G.R. No. L-14393; October 31, 1960
THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. CANTILAN LUMBER COMPANY, respondent.

FACTS

On June 17, 1946, the Cantilan Lumber Company, a partnership composed of Nelson E. Kellogg and Alonso M. Villalba, entered into a contract with the U.S. Government (Manila Engineer District or MANED) to supply timber. To enable performance, the U.S. Government agreed to furnish necessary machinery, equipment, and supplies at agreed prices. Pursuant to this, the U.S. Government delivered various equipment to the partnership in the 4th quarter of 1946 and 1st quarter of 1947, valued at P262,857.78. The Collector of Internal Revenue demanded payment of a 5% compensating tax on these articles. Subsequent deliveries increased the total value to P455,078.62, later adjusted to P430,785.28 after some returns, leading to a revised tax assessment of P21,539.26.
The partnership was dissolved on August 12, 1948, with Kellogg purchasing Villalba’s interest and assuming the partnership’s debts as shown by its books, except for income taxes. On October 29, 1948, the respondent Cantilan Lumber Company was incorporated to take over the partnership’s business. Kellogg sold all partnership assets to the respondent corporation, which agreed to discharge Kellogg’s lawful debts related to the lumber business as of August 12, 1948. Kellogg became a major stockholder and general manager of the corporation.
Title to the machinery and equipment was transferred by the U.S. Government to the respondent corporation on May 11, 1954. The Collector, having previously demanded tax payment, issued a warrant of distraint and levy on December 6, 1954, and seized property of the respondent on November 18, 1955, to satisfy the tax assessment. The respondent corporation contested the assessment and the distraint before the Court of Tax Appeals, which held the respondent not liable for the tax.

ISSUE

Whether the respondent Cantilan Lumber Company (the corporation) is liable for the payment of the compensating tax on the machinery and equipment purchased from the U.S. Government by the former partnership.

RULING

The Supreme Court reversed the decision of the Court of Tax Appeals and held the respondent corporation liable for the compensating tax. The Court ruled that the tax accrues upon purchase or receipt of the taxable articles from without the Philippines, and it is not essential that absolute title to the property be transferred at that moment for the tax to become due. The partnership that originally purchased the articles from the U.S. Government was liable for the tax. Upon the partnership’s dissolution and the subsequent incorporation, the respondent corporation, through its acquisition of the business assets and its agreement to assume the partnership’s debts (with Kellogg, a partner and major stockholder, having knowledge of the tax obligation), effectively assumed the existing tax liability. The Court also upheld the legality of the distraint and levy, as it was effected within the five-year prescriptive period from the date of the last assessment.