this statement was received, the "creditors' committee" immediately protested
its allowance. An attempt was made without success to adjust the matter on a
friendly basis and without litigation. January 10, 1922, the plaintiff brought this
action to recover from the defendant the sum of P106,277.50 with legal interest and
costs, and written instruments known in the record as Exhibits A and B were
attached to, and made a part of, the complaint.
For answer, the defendant admits the formal parts of the complaint, the execution of
Exhibit A and denies each and every other allegation, except as specifically
admitted, and alleges that what is known as Exhibit B was signed by Willits without
the authority of the defendant corporation or the firm of Willits & Patterson, and that
it is not an agreement which was ever entered into with the plaintiff by the defendant
or the firm, and, as a separate defense and counterclaim, it alleges that on the 30th
of June, 1920, there was a balance due and owing the plaintiff from the defendant
under the contract Exhibit A of the sum of P8,741.05. That his salary from June 30,
1920, to July 31, 1921, under Exhibit A was $400 per month, or a total of P10,400.
That about July 6, 1921, the plaintiff wrongfully took P30,000 from the assets of the
firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest
and costs, from which it prays judgement.

was therein agreed that he was to be employed for a period of five years as the
agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and
to do such other business as might be deemed advisable for which he was to
receive, first, the travelling expenses of his wife and self from San Francisco to
Manila, second, the minimum salary of $200 per month, third, a brokerage of 1 per
cent upon all purchases and sales of merchandise, except for the account of the
coconut oil mill, fourth, one-half of the profits on any transaction in the name of the
firm or himself not provided for in the agreement. That the agreement also provided
that if it be found that the business was operated at a loss, Arnold should receive a
monthly salary of $400 during such period. That the business was operated at a
loss from June 30, 1920, to July 31, 1921, and that for such reason, he was entitled
to nothing more than a salary of $400 per month, or for that period P10,400. Adding
this amount to the P8,741.05, which the defendant admits he owed Arnold on June
30, 1920, makes a total of P19,141.05, leaving a balance due the defendant as set
out in the counterclaim. In other words, that the plaintiff's compensation was
measured by, and limited to, the above specified provisions in the contract Exhibit A,
and that the defendant corporation is not bound by the terms or provisions of Exhibit
B, which is as follows:
WILLITS & PATTERSON, LTD.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with the
consent and authority of the defendant, and denies all other new matter in the
answer.
Upon such issues a trial was had, and the lower court rendered judgment in favor of
the defendant as prayed for in its counterclaim, from which the plaintiff appeals,
contending that the trial court erred in not holding that the contract between the
parties is that which is embodied in Exhibits A and B, and that the defendant
assumed all partnership obligations, and in failing to render judgment for the
plaintiff, as prayed for, and in dismissing his complaint, and denying plaintiff's
motion for a new trial.

JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions
involved are "what was the contract under which the plaintiff rendered services for
five years ending July 31, 1921," and "what is due the plaintiff under that contract."
Plaintiff contends that his services were performed under Exhibits A and B, and that
the defendant assumed all of the obligations of the original partnership under
Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B.
The defendant admits that Exhibit A was the original contract between Arnold and
the firm of Willits & Patterson by which he came to the Philippine Islands, and that it

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My understanding of the intent of my
agreement with Willits & Patterson is as under:
Commissions. Willits & Patterson, San Francisco, pay me a
commission of one per cent on all purchases made for them in
the Philippines or sales made to them by Manila and one per cent
on all sales made for them in the Philippines, or purchases made
from them by Manila. If such purchases or sales are on an f. o. b.
basis the commission is on the f. o. b. price; if on a c. i. f. basis
the commission is computed on the c. i. f. price
These commissions are credited to me in San Francisco.
I do not participate in any profits on business transacted between
Willits & Patterson, San Francisco, and Willits & Patterson, Ltd.,
Manila.

Profits. On all business transacted between Willits & Patterson,

Ltd. and others than Willits & Patterson, San Francisco, half the
profits are to be credited to my account and half to the Profit &
Loss account of Willits & Patterson, Ltd., Manila.
On all other business, such as the Cooperative Coconut Products
Co. account, or any other business we may undertake as agents
or managers, half the profits are to be credited to my account and
half to the Profit & Loss account of Willits & Patterson, Ltd.,
Manila.
Where Willits & Patterson, San Francisco, or Willits & Patterson,
Ltd., Manila, have their own funds invested in the capital stock or
a corporation, I of course do not participate in the earnings of
such stock, any more than Willits & Patterson would participate in
the earnings of stock held by me on my account.
If the foregoing conforms to your understanding of our agreement,
please confirm below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the inception C.D.
Willits and I. L. Patterson constituted the firm of Willits & Patterson doing business
in the City of San Francisco; that later Patterson retired from the firm, and Willits
acquired all of his interests and thereafter continued the business under the name
and style of Willits & Patterson; that the original contract Exhibit A was made
between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a
period of five years from that date; that plaintiff entered upon the discharged of his
duties and continued his services in the Philippine Islands to someone for the
period of five years; that on November 10, 1919, and as a result of conferences
between Willits and the plaintiff, Exhibit B was addressed and signed in the manner
and form above stated in the City of Manila. A short time prior to that date Willits
organized a corporation in San Francisco, in the State of California, which took over
and acquired all of the assets of the firm's business in California then being
conducted under the name and style of Willits & Patterson; that he subscribed for all
of the capital stock of the corporation, and that in truth and in fact he was the owner

of all of its capital stock. After this was done he caused a new corporation to be
organized under the laws of the Philippine Islands with principal office at Manila,
which took over and acquired all the business and assets of the firm of Willits &
Patterson in the Philippine Islands, in and to which, in legal effect, he subscribed for
all of its capital stock, and was the owner of all of its stock. After both corporations
were organized the above letter was drafted and signed. The plaintiff contends that
the signing of Exhibit B in the manner and under the conditions in which it was
signed, and through the subsequent acts and conduct of the parties, was ratified
and, in legal effect, became and is now binding upon the defendant.
It will be noted that Exhibit B was executed in Manila, and that at the time it was
signed by Willits, he was to all intents and purposes the legal owner of all the stock
in both corporations. It also appears from the evidence that the parent corporation
at San Francisco took over and acquired all of the assets and liabilities of the local
corporation at Manila. That after it was organized the Manila corporation kept
separate records and account books of its own, and that from time to time financial
statements were made and forwarded to the home office, from which it conclusively
appears that plaintiff was basing his claim for services upon Exhibit A, as it was
modified by Exhibit B. That at no time after Exhibit B was signed was there ever any
dispute between plaintiff and Willits as to the compensation for plaintiff's services.
That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed
and at all times in force and effect, after it was signed November 10, 1919. It
appears from an analysis of Exhibit B that it was for the mutual interest of both
parties. From a small beginning, the business was then in a very flourishing
conditions and growing fast, and the profits were very large and were running into
big money.
Among other things, Exhibit A provided: "(a) That the net profits from said coconut
oil business shall be divided in equal shares between the said parties hereto; (b)
that Arnold should receive a brokerage of 1 per cent from all purchases and sales of
merchandise, except for the account of the coconut mills; (c) that the net profits
from all other business should be divided in equal half shares between the parties
hereto."
Under the above provisions, the plaintiff might well contend that he was entitled to
one-half of all the profits and a brokerage of 1 per cent from all purchases and
sales, except those for the account of the coconut oil mills, which under the volume
of business then existing would run into a very large sum of money. It was for such
reason and after personal conferences between them, and to settle all disputed
questions, that Exhibit B was prepared and signed.
The record recites that "the defendant admits that from July 31, 1916 to July 31,
1921, the plaintiff faithfully performed all the duties incumbent upon him under his
contract of employment, it being understood, however, that this admission does not
include an admission that the plaintiff placed a proper interpretation upon his right to
remuneration under said contract of employment."

It being admitted that the plaintiff worked "under his contract of employment" for the
period of five years, the question naturally arises, for whom was he working? His
contract was made with the original firm of Willits & Patterson, and that firm was
dissolved and it ceased to exist, and all of its assets were merged in, and taken
over by, the parent corporation at San Francisco. In the very nature of things, after
the corporation was formed, the plaintiff could not and did not continue to work for
the firm, and, yet, he continued his employment for the full period of five years. For
whom did he work after the partnership was merged in the corporation and ceased
to exist?

The proposition that a corporation has an existence separate and distinct

from its membership has its limitations. It must be noted that this separate
existence is for particular purposes. It must also be remembered that there
can be no corporate existence without persons to compose it; there can be
no association without associates. This separate existence is to a certain
extent a legal fiction. Whenever necessary for the interests of the public or
for the protection or enforcement of the rights of the membership, courts
will disregard this legal fiction and operate upon both the corporation and
the persons composing it.

It is very apparent that, under the conditions then existing, the signing of Exhibit B
was for the mutual interests of both parties, and that if the contract Exhibit A was to
be enforced according to its terms, that Arnold might well contend for a much larger
sum of money for his services. In truth and in fact Willits and both corporations
recognized his employment and accepted the benefits of his services. He continued
his employment and rendered his services after the corporation were organized and
Exhibit B was signed just the same as he did before, and both corporations
recognized and accepted his services. Although the plaintiff was president of the
local corporation, the testimony is conclusive that both of them were what is known
as a one man corporation, and Willits, as the owner of all of the stock, was the force
and dominant power which controlled them. After Exhibit B was signed it was
recognized by Willits that the plaintiff's services were to be performed and
measured by its term and provisions, and there never was any dispute between
plaintiff and Willits upon that question.

In the same section, the author quotes from a decision in 49 Ohio State, 1371; 15 L.
R. A., 145, in which the Supreme Court of Ohio says:

The controversy first arose after the corporation was in financial trouble and the
appointment of what is known in the record as a "creditors' committee." There is no
claim or pretense that there was any fraud or collusion between plaintiff and Willits,
and it is very apparent that Exhibit B was to the mutual interest of both parties. It is
elementary law that if Exhibit B is a binding contract between the plaintiff and Willits
and the corporations, it is equally binding upon the creditors' committee. It would not
have any higher or better legal right than the corporation itself, and could not make
any defense which it could not make. It is very significant that the claim or defense
which is now interposed by the creditors' committee was never made or asserted at
any previous time by the defendant, and that it never was made by Willits, and it is
very apparent that if he had remained in control of the corporation, it would never
have made the defense which is now made by the creditors' committee. The record
is conclusive that at the time he signed Exhibit B, Willits was, in legal effect, the
owner and holder of all the stock in both corporations, and that he approved it in
their interest, and to protect them from the plaintiff having and making a much larger
claim under Exhibit A. As a matter of fact, it appears from the statement of Mr.
Larkin, the accountant, in the record that if plaintiff's cause of action was now
founded upon Exhibit A, he would have a claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:

"So long as a proper use is made of the fiction that a corporation is an

entity apart from its shareholders, it is harmless, and, because convenient,
should not be called in question; but where it is urged to an end subversive
of its policy, or such is the issue, the fiction must be ignored, and the
question determined whether the act in question, though done by
shareholders, that is to say, by the persons uniting in one body, was
done simply as individuals, and with respect to their individual interest as
shareholders, or was done ostensibly as such, but, as a matter of fact, to
control the corporation, and affect the transaction of its business, in the
same manner as if the act had been clothed with all the formalities of a
corporate act. This must be so, because, the stockholders having a dual
capacity, and capable of acting in either, and a possible interest to conceal
their character when acting in their corporate capacity, the absence of the
formal evidence of the character of the act cannot preclude judicial inquiry
on the subject. If it were otherwise, then in that department of the law fraud
would enjoy an immunity awarded to it in no other."
Where the stock of a corporation is owned by one person whereby the
corporation functions only for the benefit of such individual owner, the
corporation and the individual should be deemed to be the same. (U. S.
Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)
Ruling Case Law, vol. 7, section 663, says:
While of course a corporation cannot ratify a contract which is strictly ultra
vires, and which it in the first instance could not have made, it may by
ratification render binding on it a contract, entered into on its behalf by its
officers or agents without authority. As a general rule such ratification need
not be manifested by any voted or formal resolution of the corporation or
be authenticated by the corporate seal; no higher degree of evidence is
requisite in establishing ratification on the part of a corporation, than is
requisite in showing an antecedent authorization.

xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts done on its

account may be inferred in the same manner that the absent of a natural
person may be, and it is well settled that where a corporation with full
knowledge of the unauthorized act of its officer or agents acquiesces in
and consents to such acts, it thereby ratifies them, especially where the
acquiescence results in prejudice to a third person.
xxx

xxx

xxx

SEC. 669. So, when, in the usual course of business of a corporation, an

officer has been allowed in his official capacity to manage its affair, his
authority to represent the corporation may be inferred from the manner in
which he has been permitted by the directors to transact its business.
SEC. 656. In accordance with a well-known rule of the law of agency,
notice to corporate officers or agents within the scope or apparent scope of
their authority is attributed to the corporation.
SEC. 667. As a general rule, if a corporation with knowledge of its agents
unauthorized act received and enjoys the benefits thereof, it impliedly
ratifies the unauthorized act if it is one capable of ratification by parol.
In its article on corporations, Corpus Juris, in section 2241 says:
Ratification by a corporation of a transaction not previously authorized is
more easily inferred where the corporation receives and retains property
under it, and as a general rule where a corporation, through its proper
officers or board, takes and retains the benefits of the unauthorized act or
contract of an officer or agent, with full knowledge of all the material facts,
it thereby ratifies and becomes bound by such act of contract, together
with all the liabilities and burdens resulting therefrom, and in some
jurisdiction this rule is, in effect, declared by statute. Thus the corporation
is liable on the ground of ratification where, with knowledge of the facts, it
accepts the benefit of services rendered under an unauthorized contract of
employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local corporation, and
from time to time and in the ordinary course of business made and prepared
financial statements showing its assets and liabilities, true copies of which were
sent to the home office in San Francisco. It appears upon their face that plaintiff's
compensation was made and founded on Exhibit B, and that such statements were

made and prepared by the accountant on the assumption that Exhibit B was in full
force and effect as between the plaintiff and the defendant. In the course of
business in the early part of 1920, plaintiff, as manager of the defendant, sold 500
tons of oil for future delivery at P740 per ton. Due to break in the market, plaintiff
was able to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profit are to be credited to
may account and half to the Profit & Loss account Willits & Patterson, Ltd.,
Manila.
The purchasers paid P105,000 on the contracts and gave their notes for P75,000,
and it was agreed that all of the oil purchased should be held as security for the full
payment of the purchase price. As a result, the defendant itself received the
P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for
the balance of the purchase price. This transaction was shown in the semi-annual
financial statement for the period ending December 31, 1920. That is to say, the
business was transacted by and through the plaintiff, and the defendant received
and accepted all of the profits on the deal, and the statement which was rendered
gave him a credit for P90,737.88, or half the profit as provided in the contract
Exhibit B, with interest.
Although the previous financial statements show upon their face that the account of
plaintiff was credit with several small items on the same basis, it was not until the
23d of March, 1921, that any objection was ever made by anyone, and objection
was made for the first time by the creditors' committee in a cable of that date.
As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is
now binding upon the defendant corporation, and the plaintiff is entitled to recover
for his services on that writing as it modified the original contract Exhibit A.
It appears from the statement prepared by accountant Larkin founded upon Exhibit
B that the plaintiff is entitled to recover P106,277.50. It is very apparent that his
statement was based upon the assumption that there was a net profit of P180,000
on the 500 tons of oil, of which the plaintiff was entitled to one-half.
In the absence of any other proof, we have the right to assume that the 500 tons of
oil was worth the amount which the defendant paid for them at the time of the
purchase or P380 per ton, and the record shows that the defendant took and now
has the possession of all of the oil secure the payment of the price at which it was
sold. Hence, the profit on the deal to the defendant at the time of the sale would
amount to the difference between what the defendant paid for the oil and the
amount which it received for the oil at the time it sold the oil. It appears that at the
time of the sale the defendant only received P105,000 in cash, and that it took and

accepted the promissory notes of Cruz & Tan Chong Say, the purchasers, for
P75,000 more which have been collected and may never be. Hence, it must follow
that the amount evidence by the notes cannot now be deemed or treated as profits
on the deal and cannot be until such times as the notes are paid.
The judgment of the lower court is reversed, and a money judgment will be entered
here in favor of the plaintiff and against the defendant for the sum of P68,527.50,
with thereon at the rate of 6 per cent per annum from the 10th day of January, 1922.
In addition thereto, judgment will be rendered against the defendant in substance
and to the effect that the plaintiff is the owner of an undivided one-half interest in the
promissory notes for P75,000 which were executed by Cruz & Tan Chong Say, as a
part of the purchase price of the oil, and that he is entitled to have and receive onehalf of all the proceeds from the notes or either of them, and that also he have
judgment against the defendant for costs. So ordered.

KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM) and THE

COURT OF INDUSTRIAL RELATIONS,respondents.
Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V. Roxas for
petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged in the
business of buying and selling gaugau under the trade name La Campana Gaugau
Packing with an establishment in Binondo, Manila, which was later transferred to
Espaa Extension, Quezon City. But on July 6, 1950, Tan Tong, with himself and
members of his family corporation known as La Campana Factory Co., Inc., with its
principal office located in the same place as that of La Campana Gaugau Packing.
About a year before the formation of the corporation, or on July 11, 1949, Tan Tong
had entered into a collective bargaining agreement with the Philippine Legion of
Organized Workers, known as PLOW for short, to which the union of Tan Tong's
employees headed by Manuel E. Sadde was then affiliated. Seceding, however,
from the PLOW, Tan Tong's employees later formed their own organization known
as Kaisahan Ng Mga Manggagawa Sa La Campana, one of the herein
respondents, and applied for registration in the Department of Labor as an
independent entity. Pending consideration of this application, the Department gave
the new organization legal standing by issuing it a permit as an affiliate to
the Kalipunan Ng Mga Manggagawa.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-5677

May 25, 1953

LA CAMPANA FACTORY, INC., and TAN TONG doing business under the trial
name "LA CAMPANA GAUGAU PACKING", petitioners,
vs.

On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana, hereinafter

to be referred to as the respondent Kaisahan, which, as of that date, counted with
66 members workers all of them of both La Campana Gaugau Packing and La
Campana Coffee Factory Co., Inc. presented a demand for higher wages and
more privileges, the demand being addressed to La Campana Starch and Coffee
Factory, by which name they sought to designate, so it appears, the La Campana
Gaugau Packing and the La Campana Coffee Factory Co., Inc. As the demand was
not granted and an attempt at settlement through the mediation of the Conciliation
Service of the Department of Labor had given no result, the said Department
certified the dispute to the Court of Industrial Relations on July 17, 1951, the case
being there docketed as Case No. 584-V.
With the case already pending in the industrial court, the Secretary of Labor, on
September
5,
1951,
revoked
theKalipunan
Ng
Mga
Kaisahang

Manggagawa's permit as a labor union on the strength of information received that

it was dominated by subversive elements, and, in consequence, on the 20th of the
same month, also suspended the permit of its affiliate, the respondent Kaisahan.
We have it from the court's order of January 15, 1952, which forms one of the
annexes to the present petition, that following the revocation of the Kaisahan's
permit, "La Campana Gaugau and Coffee Factory" (obviously the combined name
of La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc,) and
the PLOW, which had been allowed to intervene as a party having an interest in the
dispute, filed separate motions for the dismissal of the case on the following
grounds:
1. That the action is directed against two different entities with distinct
personalities, with "La Campana Starch Factory" and the "La Campana
Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory, Inc." are less than
thirty-one;
3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the Department of
Labor on September 5, 1951; and

executed only on September 1, 1951, while the dispute between the

parties was pending before the Court.
C. There is only one entity La Campana Starch and Coffee Factory, as
shown by the signboard (Exhibit 1), the advertisement in the delivery
trucks (Exhibit I-1), the packages of gaugau(Exhibit K), and delivery forms
(Exhibits J, J-1, and J-2).
D. All the laborers working in the gaugau or in the coffee factory receive
their pay from the same person, the cashier, Miss Natividad Garcia,
secretary of Mr. Tan Tong; and they are transferred from the gaugau to the
coffee and vice-versa as the management so requires.
E. There has been only one payroll for the entire La Campana personnel
and only one person preparing the same Miss Natividad Garcia,
secretary of Mr. Tan Tong. But after the case at bar was certified to this
Court on July 17, 1951, the company began making separate payrolls for
the coffee factory (Exhibits M-2 and M-3, and for the gaugau factory
(Exhibits O-2, O-3 and O-4). It is to be noted that before July 21, 1951, the
coffee payrolls all began with number "41-Maria Villanueva" with 24 or
more laborers (Exhibits M and M-1), whereas beginning July 21, 1951, the
payrolls for the coffee factory began with No. 1-Loreta Bernabe with only
14 laborers (Exhibits M-2 and M-3).

4. That there is an existing valid contract between the respondent "La

Campana Gaugau Packing" and the intervenor PLOW, where-in the
petitioner's members are contracting parties bound by said contract.

F. During the ocular inspection made in the factory on August 26, 1951 the
Court has found the following:

Several hearings were held on the above motions, in the course of which ocular
inspections were also made, and on the basis of the evidence received and the
facts observed in the ocular inspections, the Court of Industrial Relations denied the
said motions in its order of January 14, 1952, because if found as a fact that:

In the ground floor and second floor of the gaugau factory there were
hundreds of bags of raw coffee behind the pile of gaugau sacks. There
were also women employees working paper wrappers for gaugau, and, in
the same place there were about 3,000 cans to be used as containers for
coffee.

A. While the coffee corporation is a family corporation with Mr. Tan Tong,
his wife, and children as the incorporations and stockhelders (Exhibit 1),
the La Campana Gaugau Packing is merely a business name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan Tong., propriety
and manager of the Ka Campana Gaugau Factory, leased a space of 200
square meters in the bodega housing the gaugau factory to his son Tan
Keng Lim, manager of the La Campana Coffee Factory. But the lease was

The Court found out also that there were 16 trucks used both for the
delivery of coffee and gaugau. To show that those trucks carried both
coffee and gaugau, the union president invited the Court to examine the
contents of delivery truck No. T-582 parked in a garage between the
gaugau building and the coffee factory, and upon examination, there were
found inside the said truck boxes of gaugau and cans of coffee,

and held that:

. . . there is only one management for the business of gaugau and coffee
with whom the laborers are dealing regarding their work. Hence, the filing
of action against the Ka Campana Starch and Coffee Factory is proper and
justified.
With regards to the alleged lack of personality, it is to be noted that before
the certification of the case to this Court on July 17, 1951, the
petitioner Kaisahan Ng Mga Manggagawa Sa La Campana, had a
separate permit from the Department of Labor. This permit was suspended
on September 30, 1951. (Exhibit M-Intervenor, page 55, of the record). It is
not true that, on July 17, 1951, when this case forwarded to this Court, the
petitioner's permit, as an independent union, had not yet been issued, for
the very Exhibit MM-Intervenor regarding the permit, conclusively shows
the preexistence of said permit. (Annex G.)
Their motion for reconsideration of the above order having been denied, Tan Tong
and La Campana Coffee Factory, Inc. (same as La Campana Coffee Factory Co.,
Inc.), later joined by the PLOW, filed the present petition for certiorari on the
grounds that the Court of Industrial Relations had no jurisdiction to take cognizance
of the case, for the reason, according to them, "(1) that the petitioner La Campana
Coffee Factory, Inc. has only 14 employees, only 5 of whom are members of the
respondent union and therefore the absence of the jurisdictional number (30) as
provided by sections 1 and 4 of Commonwealth Act No. 103; and, (2) that the
suspension of respondent union's permit by the Secretary of Labor has the effect of
taking away the union's right to collective bargaining under section 2 of
Commonwealth Act No. 213 and consequently, its personality to sue for ad in behalf
of its members."
As to the first ground, petitioners obviously do not question the fact that the number
of employees of the La Campana Gaugau Packing involved in the case is more
than the jurisdictional number (31) required bylaw, but they do contend that the
industrial court has no jurisdiction to try the case as against La Campana Coffee
Factory, Inc. because the latter has allegedly only 14 laborers and only of these are
members of the respondent Kaisahan. This contention loses force when it is noted
that, as found by the industrial court and this finding is conclusive upon us La
Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating
under one single management, that is, as one business though with two trade
names. True, the coffee factory is a corporation and, by legal fiction, an entity
existing separate and apart fro the persons composing it, that is, Tan Tong and his

family. But it is settled that this fiction of law, which has been introduced as a matter
of convenience and to subserve the ends of justice cannot be invoked to further an
end subversive of that purpose.
Disregarding Corporate Entity. The doctrine that a corporation is a legal
entity existing separate and apart from the person composing it is a legal
theory introduced for purposes of convenience and to subserve the ends
of justice. The concept cannot, therefore, be extended to a point beyond its
reason and policy, and when invoked in support of an end subversive of
this policy, will be disregarded by the courts. Thus, in an appropriate case
and in furtherance of the ends of justice, a corporation and the individual or
individuals owning all its stocks and assets will be treated as identical, the
corporate entity being disregarded where used as a cloak or cover for
fraud or illegality. (13 Am. Jur., 160-161.)
. . . A subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be regarded
as identical with the parent corporation, especially if the stockholders or
officers of the two corporations are substantially the same or their system
of operation unified. (Ibid. 162; see Annotation 1 A. L. R. 612, s. 34 A. L. R.
599.)
In the present case Tan Tong appears to be the owner of the gaugau factory. And
the coffee factory, though an incorporated business, is in reality owned exclusively
by Tan Tong and his family. As found by the Court of industrial Relations, the two
factories have but one office, one management and one payroll, except after July
17, the day the case was certified to the Court of Industrial Relations, when the
person who was discharging the office of cashier for both branches of the business
began preparing separate payrolls for the two. And above all, it should not be
overlooked that, as also found by the industrial court, the laborers of
the gaugau factory and the coffee factory were interchangeable, that is, the laborers
from the gaugau factory were sometimes transferred to the coffee factory and viceversa. In view of all these, the attempt to make the two factories appears as two
separate businesses, when in reality they are but one, is but a device to defeat the
ends of the law (the Act governing capital and labor relations) and should not be
permitted to prevail.
The second point raised by petitioners is likewise with-out merit. In the first place,
there being more than 30 laborers involved and the Secretary of Labor having
certified the dispute to the Court of Industrial Relations, that court duly acquired
jurisdiction over the case (International Oil Factory vs. NLU, Inc. 73 Phil., 401;

section 4, C. A. 103). This jurisdiction was not when the Department of Labor
suspended the permit of the respondent Kaisahan as a labor organization. For once
jurisdiction is acquired by the Court of Industrial Relations it is retained until the
case is completely decided. (Manila Hotel Employees Association vs. Manila Hotel
Co. et al., 73 Phil., 374.)
In view of the foregoing, the petition is denied, with costs against the petitioner.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-13203

January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax Appeals ordering
petitioner to pay to respondent Collector of Internal Revenue the sum of
P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth
quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54,
or a sum total of P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears
that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a
domestic corporation, organized under the laws of the Philippines, with principal
office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to
the last world war, in the importation and sale of hardware supplies and equipment.

After the liberation, it resumed its business and until June of 1946 bought a number
of cars and trucks from General Motors Overseas Corporation (hereafter referred to
as GM for short), 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.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was
organized to engage in the business of selling cars, trucks and spare parts. Its
original authorized capital stock was P1,000,000 divided into 10,000 shares with a
par value of P100 each.

subsidiary of Yutivo." The withdrawal was subject, however, to the general power of
review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom
the papers relative to the case were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to the respondent Collector for
reinvestigation.
After another investigation, the respondent Collector, in a letter to petitioner dated
December 16, 1954, redetermined that the aforementioned tax assessment was
lawfully due the government and in addition assessed deficiency sales tax due from
petitioner for the four quarters of 1950; the respondents' last demand was in the
total sum of P2,215,809.27 detailed as follows:

At the time of its incorporation 2,500 shares worth P250,000 appear to have been
subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu
Eng Poh, and Washington Sycip. The first three named subscribers are brothers,
being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively
sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in
the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by
Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks 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 prescribed 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.
On November 7, 1950, after several months of investigation by revenue officers
started in July, 1948, the Collector of Internal Revenue made an assessment upon
Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus
surcharge covering the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming 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.
The assessment was disputed by the petitioner, and a reinvestigation of the case
having been made by the agents of the Bureau of Internal Revenue, the respondent
Collector in his letter dated November 15, 1952 countermanded his demand for
sales tax deficiency on the ground that "after several investigations conducted into
the matter no sufficient evidence could be gathered to sustain the assessment of
this Office based on the theory that Southern Motors is a mere instrumentality or

Deficiency
Sales Tax

75%
Surcharge

Tot
Due

Assessment (First) of November 7, 1950 for

deficiency sales Tax for the period from 3rd Qrtr
1947 to 4th Qrtr 1949 inclusive

P773,473.4
P1,031,296.60 5

P1,

Additional Assessment for period from 1st to 4th

Qrtr 1950, inclusive

234,880.13

176,160.09

411

Total amount demanded per letter of December

16, 1954

P949,632.5
P1,266,176.73 4

P2,

This second assessment was contested by the petitioner Yutivo before the Court of
Tax Appeals, alleging 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 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 respondent. Finding against Yutivo and sustaining the respondent
Collector's theory that there was no legitimate or bona fide purpose in the
organization of SM the apparent objective of its organization being to evade the
payment of taxes and that it was owned (or the majority of the stocks thereof are
owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit,
instrumentality or alter ego of the latter, the Court of Tax Appeals with Judge
Roman Umali not taking part disregarded its separate corporate existence and

on April 27, 1957, rendered the decision now complained of. Of the two Judges who
signed the decision, one voted for the modification of the computation of the sales
tax as determined by the respondent Collector in his decision so as to give
allowance for the reduction of the tax already paid (resulting in the reduction of the
assessment to P820,509.91 exclusive of surcharges), while the other voted for
affirmance. The dispositive part of the decision, however, affirmed the assessment
made by the Collector. Reconsideration of this decision having been denied, Yutivo
brought the case to this Court thru the present petition for review.
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 corporation
petitions 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. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496,
citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States
vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.)
Another rule is that, when the corporation is the "mere alter ego or business conduit
of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule
that the Court of Tax Appeals was not justified in finding that SM was organized for
no other purpose than to defraud the Government of its lawful revenues. In the first
place, this corporation was organized in June, 1946 when it could not have caused
Yutivo any tax savings. From that date up to June 30, 1947, or a period of more
than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in
turn resold them to SM. During that period, it is not disputed that GM as importer,
was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the
sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not
arise until July 1, 1947 when it became the importer and simply continued its
practice of selling to SM. The decision, therefore, of the Tax Court that SM was
organized purposely as a tax evasion device runs counter to the fact that there was
no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945
it was known that GM was preparing to leave the Philippines and terminate its
business of importing vehicles," the court below speculated that Yutivo anticipated
the withdrawal of GM from business in the Philippines in June, 1947. This
observation, which was made only in the resolution on the motion for
reconsideration, however, finds no basis in the record. On the other hand, GM had
been an importer of cars in the Philippines even before the war and had but recently
resumed its operation in the Philippines in 1946 under an ambitious plan to expand
its operation by establishing an assembly plant here, so that it could not have been
expected to make so drastic a turnabout of not merely abandoning the assembly
plant project but also totally ceasing to do business as an importer. Moreover, the
newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping,
merely reported a rumored plan that GM would abandon the assembly plant project

in the Philippines. There was no mention of the cessation of business by GM which

must not be confused with the abandonment of the assembly plant project. Even as
respect the assembly plant, the newspaper clipping was quite explicit in saying that
the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost
a year after SM was organized.
At this juncture, it should be stated that 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. (Vitelli & Sons
vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d)
509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield
Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833;
Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore
vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93;
Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also
Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo
vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances which, at the most, create only
suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs.
Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under circumstance that
belied any intention to evade sales taxes. "Tax evasion" is a term that connotes
fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The
transactions between Yutivo and SM, however, have always been in the open,
embodied in private and public documents, constantly subject to inspection by the
tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and
trucks for Visayas and Mindanao, it merely continued the method of distribution that
it had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM,
such justification certainly ceased with the passage of Republic Act No. 594 on
February 16, 1951, governing payment of advance sales tax by the importer based
on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and
100%, depending on whether the imported article is taxed under sections 186, 185
and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at
which the article is sold is immaterial to the amount of the sales tax. And yet after
the passage of that Act, SM continued to exist up to the present and operates as it
did many years past in the promotion and pursuit of the business purposes for
which it was organized.
In the third place, sections 184 to 186 of the said Code provides that the sales tax
shall be collected "once only on every original sale, barter, exchange . . , to be paid
by the manufacturer, producer or importer." The use of the word "original" and the
express provision that the tax was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this connection, it should be

stated that a taxpayer has the legal right to decrease the amount of what otherwise
would be his taxes or altogether avoid them by means which the law permits. (U.S.
vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs.
Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the
taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may,
therefore, perform an act that he honestly believes to be sufficient to exempt him
from taxes. He does not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was
held that though an incorrect position in law had been taken by the corporation
there was no suppression of the facts, and a fraud penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the respondent Collector himself
showed a great deal of doubt or hesitancy as to the existence of fraud. He even
doubted the validity of his first assessment dated November 7, 1959. It must be
remembered that the fraud which respondent Collector imputed to Yutivo must be
related to its filing of sales tax returns of less taxes than were legally due. The
allegation of fraud, however, cannot be sustained without the showing that Yutivo, in
filing said returns, did so fully knowing that the taxes called for therein called for
therein were less than what were legally due. Considering that respondent Collector
himself with the aid of his legal staff, and after some two years of investigation and
duty of investigation and study concluded in 1952 that Yutivo's sales tax returns
were correct only to reverse himself after another two years it would seem
harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that
its sales tax returns were inaccurate.
On this point, one other consideration would show that the intent to save taxes
could not have existed in the minds of the organizers of SM. The sales tax imposed,
in theory and in practice, is passed on to the vendee, and is usually billed
separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not
SM handled the retail, the additional tax that would have been payable by it, could
have been easily passed off to the consumer, especially since the period covered
by the assessment was a "seller's market" due to the post-war scarcity up to late
1948, and the imposition of controls in the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its noninclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but
said non-inclusion was explained to have been due to an inadvertent accounting
omission, and could hardly be considered as proof of willful channelling and
fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove
fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec.
55.11 p. 21) The amount involved, moreover, is extremely small inducement for
Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of
these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs.
Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below 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. It is not disputed that the petitioner,
which is engaged principally in hardware supplies and equipment, is completely
controlled by the Yutivo, Young or Yu family. The founders of the corporation are
closely related to each other either by blood or affinity, and most of its stockholders
are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was
organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time
of its incorporation 2,500 shares worth P250,000.00 appear to have been
subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu
Eng Poh and Washington Sycip. The first three named subscribers are brothers,
being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and
Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are
co-founders of Yutivo. According to the Articles of Incorporation of the said
subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The additional subscriptions to the
capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The
payments were made, however, without any transfer of funds from Yutivo to SM.
Yutivo simply charged the accounts of the subscribers for the amount allegedly
advanced by Yutivo in payment of the shares. Whether a charge was to be made
against the accounts of the subscribers or said subscribers were to subscribe
shares appears to constitute a unilateral act on the part of Yutivo, there being no
showing that the former initiated the subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was
Yutivo who undertook the subscription of shares, employing the persons named or
"charged" with corresponding account as nominal stockholders. Of course, Yu Khe
Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the principal officers and constituted
the majority of the Board of Directors of both Yutivo and SM, their subscriptions
could readily or easily be that of Yutivo's Moreover, these persons were related to
death other as brothers or first cousins. There was every reason for them to agree
in order to protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by
various person's but except Ng Sam Bak and David Sycip, "payments" thereof were
effected by merely debiting 'or charging the accounts of said stockholders and
crediting the corresponding amounts in favor of SM, without actually transferring
cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by
the mere unilateral act of Yutivo a accounts of the virtue of its control over the
individual persons charged, would necessarily exercise preferential rights and
control directly or indirectly, over the shares, it being the party which really
undertook to pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and
in behalf of Yutivo, so even conceding that the original subscribers were

stockholders bona fide Yutivo was at all times in control of the majority of the stock
of SM and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but
the transfers were made to their immediate relatives, either to their respective
spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were
transferred to immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes in stock
ownership in both corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe
Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the
majority in both boards. All these, as observed by the Court of Tax Appeals, merely
serve to corroborate the fact that there was a common ownership and interest in the
two corporations.
SM is under the management and control of Yutivo by virtue of a management
contract entered into between the two parties. In fact, the controlling majority of the
Board of Directors of Yutivo is also the controlling majority of the Board of Directors
of SM. At the same time the principal officers of both corporations are identical. In
addition both corporations have a common comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no
doubt that by virtue of such control, the business, financial and management
policies of both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash
transactions. All cash assets of SM were handled by Yutivo and all cash
transactions of SM were actually maintained thru Yutivo. Any and all receipts of
cash by SM including its branches were transmitted or transferred immediately and
directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases
or other obligations incurred by SM are referred to Yutivo which in turn prepares the
corresponding disbursement vouchers and payments in relation there, the payment
being made out of the cash deposits of SM with Yutivo, if any, or in the absence
thereof which occurs generally, a corresponding charge is made against the
account of SM in Yutivo's books. The payments for and charges against SM are
made by Yutivo as a matter of course and without need of any further request, the
latter would advance all such cash requirements for the benefit of SM. Any and all
payments and cash vouchers are made on Yutivo stationery and made under
authority of Yutivo's corporate officers, without any copy thereof being furnished to
SM. All detailed records such as cash disbursements, such as expenses,
purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a
summary record thereof on the basis of information received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches
which are directly remitted to Yutivo, are placed in the custody and control of Yutivo,
resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's
control, the former's operations and existence became dependent upon the latter.

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.
Apart from the accounting system, other facts corroborate or independently show
that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod,
Iloilo, Cebu, and Davao treat Yutivo Manila as their "Head Office" or "Home
Office" as shown by their letters of remittances or other correspondences. These
correspondences were actually received by Yutivo and the reference to Yutivo as
the head or home office is obvious from the fact that all cash collections of the SM's
branches are remitted directly to Yutivo. Added to this fact, is that SM may freely
use forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made more patent by
the fact that arrastre conveying, and charges paid for the "operation of receiving,
loading or unloading" of imported cars and trucks on piers and wharves, were
charged against SM. Overtime charges for the unloading of cars and trucks as
requested by Yutivo and incurred as part of its acquisition cost thereof, were
likewise charged against and treated as expenses of SM. If Yutivo were the
importer, these arrastre and overtime charges were Yutivo's expenses in importing
goods and not SM's. But since those charges were made against SM, it plainly
appears that Yutivo had sole authority to allocate its expenses even as against SM
in the sense that the latter is a mere adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the parties, the management fees
due from SM to Yutivo were taken up as expenses of SM and credited to the
account of Yutivo. If it were to be assumed that the two organizations are separate
juridical entities, the corresponding receipts or receivables should have been
treated as income on the part of Yutivo. But such management fees were recorded
as "Reserve for Bonus" and were therefore a liability reserve and not an income
account. This reserve for bonus were subsequently distributed directly to and
credited in favor of the employees and directors of Yutivo, thereby clearly showing
that the management fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and
actually extended all the credit to the latter not only in the form of starting capital but
also in the form of credits extended for the cars and vehicles allegedly sold by
Yutivo to SM as well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock were made in
advances or "Guarantee" payments by Yutivo and credited in favor of SM. The
funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru
officers and directors common to it and SM, exercised full control over the cash
funds, policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of
Tax Appeals correctly disregarded the technical defense of separate corporate entity
in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to
issue the disputed assessment by reason of prescription. The contention, in our
opinion, cannot be sustained. It will be noted that the first assessment was made on
November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding
returns filed by petitioner covering the said period was made at the earliest on
October 1, as regards the third quarter of 1947, so that it cannot be claimed that the
assessment was not made within the five-year period prescribed in section 331 of
the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn
by the Collector on insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject to the approval of
the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions
of section 9 of Executive Order No. 401-A, series of 1951. The decision of the
previous assessment of November 7, Collector countermanding the as 1950 was
forwarded to the Board of Tax Appeals through the Secretary of Finance but that
official, apparently disagreeing with the decision, sent it back for re-investigation.
Consequently, the assessment of November 7, 1950 cannot be considered to have
been finally withdrawn. That the assessment was subsequently reiterated in the
decision of respondent Collector on December 16, 1954 did not alter the fact that it
was made seasonably. In this connection, it would appear that a warrant of distraint
and levy had been issued on March 28, 1951 in relation with this case and by virtue
thereof the properties of Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up to the present, which
shows that the assessment of November 7, 1950 has always been valid and
subsisting.
Anent the deficiency sale tax for 1950, considering that the assessment thereof was
made on December 16, 1954, the same was assessed well within the prescribed
five-year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend
the prescriptive period on assessment. The argument is untenable, for, as already
seen, the assessment was never finally withdrawn, since it was not approved by the
Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary
to act upon the assessment cannot be questioned, for he is expressly granted such
authority under section 9 of Executive Order No. 401-And under section 79 (c) of
the Revised Administrative Code, he has "direct control, direction and supervision
over all bureaus and offices under his jurisdiction and may, any provision of existing
law to the contrary not withstanding, repeal or modify the decision of the chief of
said Bureaus or offices when advisable in public interest."
It should here also be stated that the assessment in question was consistently
protested by petitioner, making several requests for reinvestigation thereof. Under

the circumstances, petitioner may be considered to have waived the defense of

prescription.
"Estoppel has been employed to prevent the application of the statute of
limitations against the government in certain instances in which the
taxpayer has taken some affirmative action to prevent the collection of the
tax within the statutory period. It is generally held that a taxpayer is
estopped to repudiate waivers of the statute of limitations upon which the
government relied. The cases frequently involve dissolved corporations. If
no waiver has been given, the cases usually show come conduct directed
to a postponement of collection, such, for example, as some variety of
request to apply an overassessment. The taxpayer has 'benefited' and 'is
not in a position to contest' his tax liability. A definite representation of
implied authority may be involved, and in many cases the taxpayer has
received the 'benefit' of being saved from the inconvenience, if not
hardship of immediate collection. "
Conceivably even in these cases a fully informed Commissioner may err to
the sorrow of the revenues, but generally speaking, the cases present a
strong combination of equities against the taxpayer, and few will seriously
quarrel with their application of the doctrine of estoppel." (Mertens Law of
Federal Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es
involving an original assessment of more than P5,000 refers only to
compromises and refunds of taxes, but not to total withdrawal of the assessment.
The contention is without merit. A careful examination of the provisions of both
sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the
procedure prescribed therein is intended as a check or control upon the powers of
the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it
be conceded that a decision of the Collector of Internal Revenue on partial
remission of taxes is subject to review by the Secretary of Finance and the Board of
Tax Appeals, then with more reason should the power of the Collector to withdraw
totally an assessment be subject to such review.
We find merit, however, in petitioner's contention that the Court of Tax Appeals erred
in the imposition of the 5% fraud surcharge. As already shown in the early part of
this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge
should be added to the deficiency sales tax "in case a false or fraudulent return is
willfully made." Although the sales made by SM are in substance by Yutivo this does
not necessarily establish fraud nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9,
1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a

corporation consisting of only two stockholders, to wit: Minnie Miller and her
husband Louis Miller. The only assets of third husband and wife corporation
consisted of an apartment building which had been acquired for a very low price at
a judicial sale. Louis Miller, the husband, who directed the company's business,
verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and
wife, for the sum of $54,000.00, payable in various installments. He received
$1,000.00 as down payment. The sale of this property for the price mentioned
would have netted the corporation a handsome profit on which a large corporate
income tax would have to be paid. On the afternoon of February 23, 1940, when the
Millers and the Fines got together for the execution of the document of sale, the
Millers announced that their attorney had called their attention to the large corporate
tax which would have to be paid if the sale was made by the corporation itself. So
instead of proceeding with the sale as planned, the Millers approved a resolution to
declare a dividend to themselves "payable in the assets of the corporation, in
complete liquidation and surrender of all the outstanding corporate stock." The
building, which as above stated was the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly
the same price and under the same terms as had been previously agreed upon
between the corporation and the Fines.

". . . The respondent's answer alleges that the petitioner's failure to report
as income the taxable profit on the real estate sale was fraudulent and with
intent to evade the tax. The petitioner filed a reply denying fraud and
averring that the loss reported on its return was correct to the best of its
knowledge and belief. We think the respondent has not sustained the
burden of proving a fraudulent intent. We have concluded that the sale of
the petitioner's property was in substance a sale by the petitioner, and that
the liquidating dividend to stockholders had no purpose other than that of
tax avoidance. But the attempt to avoid tax does not necessarily establish
fraud. It is a settled principle that a taxpayer may diminish his liability by
any means which the law permits. United States v. Isham, 17 Wall.
496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d)
14. If the petitioner here was of the opinion that the method by which it
attempted to effect the sale in question was legally sufficient to avoid the
imposition of tax upon it, its adoption of that method is not subject to
censure. Petitioner took a position with respect to a question of law, the
substance of which was disclosed by the statement endorsed on its return.
We can not say, under the record before us, that that position was taken
fraudulently. The determination of the fraud penalties is reversed."

The return filed by the Court Holding Co. with the respondent Commissioner of
Internal Revenue reported no taxable gain as having been received from the sale of
its assets. The Millers, of course, reported a long term capital gain on the exchange
of their corporate stock with the corporate property. The Commissioner of Internal
Revenue contended that the liquidating dividend to stockholders had no purpose
other than that of tax avoidance and that, therefore, the sale by the Millers to the
Fines of the corporation's property was in substance a sale by the corporation itself,
for which the corporation is subject to the taxable profit thereon. In requiring the
corporation to pay the taxable profit on account of the sale, the Commissioner of
Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional
surcharge as fraud penalties.

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the
sales tax was paid only once and on the original sales by the former and neither the
latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore,
honestly believed that the payment by it, as importer, of the sales tax was enough
as in the case of GM Consequently, in filing its return on the basis of its sales to SM
and not on those by the latter to the public, it cannot be said that Yutivo deliberately
made a false return for the purpose of defrauding the government of its revenues
which will justify the imposition of the surcharge penalty.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other
purpose than to avoid the tax and was, in substance, a sale by the Court Holding
Co., and that, therefore, the said corporation should be liable for the assessed
taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner
of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax
Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax
does not necessarily establish fraud; that it is a settled principle that a taxpayer may
diminish his tax liability by means which the law permits; that if the petitioner, the
Court Holding Co., was of the opinion that the method by which it attempted to
effect the sale in question was legally sufficient to avoid the imposition of a tax upon
it, its adoption of that methods not subject to censure; and that in taking a position
with respect to a question of law, the substance of which was disclosed by the
statement indorsed on it return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax
Appeals: .

We likewise find meritorious the contention that the Tax Court erred in computing
the alleged deficiency sales tax on the selling price of SM without previously
deducting therefrom the sales tax due thereon. The sales tax provisions (sees.
184.186, Tax Code) impose a tax on original sales measured by "gross selling
price" or "gross value in money". These terms, as interpreted by the respondent
Collector, do not include the amount of the sales tax, if invoiced separately. Thus,
General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939,
which implements sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the articles sold,
bartered, exchanged, transferred as the term is used in the aforecited
sections (sections 184, 185 and 186) of the National Internal Revenue
Code, is the total amount of money or its equivalent which the purchaser
pays to the vendor to receive or get the goods. However, if a manufacturer,
producer, or importer, in fixing the gross selling price of an article sold by
him has included an amount intended to cover the sales tax in the gross
selling price of the articles, the sales tax shall be based on the gross

selling price less the amount intended to cover the tax, if the same is billed
to the purchaser as a separate item.

7%

909,559.50

63,669.16

973,228.66

10%

2,618,695.28

261,869.53

2,880,564.81

15%

3,602,397.65

540,359.65

4,142,757.30

20%

267,150.50

53,430.10

320,580.60

30%

837,146.97

251,114.09

1,088,291.06

50%

74,244.30

37,122.16

111,366.46

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as
not to pay a tax on the tax. On sales made after he third quarter of
1939, the amount intended to cover the sales tax must be billed to the
purchaser as separate items in the, invoices in order that the reduction
thereof from the gross ailing price may be allowed in the computation of
the merchants' percentage tax on the sales. Unless billed to the purchaser
as a separate item in the invoice, the amounts intended to cover the sales
tax shall be considered as part of the gross selling price of the articles
sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat.
Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and as separately
billed, the sales taxes did not form part of the "gross selling price" as the measure of
the tax. Since Yutivo had previously billed the sales tax separately in its sales
invoices to SM General Circulars Nos. 431 and 440 should be deemed to have
been complied. Respondent Collector's method of computation, as opined by Judge
Nable in the decision complained of
. . . is unfair, because . . .(it is) practically imposing tax on a tax already
paid. Besides, the adoption of the procedure would in certain cases
elevate the bracket under which the tax is based. The late payment is
already penalized, thru the imposition of surcharges, by adopting the
theory of the Collector, we will be creating an additional penalty not
contemplated by law."

75%

TOTAL
If the taxes based on the sales of SM are computed in accordance with Gen.
Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25%
and 50% surcharges for late payment and for fraud, would amount only to
P820,549.91 as shown in the following computation:

Rates of
Sales Tax

Sales Taxes Due

Gross Sales of
Total Gross Selling
and Computed under
Vehicles Exclusive of
Price Charged to the
Gen. Cir Nos. 431 &
Sales Tax
Public
400

8,000.00

P20,220,413.77

6,000.00

P1,809,205.67

Less Taxes Paid by Yutivo

988,655.76

Deficiency Tax still due

P820,549.91

14,000.00

P22,038,619.44

This is the exact amount which, according to Presiding Judge Nable of the Court of
Tax Appeals, Yutivo would pay, exclusive of the surcharges.
5%

P11,912,219.57

P595,610.98

P12,507,83055

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of
its jurisdiction in promulgating judgment for the affirmance of the decision of
respondent Collector by less than the statutory requirement of at least two votes of
its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the
Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals
shall constitute a quorum, and the concurrence of two judges shall be necessary to
promulgate decision thereof. . . . " It is on record that the present case was heard by
two judges of the lower court. And while Judge Nable expressed his opinion on the
issue of whether or not the amount of the sales tax should be excluded from the
gross selling price in computing the deficiency sales tax due from the petitioner, the
opinion, apparently, is merely an expression of his general or "private sentiment" on
the particular issue, for he concurred the dispositive part of the decision. At any rate,
assuming that there is no valid decision for lack of concurrence of two judges, the
case was submitted for decision of the court below on March 28, 1957 and under
section 13 of Republic Act 1125, cases brought before said court hall be decided
within 30 days after submission thereof. "If no decision is rendered by the Court
within thirty days from the date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said Court a notice of his
intention to appeal to the Supreme Court, and if no decision has as yet been
rendered by the Court, the aggrieved party may file directly with the Supreme Court
an appeal from said ruling, order or decision, notwithstanding the foregoing
provisions of this section." The case having been brought before us on appeal, the
question raised by petitioner as become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under
review is hereby modified in that petitioner shall be ordered to pay to respondent
the sum of P820,549.91, plus 25% surcharge thereon for late payment.
So ordered without costs.

Said undisputed facts are substantially as follows:

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-9687

June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
Ozaeta, Lichauco and Picazo for petitioner-appellant.
Office of the Solicitor General for respondent-appellee.
BENGZON, C.J.:
Statement. This is an appeal from the decision of the Court of Tax Appeals imposing
a tax deficiency liability of P1,317,629.61 on Liddell & Co., Inc.
Said Company lists down several issues which may be boiled to the following:
(a) Whether or not Judge Umali of the Tax Court below could validly
participate in the making of the decision;
(b) Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are
(practically) identical corporations, the latter being merely .the alter ego of
the former;
(c) Whether or not, granting the identical nature of the corporations, the
assessment of tax liability, including the surcharge thereon by the Court of
Tax Appeals, is correct.
Undisputed Facts. The parties submitted a partial stipulation of facts, each reserving
the right to present additional evidence.

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. 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
shares 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 on,
Frank Liddells holding in the Company increased to 1,960 shares and the
employees, Charles Kurz E.J. Darras, Angel Manzano and Julian Serrano
at 10 share each. The declaration of stock dividend was followed by a
resolution increasing the authorized capital of the company 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 P300,000 so that he had in his own
name 4,960 shares.
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 (Exhibits B and
C) dated May 24, 1947 and June 3, 1948, wherein Frank Liddell
transferred (On June 7, 1948) to various employees of Liddell & Co.
shares of stock.
At the annual meeting of stockholders of Liddell & Co. held on March 9,
1948, a 100% stock dividend was 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 Liddell-Drawing
Account and credited to Subscribed Capital Stock on December 11, 1948.
On March 8, 1949, stock dividends were again issued by Liddell & Co. and
in accordance with the agreements, Exhibits A, B, and C, the stocks of said
company stood as follows:

Name

No. of

Amount

Per Cent

On November 15, 1948, in accordance with a resolution of a special meeting of the

Board of Directors of Liddell & Co., stock dividends were again declared. As a result
of said declaration and in accordance with the agreements, Exhibits, A, B, and C,
the stockholdings in the company appeared to be:

Shares

Frank Liddell

Irene Liddell

Mercedes Vecin

Charles Kurz

E.J. Darras

Angel Manzano

Julian Serrano

E. Hasim

G. W. Kernot

13,688

P1,368,800 72.00%

100

100

1,225

1,225

1,150

710

500

500

19,000

122,500

122,500

115,000

71,000

50,000

50,000

Name

No. of
Shares

Amount

Frank Liddell

19,738

P1,973,800 65.791%

Irene Liddell

100

.003%

Mercedes Vecin

100

.003%

Charles Kurz

2,215

221,500

7.381%

E.J. Darras

2,215

221,500

7.381%

Angel Manzano

1,810

181,000

6.031%

Julian Serrano

1,700

170,000

5.670%

E. Hasim

830

83,000

2.770%

Per Cent

.01%

.01%

6.45%

6.45%

6.06%

3.74%

2.64%

2.64%

P1,900,000 100.00%
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 Frank Liddell although at the time of the
execution of aid instrument, Frank Liddell owned all of the shares in said
corporation. 45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras
12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. The agreement Exhibit A
was also made retroactive to 1946. Frank Liddell reserved the right to reapportion
the 45% dividends pertaining to the employees in the future for the purpose of
including such other faithful and efficient employees as he may subsequently
designate. (As a matter of fact, Frank Liddell did so designate two additional
employees namely: E. Hasim and G. W. Kernot). It was for such inclusion of future
faithful employees that Exhibits B-1 and C were executed. As per Exhibit C, dated
May 13, 1948, the 45% given by Frank Liddell to his employees was reapportioned
as follows: C. Kurz 12,%; E. J. Darras 12%; A. Manzano l2%; J. Serrano
3-1/2%; G. W. Kernot 2%.
Exhibit B contains the employees' definition in detail of the manner by which they
sought to prevent their share-holdings from being transferred to others who may be
complete strangers to the business on Liddell & Co.
From 1946 until November 22, 1948 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.
On December 20, 1948, the Liddell Motors, Inc. was organized and registered with
the Securities and Exchange Commission with an authorized capital stock of
P100,000 of which P20,000 was subscribed and paid for as follows: Irene Liddell
wife of Frank Liddell 19,996 shares and Messrs. Marcial P. Lichauco, E. K.
Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.
At about the end of the year 1948, Messrs. 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.: Kurz as Manager-Treasurer,
Manzano as General Sales Manager for cars and Kernot as General Sales
Manager for trucks.
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.

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. Accordingly, the Collector of Internal Revenue assessed against
Liddell & Co. a sales tax deficiency, including surcharges, in the amount of
P1,317,629.61. In the computation, the gross selling price of Liddell Motors, Inc. to
the general public from January 1, 1949 to September 15, 1950, was made the
basis without deducting from the selling price, the taxes already paid by Liddell &
Co. in its sales to the Liddell Motors Inc.
The Court of Tax Appeals upheld the position taken by the Collector of Internal
Revenue.
A. Judge Umali: Appellant urges the disqualification on of Judge Roman M. Umali to
participate in the decision of the instant case because he was Chief of the Law
Division, then Acting Deputy Collector and later Chief Counsel of the Bureau of
Internal Revenue during the time when the assessment in question was made.1 In
refusing to disqualify himself despite admission that had held the aforementioned
offices, Judge Umali stated that he had not in any way participated, nor expressed
any definite opinion, on any question raised by the parties when this case was
presented for resolution before the said bureau. Furthermore, after careful
inspection of the records of the Bureau, he (Judge Umali as well as the other
members of the court below), had not found any indication that he had expressed
any opinion or made any decision that would tend to disqualify him from
participating in the consideration of the case in the Tax Court.
At this juncture, it is well to consider that petitioner did not question the truth of
Judge Umali's statements. In view 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 participation of a judge in prior proceedings relating to the subject in the
capacity of an administrative official does not necessarily disqualify him from acting
as judge.2
Appellant also contends that Judge Umali signed the said decision contrary to the
provision of Section 13, Republic Act No. 1125;3 that whereas the case was
submitted for decision of the Court of Tax Appeals on July 12, 1955, and the
decision of Associate Judge Luciano and Judge Nable were both signed on August
11, 1955 (that is, on the last day of the 30-day period provided for in Section 13,
Republic Act No. 1125), Judge Umali signed the decision August 31, 1955 or 20
days after the lapse of the 30-day period allotted by law.
By analogy it may be said that inasmuch as in Republic Act No. 1125 (law creating
the Court of Tax Appeals) like the law governing the procedure in the court of
Industrial Relations, there is no provision invalidating decisions rendered after the

lapse of 30 days, the requirement of Section 13, Republic Act No. 1125 should be
construed as directory.4
Besides as pointed out by appellee, the third paragraph of Section 13 of Republic
Act No. 1125 (quoted in the margin)5 confirms this view; because in providing for
two thirty-day periods, the law means that decision may still be rendered within the
second period of thirty days (Judge Umali signed his decision within that period).
B. Identity of the two corporations: On the question whether or not Liddell Motors,
Inc. is the alter ego of Liddell & 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% 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.
These stipulations and conditions appear in Exhibit A: (1) that Frank Liddell had the
authority to designate in the future the employee who could receive earnings of the
corporation; to apportion among the stock holders the share in the profits; (2) that
all certificates of stock in the names of the employees should be deposited with
Frank 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 cause whatsoever from
the corporation, the said corporation should, within a period of sixty days therefor,
have the absolute and exclusive option to purchase and acquire the whole of the
stock interest of the employees so dying, resigning, retiring or separating.
These stipulations in our opinion attest to the fact that Frank Liddell also owned it.
He supplied the original his complete control over the corporation.
As to Liddell Motors, Inc. we are fully persuaded that Frank Liddell also owned it. He
supplied the original capital funds.6 It is not proven that his wife Irene, ostensibly the
sole incorporator of Liddell Motors, Inc. had money of her own to pay for her
P20,000 initial subscription.7 Her income in the United States in the years 1943 and
1944 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.
The evidence at hand also shows that Irene Liddell had scant participation in the
affairs of Liddell Motors, Inc. She could hardly be said to possess business
experience. The income tax forms record no independent income of her own. As a
matter of fact, the checks that represented her salary and bonus from Liddell
Motors, Inc. found their way into the personal account of Frank Liddell. Her frequent
absences from the country negate any active participation in the affairs of the
Motors company.

There are quite a series of conspicuous circumstances that militate against the
separate and distinct personality of Liddell Motors, Inc. from Liddell & Co.8 We
notice that the 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. These sales of vehicles by Liddell & Co. to Liddell Motors, Inc.
for the most part were shown to have taken place on the same day that Liddell
Motors, Inc. sold such vehicles to the public. We may even say that the cars and
trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.
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 issued in favor of Liddell Motors,
Inc. six (6) checks drawn against his personal account with the same bank. The
checks issued by Frank Liddell to the Liddell Motors, Inc. were significantly for the
most part issued on the same day when Liddell & Co. Inc. issued the checks for
Frank Liddell9 and for the same amounts.
It is of course accepted that the mere fact that one or more corporations are owned
and controlled by a single stockholder is not of itself sufficient ground for
disregarding separate corporate entities. Authorities10 support the rule that it is
lawful to obtain a corporation charter, even with a single substantial stockholder, to
engage in a specific activity, and such activity may co-exist with other private
activities of the stockholder. If the corporation is a substantial one, conducted
lawfully and without fraud on another, its separate identity is to be respected.
Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are
corporations owned and controlled by Frank Liddell directly or indirectly is not by
itself sufficient to justify the disregard of the separate corporate identity of one from
the other. There is, however, in this instant case, a peculiar consequence of the
organization and activities of Liddell Motors, Inc.
Under the law in force at the time of its incorporation the sales tax on original sales
of cars (sections 184, 185 and 186 of the National Internal Revenue Code), was
progressive, i.e. 10% of the selling price of the car if it did not exceed P5000, and
15% of the price if more than P5000 but not more than P7000, etc. This progressive
rate of the sales tax naturally would tempt the taxpayer to employ a way of reducing
the price of the first sale. And Liddell Motors, Inc. was the medium created by
Liddell & Co. to reduce the price and the tax liability.
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, no more sales tax was paid.11 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.

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.

As opined in the case of Gregory v. Helvering,12 "the legal right of a taxpayer to

decrease the amount of what otherwise would be his taxes, or altogether avoid
them by means which the law permits, cannot be doubted." But, as held in another
case,13 "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."

Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, De Leon

and Natividad, JJ., concur.

As it appears that, during the pendency of this litigation appellant paid under protest
to the Government the total amount assessed by the Collector, the latter is hereby
required to return the excess to the petitioner. No costs.

Consistently with this view, the United States Supreme Court14 held that "a taxpayer
may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in proper cases, may disregard the separate corporate entity where
it serves but as a shield for tax evasion and treat the person who actually may take
the benefits of the transactions as the person accordingly taxable."

Republic of the Philippines

SUPREME COURT
Manila

Thus, we repeat: 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.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 Judge Nable in his concurring
and dissenting opinion on this case, that the deficiency sales tax should be based
on the selling price obtained by Liddell Motors, Inc. to the public AFTER
DEDUCTING THE TAX ALREADY PAID BY LIDDELL & CO., INC. in its sales to
Liddell Motors, Inc.
On the imposition of the 50% surcharge by reason of fraud, we see that the
transactions between Liddell Motors Inc. and Liddell & Co., Inc. have always been
embodied in proper documents, constantly subject to inspection by the tax
authorities. Liddell & Co., Inc. have always made a full report of its income and
receipts in its income tax returns.
Paraphrasing our decision in the Yutivo case, we may now say, in filing its return on
the basis of its sales to Liddell Motors, Inc. and not on those by the latter to the
public, it cannot be held that the Liddell & Co., Inc. deliberately made a false return
for the purpose of defrauding the government of its revenue, and should suffer a
50% surcharge. But penalty for late payment (25%) should be imposed.

EN BANC
G.R. No. L-22614

August 29, 1969

RAMIREZ TELEPHONE CORPORATION, petitioner,

vs.
BANK OF AMERICA, E.F. HERBOSA, THE SHERIFF OF MANILA and THE
COURT OF APPEALS, respondents.
Quijano and Arroyo, for petitioner.
Lichauco, Picazo and Agcaoili for respondent Bank of America.
Vicente M. Magpoc for respondent E.F. Herbosa.
Fiscal Eulogio S. Serrano for respondent Sheriff of Manila.
CAPISTRANO, J.:
This is a petition for review on certiorari of a decision of the Court of Appeals of
February 27, 1964, wherein the judgment of the lower court was reversed and
another entered dismissing the complaint of plaintiff, now petitioner, Ramirez
Telephone Corporation, and ordering it to pay to defendant, now respondent, Bank

of America, the sum of P500.00 and to the third-party defendant E.F. Herbosa, now
likewise respondent, the same amount, both in the concept of attorney's fees, the
costs being adjudged likewise against petitioner. The judgment of the Court of First
Instance which was reversed by the Court of Appeals reads as follows:1
In view of the foregoing considerations, judgment is hereby rendered in
favor of the plaintiff and against the defendant Bank of America ordering
the latter to pay the former the sum of P3,000.00 in the form of actual
damages, and to pay the costs of these proceedings.
Likewise, judgment is hereby rendered sentencing the third-party
defendant, E.F. Herbosa, to indemnify or reimburse the third-party plaintiff,
Bank of America, any sum or sums which the latter may pay the plaintiff by
virtue of this judgment.
The third-party complaint against the Sheriff of Manila as well as the
counterclaim of defendant Bank of America and third-party defendant E.F.
Herbosa are hereby ordered dismissed.
The facts as found by the Court of Appeals, which we cannot review are set forth in
its decision, thus:2
Resultando: Que los hechos al parecer, no son muy embrollados; el
demandado, Herbosa era y es dueno del edificio No. 612, Int. 3 Sta. Mesa;
se lo habia dado en arrendamiento a Ruben R. Ramirez, y como este era
el presidente de la Ramirez Telephone Corporation, el taller de la
corporacion aunque su oficina central estaba en la Escolta, Natividad
Building, Exh. D. fue trasladado al local: pero habiendose amontonado los
alquilares sin pagar, Herbosa presento demanda de desahucio contra
Ramirez en el Juzgado Municipal de Manila el 10 de Noviembre, 1949, y
elevada la causa al Juzgado del 1.a Instancia, Herbosa pudo conseguir
decision favorable alli el 14 de Octubre, 1950, pero en la vispera de la
promulgacion de la sentencia a su favor habia ya conseguido
mandamiento de embargo preventivo contra Ramirez, Exh. A, y el mismo,
servido al Bank of America el 13 de Octubre, 1950, Exh. 2, lease como
sigue:

-- versus --

GARNISHMENT

Ruben R. Ramirez, Defendant

To: Bank of America
Manila
Greetings:
You and each of you are hereby notified that, by virtue of an order of
attachment issued by the Court of First Instance of Manila, copy of which is
hereto attached, levy is hereby made (or attachment is hereby levied)
upon all the goods, effects, interests, credits, money, stocks, shares, any
interests in stocks and shares and all debts owing by you to the defendant,
Ruben R. Ramirez ---------, in the above entitled case, and any other
personal property in your possession or under your control, belonging to
the said defendant --------- on this date, to cover the amount of P2,400.00
and specially the ... .
xxx

xxx

xxx

Manila, Philippines, October 13, 1950

MACARIO
Sheriff
(Exh. 2);

M.
of

OFILADA
Manila

y fue contestado por el banco el mismo dia de la siguiente manera:

Dear Sir:
In reply to your Garnishment of October 13, 1950, issued under the abovesubject case, we wish to inform you that we do not hold any fund in the
name of the defendant, Ruben R. Ramirez.
Yours very truly, (Exh. 3);

Civil Case No. 10620

E.F. Herbosa, Plaintiff

pero el Sheriff reitero el embargo el 17 de Octubre, 1950, Exh. B,

notificando al Bank of America de que quedaba embargado,

"... the interest or participation which the defendant Ruben R.

Ramirez may or might have in the deposit of the Ramirez
Telephone, Inc., with that Bank sufficient to cover the said amount
of P2,400.00"; Exh. B; y
la institucion bancaria en contestacion al Sheriff, de fecha 17 de Octubre,
1950 o sea el mismo dia, hizo constar que:
"... we are holding the amount of P2,400.00 in the name of the
Ramirez Telephone, Inc. subject to your further orders," Exh. G;
es decir acato la notificacion del embargo de los fondos de la Ramirez
Telephone; ahora bien, recuerdase de que en aquella fecha, 17 de
Octubre, 1950, es Ramirez Telephone tenia en deposito con el Bank of
America, la suma de P4,789.53, Exh. 9; de manera que con el embargo,
se redujo los fondos libres a la cantidad de P2,389.53; pero el dia
siguiente, el Ramirez Telephone retiro la suma de P1,500.00, quedando
por tanto como ultimo balance, nada mas que unos P889.00; de esto
surgio la presente contienda, pues, el 19 de Octubre, 1950, la Ramirez
Telephone por medio de su presidente, el mismo demandado, Ruben
Ramirez, ya mencionado, habiendo expedido el 19 de Octubre, 1950, otro
cheque en la suma de P2,320.00 a favor de la Ray Electronics, en pago
de ciertos equipos vendidos por este ultimo, Exhs. 15, 17, L, el cheque
Exh. N, este cheque al ser presentado a la Bank of America, fue
rechazado por lo que el abogado de la Ramirez Telephone el 23 de
Octubre, 1950, envio carta de requerimiento al Bank of America, Exh. 14,
manifestando que su cliente habia sufrido "considerable damage and
embarrassment," y advirtiendole que si no se le diera completa
satisfaccion el dia siguiente, el presentaria la demanda correspondiente,
"without further notice," Exh. 14; esta carta la contesto la institucion
bancaria el 24 de Octubre, 1950, alegando que,
"With reference to your letter dated October 23, 1950, in which
you are writing in behalf of the Ramirez Telephone Corporation, it
is suggested that you obtain a release from the Court on Civil
Case No. 10620, Ruben E. Ramirez, defendant.
"This Bank is acting only in accordance with the garnishment and
has no interest whatsoever in the funds held," Exh. 15;

pero conforme con su advertencia, el abogado dela Ramirez Telephone,

Inc., incoo esta accion el 28 de Octubre, cuatro dias despues; y el motivo
deaccion se de hace consistir en que el banco,
"... knows or should have known that Ruben N. Ramirez the
defendant in said Civil Case and whose property or fund was
ordered attached has no personal deposit in that bank and that
the Ramirez Telephone Corporation is entirely a distinct and
separate entity regardless of the fact that Ruben R. Ramirez
happens to be its President and General Manager.' par. 4,
demanda; y alegando que con motivo de ello y la siguiente
devolucion de su cheque a favor de la Ray Electronics sin pagar,
esta habia cancelado su pedido para los equipos necesarios en
la construccion de sus lineas telefonicas en la region bicolana, asi
que todas sus operaciones se habian quedado paralizadas, par.
5 id.; la demandada Bank of America, emplazada de la
demandada, presento mocion de sobresimiento, que denegada,
el 4 de Diciembre, 1950, el banco sometio su contestacion el 23
de Diciembre, 1950 con reconvencion para despues presentar
demanda contra el Sheriff, el 25 de Agosto, 1953, y Contra
Herbosa, el 16 de Agosto, 1955; y este ultimo a su vez en
contestacion, presento contra reclamacion o mejor dicho,
reconvencion contra la misma demandante, Ramirez Telephone,
y tambien contra el Bank of America, el 10 de Septiembre, 1955,
y el Juzgado Inferior, despues de la vista, como ya se ha dicho,
dictamino en favor de la demandante contra el Bank of America
en la contra-demanda de este contra aquel; ... ."
It was further found by the Court of Appeals:3
Considerando: Que el testimonio de Estanislao Herbosa al efecto de que;
si bien Ruben R. Ramirez era su inquilino al principio, pero es que mas
tarde, este lo habia manifestado que "the shop of company was
established downstairs," e decir que la Ramirez Telephone Corporation a
la verdad ocupaba el local alquilado, tanto que Ruben R. Ramirez solia
pagar el alquilar en cheques de la Ramirez Telephone Corporation, y esta
declaracion, t.n. 10 y 11, 25 June 1956, estando corroborada no
solamente por el Exh. 12, en donde Ruben R. Ramirez, en papel con el
embrete de la Ramirez Telephone, habia enviado el abogado de Herbosa,
el cheque No. C-78900, manifestando en la carta de que:

In accordance with your agreement yesterday with my attorney,

Mr. Jose L. de Leon, I am sending you herewith check No. C78900 for the amount of P812.60, rentals for the premises I am
occupying at the rate of P161.00 a month for the period from
February 1, 1949 to June 30, 1949, both dates, inclusive, plus
P7.00 for the court costs.' Exh. 12;

II

y esta carta, leida en relacion con el Exh. 3, en donde se ve que Ruben R.

Ramirez y tenia fondos depositados en el banco mencionado, Bank of
America, asi que resulta evidente que lo fondos de la Ramirez Telephone
los eran a la verdad, fondos de que buenasanta podia disponer su
Presidente, Ruben R. Ramirez, para el pago de los alquilares por el
debidos a Herbosa, y luego, tambien resulta evidente de que la casa por
el alquilada Ramirez Telephone, y estos hechos agregados el otro hecho
tambien probado, de que el 75% de las acciones de la compania
pertenecia a Ruben Ramirez y su esposa Rizalina P. de Ramirez, Exh. E,
todos estos no pueden menos de justificar la conclusion de que el
embargo de los fondos de la Ramirez Telephone por y en virtud de un
mandamiento judicial de embargo contra Ruben R. Ramirez,
especialmente teniendo en cuenta que el embargo solo abarcaba,

III

"The interest or participation which the defendant Ruben R.

Ramirez may or might have in the deposit of the Ramirez
Telephone, Inc., in the amount of P2,400.00" Exh. B;
cuando entonces estaba depositada la cantidad de P4,857.28, Exh. 9, era
un acto de justicia a favor del acreedor Herbosa y a la verdad, de no
haberse permitido el mencionado embargo, este se hubiera visto en igual
situacion que aquel pobre agraviado que como se dice vulgarmente, tras
de cornudo, fue apaleado; ... .
The aforestated facts notwithstanding, which must be considered conclusive and
binding on us, plaintiff in the lower court, now petitioner, Ramirez Telephone
Corporation, as noted, appealed, assigning the following alleged errors:4
I
The Court of Appeals erred in not applying the settled legal principle that a
corporation has a personality separate and distinct from that of its
stockholders and, therefore, the funds of a corporation cannot be reached
to satisfy the debt of its stockholders.

The Court of Appeals erred in not taking into account the significant fact
that when the events that gave rise to this case took place, the lawyer of
both respondents, i.e., the Bank of America and E.F. Herbosa, was one
and the same.

The Court of Appeals erred in not granting petitioner damages as awarded

by the lower court; likewise, the Court of Appeals erred in declaring instead
that it is petitioner that should pay respondents attorneys' fees.
Petitioner's main grievance in the first assigned error is that the Court of Appeals
disregarded its corporate personality; it relies on the general principle "that the
corporate entity will not be disregarded no matter how large the holding a particular
stockholder may have in the corporation." 5 Petitioner would thus maintain that the
personality as an entity separate and distinct from its major stockholders, Ruben R.
Ramirez and his wife, was not to be disregarded even if they did own 75% of the
stock of the corporation. 6 The conclusion that would thus emerge, in petitioner's
opinion, is that its funds as a corporation cannot be garnished to satisfy the debts of
a principal stockholder.
While respect for the corporate personality as such is the general rule, there are
exceptions. In appropriate cases, the veil of corporate fiction may be pierced. From
the facts as found which must remain undisturbed, this is such a case. This
assignment of error has no merit, in view of a number of cases decided by this
Court, the latest of which is Albert v. Court of First Instance 7 reaffirming a 1965
resolution in Albert v. University Publishing Co., Inc. 8 In that resolution, the principle
is restated thus: "Even with regard to corporations duly organized and existing
under the law, we have in many a case pierced the veil of corporate fiction to
administer the ends of justice." In support of the above principle, the following cases
were cited: Arnold vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel (Phil.), Inc. vs.
Yatco, 77 Phil. 496; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga
Manggagawa sa La Campana, 93 Phil. 160; Marvel Building Corporation vs. David,
94 Phil. 376; Madrigal Shipping Co., Inc. vs. Ogilvie, L-8431, Oct. 30, 1958; Laguna
Transportation Co., Inc. vs. S.S.S., L-14606, April 28, 1960; McConnel vs. C.A., L10510, March 17, 1961; Liddel & Co., Inc. vs. Collector of Internal Revenue, L9687, June 30, 1961; Palacio vs. Fely Transportation Co., L-15121, August 31,
1962. Hence, to repeat, the first assigned error cannot be sustained.

The next two errors assigned likewise fail to call for a reversal of the judgment now
on appeal. The second alleged error would find fault with the decision because the
Court of Appeals allegedly did not take into account a significant fact, namely, that
only one lawyer represented both the respondent Bank of America and respondent
E.F. Herbosa. We are not called upon to consider this particular assignment of error
as it is essentially factual, which is a matter for the Court of Appeals, not for us, to
determine. The last assigned error would in effect seek a restatement of the
damages awarded petitioner on the theory that the Court of Appeals decided the
matter erroneously. Since, as we made clear in the foregoing, the decision of the
Court of Appeals is in accordance with law on the facts as found, this alleged error
likewise is not meritorious.
PREMISES CONSIDERED, the judgment of the Court of Appeals of February 27,
1964 is affirmed, with costs against petitioner Ramirez Telephone Corporation.
Concepcion, C.J., Dizon, Makalintal, Sanchez, Castro, Fernando, Teehankee and
Barredo,
JJ.,
concur.
Reyes, J.B.L., and Zaldivar, JJ., are on leave.

International Courier Services, Inc. (MEREX) assail the Decision, rendered by the
National Labor Relations Commission in Case No. NLRC-NCR-00-11-0451-88
entitled "Jolly M. Almoradie v. Guatson's Travel Company, Philac and MEREX,"
dated March 21, 1991 and its Resolution, dated May 31, 1991, denying the
petitioners' Motion for Reconsideration.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

In the questioned decision, the NLRC found that Mr. Henry Ocier's (Vice-President
and General Manager of petitioner Guatson Travel) actuation of threatening and
forcing private respondent, Jolly M. Almoradie, to resign amounted to illegal
dismissal and thus ordered petitioners to pay private respondent backwages,
computed from the date of his dismissal on November 1988, until the decision was
rendered on February 28, 1991 or the amount of P50,328.00; and to pay separation
pay equivalent to one-half (1/2) month for every year of service, for seven (7) years
or the amount of P6,524.00.
From the records it appears that Jolly M. Almoradie was first employed by Mercury
Express International Courier Service, Inc. (MEREX) in October, 1983 as
Messenger receiving a monthly salary of P800.00. When it closed its operations,
Almoradie was absorbed by MEREX's sister company Philippine Integrated Labor
Assistance Corp. (Philac), likewise as Messenger with an increased salary of
P1,200.00.

G.R. No. 100322 March 9, 1994

GUATSON INTERNATIONAL TRAVEL AND TOURS, INC., PHILIPPINE
INTEGRATED LABOR ASSISTANCE CORPORATION, MERCURY EXPRESS
INTERNATIONAL COURIER SERVICES, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION AND JOLLY
ALMORADIE, respondents.

In September, 1986, Almoradie was transferred to Guatson Travel, allegedly also a

sister company of MEREX and Philac, as Liaison Officer with a salary of P1,864.00.
Thereafter, he was promoted to the position of Sales Representative sometime in
April, 1988. On April 30, 1988, Almoradie was issued three separate memoranda as
follows:
IOM/88-70

Generosa R. Jacinto for petitioners.

Please explain in writing within 24 hrs. or not

later than Monday morning the reason why you
don't want to sell. 1

Donato H. De Castro and Rolando P. Rotairo for private respondent.

IOM/88-71

Please explain in writing why did you went (sic)

to BEMIL and who sent you there. 2

NOCON, J.:
Petitioners Guatson Travel and Tours, Inc. (hereinafter referred to as Guatson
Travel), Philippine Integrated Labor Assistance Corp. (Philac) and Mercury Express

IOM-88

Explain in writing not later than Monday the

following:
1. The reason why you want to be a messenger
and no more a sales representative;
2. That I'm always confronting (sic) you, as
what you've told me personally;
3. Why you will not answer in writing the memo
issued to you by Lou Cantara on 30 Apr;
xxx xxx xxx

the Vice President and General Manager if only an appropriation

be set aside for the expenses in going around, meeting people
and soliciting prospective clients.
2. Bemil is a customer of our company. With respect to the
ticketing and booking of Bemil passengers, undertaking (sic) by
the sales department of our company, I used to go Bemil (sic) to
inquire whether they have passengers for booking and ticketing.
As a matter of fact, I went to Bemil to pick-up their ticketing and
booking for their passengers last Monday, April 29, 1988 (sic) and
then returned the following day, Saturday April 30, 1988, to deliver
the ticket.
xxx xxx xxx

5. Why when you were asked last Friday to join

the Sales Blitz to Sta. Ana you said yes and you
change (sic) your mind when you were asked
again last Saturday;
xxx xxx xxx
7. Why you have forgotten the situation wherein
you refuse (sic) to sell a certain product
recommended by Myrna;
8. The meaning of "You pirated me from
Philac . . . 3
Within the time frame specified, Almoradie responded to each of the charges, the
essence of which are as follows:
1. It is not true that I do not want to sale (sic) the rates & package
tour of Our Company as imputed and charge (sic), because since
April, 1988 (sic) when I was transferred from Accounting to sales
department of our Company I was able to sale (sic) almost 110
dollars to 21 passengers. The truth however is that, I am
hampered in my sales promotion and solicitation of customer, due
to financial constraint considering that the kind and nature of work
entails much expenses for which I shouldered (sic) with my
personal money. As a matter of fact I have brought this matter to

3.1. Considering that the job of sales representative entails so

much expense in the performance thereof (sic), as I have stated
in my number one (1) explanation and I have to use my own
personal money to promote and solicit customer without any
funding of our company (sic), I have taught (sic) it better that I like
my position as messenger, that (sic) as sales representative,
although the later (sic) position is more dignified, hence I prefer to
be entered to my messenger position.
3.2. That I admit of the often confrontation conducted (sic) by Vice
President/General Manager, even in the absence of my error or
fault (sic) . . .
3.3. It is not true that I did not or fail to answer the memo issued
by Lou Cantara, since I was given until May 2, 1988 to answer the
same . . .
xxx xxx xxx
3.5. As scheduled, I said yes to the sales blitz to Sta. Ana,
because in truth I am very interested in such sales business
attack since it is in connection with my function as a sales
representative that will surely enhance and sharpen my sales
acumen, but if I was not able to join it is not the reason my
change of mind (sic), but because the Vice-President/General

Manager of Our Company, Henry Ocier summoned me to his

office and had a very lengthy confrontation of me (sic), and when
I go out (sic) after the confrontation to join the sales blitz-krieg to
Sta. Ana last Saturday, April 30, 1988, Mr. Oscar Vanderlipe who
heads the sales Group (sic) were (sic) already gone.
xxx xxx xxx
3.7. I deny vehemently that I refuse to sale (sic) a certain product
recommended by Myrna de Vera because the same is totally
false. Since April 1, 1988 when I was transferred to the sales
department of our company where from the very beginning I was
briefed and taught and learned about the nature of my job and the
product to sale (sic) by Myrna (sic) de Vera herself, I have ever
since until now ventured and performed the selling of rates and
package tour which are every products (sic) for sales department
of our company. If sometimes I make no sales, which all sales
representative suffer and are beset such (sic), however, cannot
be considered as refusal to sale (sic). The only product of our
Company that Myrna briefed, taught and required as to (sic) our
rates and Package Tours which I've been selling since April 1,
1988 up to present. (sic)
xxx xxx xxx 4
On May 4, 1988, Almoradie was reverted to the position of Messenger, yet
sometime in September, 1988, he was again given the position of Account
Executive, the nature of work of which is similar to that of a sales representative.
Almoradie accepted the transfer with the understanding that he will solely discharge
the duties of an account executive and will no longer be required to do
messengerial work.
In the morning of October 1, 1988, Almoradie was allegedly summoned by Henry
Ocier to his office and was there and then forced by the latter to resign. Ocier
taunted Almoradie with threats that it he will not resign, he will file charges against
him which would adversely affect his chances of getting employed in the future.
Ocier allegedly even provided the pen and paper on which Almoradie wrote and
signed the resignation letter dictated by Ocier himself. 5
On that same day, Almoradie sought the help of a friend, Isagani Mallari, who
advised him to report the matter to the Barangay Captain. 6 Subsequently,

Almoradie filed a complaint for illegal Dismissal on November 14, 1988. The Labor
Arbiter, however dismissed his case based on the following conclusions:
In examining the facts and the arguments, it is difficult to abide by
the impression that complainant was forced to resign. Apart from
the averment of respondent Guatson that Mr. Ocier was out of
town when the resignation letter was executed that he just saw
the resignation letter when he arrived. 7There is reason to believe
that complainant apparently defied the order for his transfer or
designation as account executive earlier before he executed his
resignation letter.
It must be concluded that his designation as account executive is
a management prerogative which under the circumstance is
untainted with any unfair labor practice. Apparently, complainant
resented his resignation without any plausible or cogent reason
as he had earlier resented to be a sales representative for which
he was made to explain the reasons why. The only graceful exit to
the complainant was to execute his letter of resignation. As his
letter of resignation shows, it was executed in his own handwriting
spontaneously out of his own free will. 8
Upon Almoradie's appeal, the NLRC reversed the decision of the Labor Arbiter on
his finding that complainant was not forced to resign, anchoring its conclusion to the
fact that Almoradie was a permanent employee who has been working for the
Ocier's for five long years; that he was receiving a fairly good salary considering
that he is single; that he had no potential employer at the time of his resignation;
that there was no evidence to show that Mr. Henry Ocier was indeed not in town on
October 1, 1988, when he allegedly forced Almoradie to resign; and his reaction
immediately after his forced resignation by seeking the assistance of a friend who
was placed in a similar situation before and in reporting the incident to the Barangay
Chairman to seek redress.
The issue therefore, boils down to the question of whether Jolly Almoradie was
indeed illegally dismissed by being forced to resign in the manner narrated by him.
From a synthesis of the evidence on record, we fully agree with the finding of the
NLRC that Jolly Almoradie's resignation was NOT voluntary. The NLRC did not err
in disregarding the conclusions reached by the Labor Arbiter because the latter's
findings are not supported by substantial evidence.

It appears that as early as April, 1988, when Almoradie was promoted as Sales
Representative he had caught the ire of management, so much so that he was
issued no less than three memoranda on one day ordering him to answer certain
charges. Why he was again promoted to the position of Account Executive after he
was reverted back to the rank of a messenger from being a Sales Representative is
rather intriguing, unless it was a scheme of management to really rid him from the
company. Apparently, Almoradie is not cut out for a sales job, and hence could be
dismissed or forced to resign for failing to make good on his job on sales. On the
other hand, it would be difficult to dismiss him while being a messenger since he is
a permanent employee and there would not be enough basis to make him resign.
We do not agree with petitioners' proposition that Mr. Ocier's mere utterances of the
words "I will file charges against you," and "I have a very good lawyer," do not
constitute force or coercion as to vitiate the free will of Almoradie in writing his
resignation letter.
Intimidation may vitiate consent when the following requisites are present: (1) that
the intimidation caused the consent to be given; 2) that the threatened act be unjust
or unlawful; 3) that the threat be real or serious, there being evident disproportion
between the evil and the resistance which all man can offer, leading to the choice of
doing that act which is forced on the person to do as the lesser evil; and 4) that it
produces a well-grounded fear from the fact that the person from whom it comes
has the necessary means or ability to inflict the threatened injury to his person or
property. 9
The moment that a person by whom respect and reverence are due should wrongly
exert pressure upon his subordinates, amounting to intimidation in the manner
stated in the Lichauco de Leon case, supra, in order to exact from said
subordinates an act against their will, the same is enough to vitiate consent.
Henry Ocier did not only say that he will file charges against Almoradie and that he
has a good lawyer but he even threatened to block his future employment should
the latter not file his resignation. This threat is not farfetched. Almoradie is not even
a college graduate. 10 With his limited skills and the scarcity of employment
opportunities it would really be difficult for him to find a job. Considering further the
influence of Mr. Henry Ocier and his capacity to make good his threat by refusing to
give a favorable recommendation on Almoradie's performance, the latter is helpless
in not complying with the former's demand for his resignation.
Anent NLRC's grant of separation pay and backwages to private respondent Jolly
M. Almoradie, petitioners argues that the companies, Guatson Travel Company,

Philac Merex have separate and distinct legal personalities such that the latter
companies should not be held liable; assuming, for the sake of argument that
private respondent was illegally dismissed.
We uphold the NLRC. The three companies are owned by one family, such that
majority of the officers of the companies are the same. The companies are located
in one building and use the same messengerial service. Moreover, there was no
showing that private respondent was paid separation pay when he was absorbed by
Philac upon closure of Merex; nor was there evidence that he resigned from Philac
when he transferred to Guatson Travel. Under the doctrine of piercing the veil of
corporate fiction, when valid ground exists, the legal fiction that a corporation is an
entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded. We have applied this doctrine in the case of
"Philippine Scout Veterans Security and Investigation Agency (PSVSIA), et al. v.
The Hon. Secretary of Labor," G.R. No. 92357, July 21, 1993.
Where there is a finding of illegal dismissal, the employee is entitled to both
reinstatement and award of backwages from the time the compensation was
withheld, in this case in 1988, up to a maximum of three years, applying the
Mercury Drug Rule. 11
Reinstatement, however, will not be required not only for the reason that it was not
prayed for by the respondent, but also because the relationship between Almoradie
and Ocier had become strained as to preclude a harmonious working relationship.
In lieu of reinstatement, separation pay is awarded. 12 As the term suggests,
separation pay is the amount that an employee receives at the time of his
severance from the service and is designed to provide the employee with the
wherewithal during the period that he is looking for another employment. 13
However the award of separation pay should be, as we have consistently ruled,
equivalent to one (1) month for every year of service, 14 instead of one-half (1/2)
month as awarded by the NLRC. In the computation of separation pay, the three (3)
year period wherein backwages are awarded, must be included. 15
WHEREFORE, the decision of the NLRC is hereby MODIFIED to the extent that the
award of backwages should be computed based on a three-year period, while the
separation pay of one month for every year of service should be computed from the
time petitioner was employed by Merex and should include the three-year period as
backwages. The petition is hereby DISMISSED for lack of merit.
SO ORDERED.

Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and
Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio
Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio Garcia,
Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio,
Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where
badges of fraud exist; where public convenience is defeated; where a wrong is
sought to be justified thereby, the corporate fiction or the notion of legal entity
should come to naught. The law in these instances will regard the corporation as a
mere association of persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's

subsidiary liability for damages, the corporation may not be heard to say that it has
a personality separate and distinct from the other corporation. The piercing of the
corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor
Relations Commission committed grave abuse of discretion when it issued a
"break-open order" to the sheriff to be enforced against personal property found in
the premises of petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355
Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business.
Private respondents were employed by said company as laborers, carpenters and
riggers.
On November, 1981, private respondents were served individual written notices of
termination of employment by petitioner, effective on November 30, 1981. It was
stated in the individual notices that their contracts of employment had expired and
the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that
termination of private respondent's employment, the project
hired had not yet been finished and completed. Petitioner
services of sub-contractors whose workers performed the
respondents.

at the time of the

in which they were
had to engage the
functions of private

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenthmonth pay against petitioner.

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was partially
satisfied through garnishment of sums from petitioner's debtor, the Metropolitan
Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount
was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate private
respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve
the alias writ of execution on petitioner through the security guard on duty but the
service was refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his
progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc.
(HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon. 4

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year
or three hundred working days.

The said special sheriff recommended that a "break-open order" be issued to

enable him to enter petitioner's premises so that he could proceed with the public
auction sale of the aforesaid personal properties on November 7, 1989.

On November 27, 1985, the National Labor Relations Commission (NLRC)

dismissed the motion for reconsideration filed by petitioner on the ground that the
said decision had already become final and executory. 2

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought to be levied upon by the sheriff
were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.

On October 16, 1986, the NLRC Research and Information Department made the
finding that private respondents' back wages amounted to P199,800.00. 3

On November 23, 1989, private respondents filed a "Motion for Issuance of a

Break-Open Order," alleging that HPPI and petitioner corporation were owned by

the same incorporator/stockholders. They also alleged that petitioner temporarily

suspended its business operations in order to evade its legal obligations to them
and that private respondents were willing to post an indemnity bond to answer for
any damages which petitioner and HPPI may suffer because of the issuance of the
break-open order.
In support of their claim against HPPI, private respondents presented duly certified
copies of the General Informations Sheet, dated May 15, 1987, submitted by
petitioner to the Securities Exchange Commission (SEC) and the General
Information Sheet, dated May 25, 1987, submitted by HPPI to the Securities and
Exchange Commission.
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for
issuance of a break-open order, contending that HPPI is a corporation which is
separate and distinct from petitioner. HPPI also alleged that the two corporations
are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm
while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents' motion for break-open order.

Petitioner alleges that the NLRC committed grave abuse of discretion when it
ordered the execution of its decision despite a third-party claim on the levied
property. Petitioner further contends, that the doctrine of piercing the corporate veil
should not have been applied, in this case, in the absence of any showing that it
created HPPI in order to evade its liability to private respondents. It also contends
that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes,
a business which is distinct and separate from petitioner's construction business.
Hence, it is of no consequence that petitioner and HPPI shared the same premises,
the same President and the same set of officers and subscribers. 7
We find petitioner's contention to be unmeritorious.
It is a 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. 8 But, this separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to promote justice. 9 So, when
the notion of separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the
labor laws, 10 this separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. 11 This is true likewise when the corporation is
merely an adjunct, a business conduit or an alter ego of another corporation. 12

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set
aside the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Thereafter, it directed the sheriff to proceed with the
auction sale of the properties already levied upon. It dismissed the third-party claim
for lack of merit.

The conditions under which the juridical entity may be disregarded vary according
to the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that
will justify the application of the doctrine of piercing the corporate veil, to wit:

Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.

1. Stock ownership by one or common ownership of both

corporations.

Hence, the resort to the present petition.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.
4. Methods of conducting the business. 13
The SEC en banc explained the "instrumentality rule" which the courts have applied
in disregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its

affairs are conducted so that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made.

In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar information
sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Furthermore, the NLRC stated that:

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:

Both information sheets were filed by the same Virgilio O. Casio

as the corporate secretary of both corporations. It would also not
be amiss to note that both corporations had the same president,
thesame board of directors, the same corporate officers, and
substantially the same subscribers.

1. Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;

From the foregoing, it appears that, among other things, the

respondent (herein petitioner) and the third-party claimant shared
the same address and/or premises. Under this circumstances,
(sic) it cannot be said that the property levied upon by the sheriff
were not of respondents. 16

2. Such control must have been used by the defendant to commit

fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act in contravention of
plaintiff's legal rights; and

Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.

3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to that operation. 14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact. 15

The facts in this case are analogous to Claparols v. Court of Industrial

Relations, 17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and
Nail Plant, which ceased operation of June 30, 1957, was
SUCCEEDED by the Claparols Steel Corporation effective the
next day, July 1, 1957, up to December 7, 1962, when the latter
finally ceased to operate, were not disputed by petitioner. It is
very clear that the latter corporation was a continuation and
successor of the first entity . . . . Both predecessors and
successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability"

scheme is very patent, considering that 90% of the subscribed

shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself, and
all the assets of the dissolved Claparols Steel and Nail plant were
turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could,
and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but to
apply for a break-open order after the third-party claim of HPPI was dismissed for
lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the
NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or
prohibit the Sheriff or his representative entry to the place where
the property subject of execution is located or kept, the judgment
creditor may apply to the Commission or Labor Arbiter concerned
for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due
notice and hearing were complied with. Petitioner and the third-party claimant were
given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the
break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasijudicial agencies supported by substantial evidence are binding on this Court and
are entitled to great respect, in the absence of showing of grave abuse of a
discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.