FACTS: Herein petitioner Yutivo purchased its cars and trucks from General Motors Overseas

Corporation (GM), the latter paying the sales tax once on original sales, Yutivo no longer paid
sales tax on its sales to the public. Later no, GM withdrew from the Philippines and appointed
Yutivo as importer. Yutivo in turn exclusively sold to Southern Motors, Inc. (SM), a corporation
where the incorporators are sons fo the founders of Yutivo. Under this arrangement, Yutivo paid
the sales tax on original sale, while SM did not subject to sales tax its sales to the public.

The Collector of Internal Revenue assessed Yutivo for deficiency sales taxes which the CTA
affirmed.

ISSUE: WON Yutivo is liable for the deficiency taxes.

HELD: NO. It is elementary rule and fundamental principle of corporation law that a corporation
is an entity separate and distinct from its stockholders and from other corporations to which it
may be connected. However, when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as
an association of persons, or in case of two corporations merge them into one. Another rule is
that, when the corporation is a mere alter-ego or business conduit of a person, it may be
disregarded.

The sales tax liability of Yutivo did not arise until 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.

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 and 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.

According to the AOI, the amount of P62,500 was actually advanced by Yutivo. The additional
subscriptions to SM were paid by Yutivo. The shareholders in SM are mere nominal
stockholders holding the share for and in behalf of Yutivo, so even conceding that the original
subscribers were bona fide stockholders, Yutivo was at all tie in control of the stock of SM and
that the latter was a mere subsidiary of the former.

SM is under the management control of Yutivo by virtue of the management contract entered
into between the two parties. In fact, the controlling majority of the BOD of Yutivo is also the
controlling majority of the Board of SM. At the same time, the principal officers of both
corporations are identical. In addition, both corporations have a common comptroller. There is
therefore no doubt that by virtue of such control, the business, financial and management
policies of both corporations would
be directed towards common ends. Likewise, cash or funds of SM, including those of its
branches which are directly remitted to Yutivo, 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.SM, being but a mere instrumentality or adjunct of Yutivo, the CTA correctly
disregarded the technical defense of separate corporate entity to arrive at the true tax liability of
Yutivo.

MAIN DOCTRINE:

It is elementary rule and fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may be
connected. However, when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime, the law will regard the corporation as an association of
persons, or in case of two corporations merge them into one. Another rule is that, when the
corporation is a mere alter-ego or business conduit of a person, it may be disregarded.