13. Taxation of domestic corporations Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to the original or…

The question

13. Taxation of domestic corporations Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to the original or the first sale; the second and subsequent sales were not subject to tax. Deltoid Motors, Inc. (Deltoid) hit on the idea of setting up a wholly-owned subsidiary, Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars to Gonmad at a low price so it would pay a lower tax on the first sale. Gonmad would then sell the cars to the public at a higher price without paying any sales tax on this subsequent sale. Characterize the arrangement. (2013 Bar Question)

1. A.The plan is a legitimate exercise of tax planning and merely takes advantage of a loophole in the law.
2. B.The plan is legal because the government collects taxes anyway.
3. C.The plan is improper; the veil of corporate fiction can be pierced so that the second sale will be considered the taxable sale.
4. D.The government must respect Gonmad's separate juridical personality and Deltoid's taxable sale to it.

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