Lidell Co. v.

Collector of Internal Revenue

Facts: The case 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.
The petitioner, Liddell & Co. Inc., (Liddell & Co. for short) is a domestic
corporation establish in the Philippines on February 1, 1946. 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.
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.
The Collector of Internal Revenue argued that the Lidell Motors, Inc. was but
an alter ego of Liddell & Co. and 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. hence the imposition of tax deficiency.
Issue: Whether or not Lidell Motors, Inc. is an alter ego of Lidell & Co. making it
liable for the said tax deficiency?
Held: The Court held that Lidell Motors, Inc. is an alter ego of Lidell & Co. hence
makin it liable for tax deficiency based on the principle that 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 which is consistent with the view of the US Supreme Court stating in one
case 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."
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.
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.
In Lidell & Co.:
(1) 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.
As to Liddell Motors, Inc Frank Lidell also owned it.
He supplied the original capital funds. It is not proven that his wife Irene,
ostensibly the sole incorporator of Liddell Motors, Inc. had money of her own to pay
for her P20,000 initial subscription. 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.