TO PIC: DOCTRINE OF EQUITABLE RECOUPMENT

Collector v. UST (1958)

MONTEMAYOR, J.
THE COURT HELD THAT THE CTA ERRED IN APPLYING THE DOCTRINE OF EQUITABLE
RECOUPMENT IN ITS DECISION. Such doctrine is not binding in this country, and the Court refused to
introduce the same in this jurisdiction by virtue of this decision. Its acceptance and adoption should be
left to the sound discretion of the Legislature. Thus, the CIR may still collect the amount of P2,451.04
as percentage tax and surcharge against UST.
The doctrine of equitable recoupment means that when a refund of a tax illegally or erroneously
collected or overpaid by a taxpayer is barred by the statute of limitations and a tax is being presently
assessed against said taxpayer, SAID PRESENT TAX MAY BE RECOUPED OR SET-OFF AGAINST THE TAX,
the refund of which has been barred. The same thing would have been true where the Government has
failed to collect a tax within the period of limitation and said collection is already barred, and the
taxpayer has to its credit a tax illegally or erroneously collected or overpaid, whose refund is not yet
barred, the Government need not make refund of all the tax illegally or erroneously collected, BUT IT
MAY SET OFF AGAINST ITTHE TAX WHOSE COLLECTION IS BARRED BY THE STATURE OF LIMITATIONS.
EFFECT: mitigates the effect of prescription and the statute of limitations
Notes from reviewer: Common law doctrine to the effect that a claim for refund barred by
prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising
from the same transaction on which an overpayment is made and underpayment is due. It finds no
application where the taxes involved are totally unrelated. (Invocation of equity rather than law)

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