Estate and Inheritance Taxes Cannot be Subject to Set-off or Compensation

May 11, 1966 BIR RULING NO. 016-66 Mr. Amadeo R. Neri Rm. 207 DBP Building Cagayan de Oro City S i r : This refers to your letter stated as follows: "This is in connection with the Estate and Inheritance Tax Assessment made against me, due the National Government for which I am herewith making a down payment of TWO HUNDRED (P200.00) PESOS in a PCIB Check bearing No. 26168 in the amount of P200.00, to show my good faith in coming across with your tax demand. As regards my balance, I am respectfully requesting as to whether you can accept a compensation or set-off of a money claim against the City of Cagayan de Oro which I am prosecuting against the City Government worth more than P6,000.00. Said claim is a liquidated claim due me and the estate of my late sister Lydia Neri Sarmiento for real property which has been converted into City Streets. The claim is consolidated in the name of Lydia Neri Sarmiento." In reply thereto, I have the honor to inform you that internal revenue taxes, such as estate and inheritance taxes, cannot be subject to a set-off or compensation. The reason is that "taxes are not in the nature of contracts between party and party, but grow out of a duty to and are the positive acts of the government to the making and enforcing of which the personal consent of individual taxpayers is not required. A practical and at the same time an amply sufficient reason for the rule is to be found in the fact that the amount of the annual tax levy and the various purposes for which taxes are imposed are fixed and defined in advance of the levy, and the money raised must be expended for the purposes so defined. If the taxpayer can properly refuse to pay his tax when called upon by the collector because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile, the financial affairs of the government will be thrown into great confusion." (47 Am. Jur. p. 766-767). Moreover, the Court, in the case of Republic v. Mambulao Lumber Co. (G.R. No. L-17725, Feb. 28, 1962) held that "a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set off under the statutes of set-off which are construed uniformly in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they proper subjects of recoupment since they do not arise out of the contract or transaction sued on." aisadc In view of the foregoing, your request has to be, as it is, hereby denied. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue This is to certify that the above ruling was duly signed by the Commissioner of Internal Revenue on May 11, 1966 . (SGD.) PRISCILLA R. GONZALES Asst . Rev . Operations Head (Legal)