TO PIC: DOCTRINE OF EQUITABLE RECOUPMENT b.

With this doctrine available and enforceable to both

Collector v. UST (1958) parties,
MONTEMAYOR, J. i. The tax collector would be tempted to
THE COURT HELD THAT THE CTA ERRED IN APPLYING delay and neglect the collection of
THE DOCTRINE OF EQUITABLE RECOUPMENT IN ITS DECISION. taxes within the period set by the law
Such doctrine is not binding in this country, and the Court refused to confident that when it finally wakes up
introduce the same in this jurisdiction by virtue of this decision. Its from its lethargy, it could still recover
acceptance and adoption should be left to the sound discretion of the the tax it failed to collect by having it
Legislature. Thus, the CIR may still collect the amount of P2,451.04 as set off or recouped from any tax which
percentage tax and surcharge against UST. it may have illegally collected from the
The doctrine of equitable recoupment means that when a same taxpayer
refund of a tax illegally or erroneously collected or overpaid by a 1. And this is not without its
taxpayer is barred by the statute of limitations and a tax is being resulting danger, because a
presently assessed against said taxpayer, SAID PRESENT TAX collector, to play safe and
MAY BE RECOUPED OR SET-OFF AGAINST THE TAX, the refund have a fund available for said
of which has been barred. The same thing would have been true set-off and recoupment of a
where the Government has failed to collect a tax within the period tax which he had failed and
of limitation and said collection is already barred, and the neglected to collect, may be
taxpayer has to its credit a tax illegally or erroneously collected tempted to make illegal
or overpaid, whose refund is not yet barred, the Government assessments and collections,
need not make refund of all the tax illegally or erroneously and the taxpayer would be
collected, BUT IT MAY SET OFF AGAINST ITTHE TAX WHOSE helpless because however
COLLECTION IS BARRED BY THE STATURE OF LIMITATIONS. illegal and unauthorized the
EFFECT: mitigates the effect of prescription and the statute assessment may be, the
of limitations Collector can always enforce
Notes from reviewer: Common law doctrine to the effect that the same by levy and
a claim for refund barred by prescription may be allowed to offset distraint, and the only remedy
unsettled tax liabilities should be pertinent only to taxes arising from of the taxpayer would be to
the same transaction on which an overpayment is made and file a formal demand for
underpayment is due. It finds no application where the taxes involved refund, followed by a court
are totally unrelated. (Invocation of equity rather than law) suit to enforce the demand.
ii. As regards the taxpayer, he may also
FACTS be tempted to delay and neglect the
1. During the period from January 1, 1948-June 30, 1950, UST filing of the corresponding suit for
paid on its gross receipts derived from its printing and refund of a tax illegally or erroneously
binding jobs for the public and the different departments of collected, trusting that he can always
the University, the aggregate amount of Php13,590.03, recover or be credited with the same
representing the 2% tax on its gross receipts during the or part thereof by refusing to pay a
period in question valid tax assessed against him and
2. On October 17,1950, UST requested in writing from the compelling the Government to set-off
respondent the refund of the sum of Php 8,293.31, on the same against a tax payment he
account of the following: could no longer recover.
a. The amount of Php 359,972.45 paid by the other c. Contrary to the CTA’s contention that the
departments to the UST Press was for the application of the doctrine in this jurisdiction is
purposes of accounting onlyand does not legally sanctioned by Sections 306 and 309 of the
constitute gross receipts subject to the percentage Internal Revenue Code, the Court found that:
tax i. The aforementioned sections do not
b. The printing and binding of the annuals contain any right of a taxpayer to a set off
THOMASIAN and VERITAS fall under the or credit, where because of the expiration
exception provided for in Section 191 in relation to of the period of prescription, his right to a
Section 183(a) of the Tax Code refund is already barred
3. COLLECTOR OF INTERNAL REVENUE: UST’s claim for ii. It is true that under Section 309, the
refund in the sum of Php 8,293.31 (representing business Collector “may credit or refund taxes
printer’s percentage tax pursuant to Section 191 of the Tax erroneously or illegally received,” but the
Code, in relation to Section 183(a)) is denied; also, the word may clearly implies discretion.
amount of Php 2,452.04, representing deficiency percentage 1. He may or he may not exercise
tax and surcharge on the undeclared receipts derived from the authority granted him by the
the printing and binding of the subject annuals, is hereby law to make the refund or credit
assessed and demanded from UST; also, petitioner is 2. Under the circumstances, he
ordered to pay Php 100 as compromise penalty may not be compelled or
4. Court of tax appeals: Modified the decision of the CIR ordered by the courts, as the
a. UST’s claim for refund to the extent of Php 5, Tax Court is compelling him and
842.27 is DENIED, the same being BARRED BY ordering him to do so, especially
PRESCRIPTION when the Collector himself not
b. The deficiency tax assessment of Php 2, 451.04 for only refuses to make the refund
percentage taxes and surcharges is or set off, but also denies the
RECOGNIZED, but the amount is DEEMED PAID, authority of the Tax Court to
BY WAY OF RECOUPMENT, to the extent of the order it.
amount of Php 2, 451.04 which UST erroneously d. The Tax Court, in applying such doctrine, reasoned
paid for the period from January 1948 to Jun 1950 that the same serves as a cushion to the harsh and
i. Respondent is thus ordered to desist from iniquitous effects of the statute of limitations,
further collecting said deficiency because it would be oppressive to leave the
assessment taxpayer without any remedy to set off taxes
erroneously collected, which are barred by
SUPREME COURT prescription.
1. W/N THE CTA ERRED IN APPLYING THE DOCTRINE OF i. SUPREME COURT:
EQUITABLE RECOUPMENT IN THE CASE? 1. Prescription may be rigorous
a. YES. and at times may be a little
harsh, but certainly there could
 be no oppression, much less a. The amount of PHP 8,293.31, which the university
iniquity WHERE THE SAME seeks to be refunded was paid during the period
LAW IS APPLIED EQUALLY from January 1, 1948 to June 30, 1950, the last
TO THE GOVERNMENT AND payment having been made on July 15, 1950
THE TAXPAYER b. On the other hand, the appeal or petition for
a. On the contrary, that review of the CIR’s decision was filed with the
statute of limitations CTA on September 8, 1954
has a salutary and c. Thus, the action for refund was filed more than four
wholesome effect years from last payment, and is therefore already
because under the barred by the statute of limitations
same, the tax i. Section 306 provides that no suit or
collecting agency of proceeding for the recovery of any
the Government, and internal revenue tax alleged to have been
the taxpayer would be erroneously or illegally assessed or
alert and vigilant, and collected, shall be begun after the
would be constrained expiration of TWO YEARS from the date
to make assessment of payment of tax
and collection, and d. UST contends that its claim has not yet prescribed
demand the refund of because in the course of its negotiations with the
taxes illegally or CIR, the latter allegedly stated in a letter that a
erroneously collected, refund will be granted
respectively, ON i. WRONG
TIME. ii. The mere mention of a possible grant is
2. Also, when a tax is illegally or not a grant in itself, and thus, does not
erroneously collected, or an bind the government
overpayment is made by a iii. In the letter, the CIR, spoke of
taxpayer, and the latter fails to arrangements being made, hence, there
ask for the refund thereof within was as yet no favourable action taken on
the time prescribed by law, the petitioner’s claim for refund
which under the tax law is also 2. THE TAX OF PHP7,199.45, CORRESPONDING TO THE
two years, then the Government GROSS RECEIPTS AMOUNTING TO PHP359,572.45 HAD
would feel free to appropriate BEEN ERRONEOUSLY COLLECTED BY THE CIR
the same for its purposes… a. Although the UST Press is a distinct department,
a. And when the separate and independent from the other
taxpayer years departments of the university, IT IS
afterward remembers NEVERTHELESSAN INTEGRAL PART THEREOF
and decides to ask for i. And thus, for purposes of taxation, IT IS
the refund, by way of THE UNIVERSITYAS A LEGAL ENTITY
equitable recoupment, WHICH SHOULDER TAXES THAT MAY
the Government may BE DUE FROM ANY OF ITS
find itself financially DEPARTMENTS
embarrassed, 1. Because the individual
because it had already existence or personality of the
spent the money various departments are
3. The same thing would be true merged into one taxable
for a taxpayer, when the being UST
Government fails to collect the 3. THE CIR’S ASSESSMENT IN THE AMOUNT OF PHP
tax within the statute of 2,451.04 AS DEFICIENCY IN TAX PERCENTAGE AND
limitations, the taxpayer would SURCHARGES WAS VALID
feel free, and in all probability a. The university was liable under this tax because it
would dispose of the amount... did not come under the exemption provided for
a. And when the under Section 191 of the Internal Revenue Code,
Government finally because:
wakes up and i. The subject annuals do not have fixed
demands the tax by prices
way of recoupment, ii. It was not shown that the UST Press is
the taxpayer might be the publisher of these annuals
unable to meet the iii. It is also unclear whether such annuals
demand without fall within the purview of the term
detriment to its newspaper, magazine, review, or bulletin
business 4. THE COMPROMISE PENALTY WORTH PHP 100 WAS
ii. HALL V. US (1942): IMPROPER
1. We are not unmindful of the a. Compromise implies mutual agreement between
merits of the principle of the parties, thus, one party cannot exact from or
recoupment nor of the measure impose upon another a compromise
of justice which it permits…but i. In this case, THE COMPROMISE
there is also a reason behind SOUGHT BY CIR WAS REJECTED BY
limitation statutes. Frequently, UST (so walang mutual agreement)
records are lost and memories
fade as to the transactions long
past… Limitation
statutes…operate to terminate
what otherwise be almost
endless litigation and
consequent confusion.
OTHER ISSUES DISCUSSED
1. USTS’S CLAIM FOR REFUND IS BARRED BY
PRESCRIPTION