Collector v. UST (1958)
COLLECTOR OF INTERNAL REVENUE: UST’s claim for refund in
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.
the sum of Php 8,293.31 (representing business printer’s 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. UST’s 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 CTA’s 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 permits…but there is also a
reason behind limitation statutes. Frequently,
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
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 iii. It is also unclear whether such annuals fall within the
July 15, 1950 purview of the term newspaper, magazine, review, or
b. On the other hand, the appeal or petition for review of the bulletin
CIR’s decision was filed with the CTA on September 8, 4. THE COMPROMISE PENALTY WORTH PHP 100 WAS IMPROPER
1954 a. Compromise implies mutual agreement between the parties,
c. Thus, the action for refund was filed more than four years from thus, one party cannot exact from or impose upon another a
last payment, and is therefore already barred by the statute of compromise
limitations i. In this case, THE COMPROMISE SOUGHT BY CIR
i. Section 306 provides that no suit or proceeding for the WAS REJECTED BY UST (so walang mutual
recovery of any internal revenue tax alleged to have agreement)
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 petitioner’s 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 CIR’S 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