BIR Ruling No. 306-61

June 30, 1961 BIR RULING NO. 306-61 There is returned to you herewith the entire docket bearing on the internal revenue tax case of the Estate of the late . . . . cdtech The records of this case show that before her death, the late . . . together with her six (6) children formed a family corporation which is now known as ". . . (PVLB), Inc., with an authorized capital stock of P300,000.00 divided into 3,000 shares with a par value of P100 per share. The decedent did not pay in cash to the corporation her subscription of 2,940 shares of stocks. Instead, by virtue of a Deed of Assignment dated December 9, 1954, she ceded to the said corporation her real properties with a total net assessed value of P332,900.00. Likewise, on December 9, 1954, the . . ., Inc. applied for registration with the Securities and Exchange Commission by filing on the same date its Articles of Incorporation. However, the corresponding Certificate of Incorporation was obtained by it only on February 4, 1957. LLjur This case has been referred to the Law Division for a ruling on the question of whether or not the . . ., Inc. was already existing with the status of at least a de facto corporation at the time of decedent's death on July 23, 1956. A corporation de facto is an apparent corporate organization, asserted to be a corporation by its members and actually acting as such, but lacking the creative fist of the law. It is a corporation from the fact of its acting as such, though not in law or of right a corporation. (Re Gibb's Estate, 157 Pa. 59, 27 A. 383, 22 L.R.A. 276; Georgia S. 7 F. R. Co. v. Mercantile Trust & D. Co. (McTighe v. Macon Consts. Co. 94 Ga. 306, 21 S.E. 701, 32 L.R.A. 208) Generally, it is essential to the existence of a de facto corporation that there should be (1) a valid law under which a corporation with the powers assumed might be incorporated; (2) bona fide attempt to organize a corporation under such law; and (3) an actual exercise of corporate powers. (Vol. 13 Am. Jur.) prll After a study of this case, it would seem that even before the issuance of its certificate of incorporation, the . . ., Inc. has already substantially complied with the aforecited prerequisites. A de facto corporation can exist only where a number of persons have organized and acted as a corporation and have conducted their affairs to some extent, at least, by methods and through officers usually employed by corporations. Moreover, there can be no other strong and better proof of its existence as such de facto corporation than the truth of the allegation of one of the heirs in this case, that even before the decedent's death, the . . ., Inc. acting as such corporation was already keeping books of accounts and filing its income tax returns. However, in this connection, we suggest that the veracity of this allegation should be properly looked into. In this case, there was no actual verification of the existence of this alleged income tax returns filed by the corporation in question. The investigating examiner merely submitted an affidavit executed by one of the heirs alleging among other things that the corporation had been filing its income tax returns as early as the year 1956. Unless verified as true, the said affidavit shall only be in the category of a self-serving evidence. It would seem, upon principle, that the nature and character of the informality or defect in attempting to organize a corporation is immaterial, provided, notwithstanding its existence, it is apparent that there was an attempt in good faith to create a corporation and that in like good faith there has been an assumption and exercise of corporate functions. In other words, a corporation de facto exists when from irregularity or defect in the organization or constitution or from some omission to comply with the conditions precedent a corporation de jure is not created. but there has been a colorable compliance with the requirements of some law under which an association might be lawfully incorporated for the purposes and powers assumed, and a user of the rights claimed to be conferred by the law when there is an organization with color of law and the exercise of corporate franchises. (Louis Snider's Sons' Co. v. Troy, 91 Ala. 224, 8 So. 658, 11 L.R.A., 515) Finally, a de facto corporation possesses all the powers of a de jure corporation except that it is open to a direct attack by the state in quo warranto proceedings. It is under the protection of the same law and governed by the same legal principles as a corporation de jure, so long as the state acquiesces in its existence and exercise of corporate functions.