Set-off: Compensation in TaxationRule on Compensation of Taxes: There can be no off-setting of taxes against the claims

that the taxpayer may have against the government. Government and taxpayer are not

mutually creditors and debtors of each other under Article 1278 of the Civil Code and a claim

for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

(REPUBLIC vs. MAMBULAO LUMBER COMPANY, ET AL. , ENGRACIO FRANCIA vs.

INTERMEDIATE APPELLATE COURT, ET AL.)

Exception to the rule: When both taxes and claim against the government is overdue,

demandable and fully liquidated. Government has been recognized and an amount has

already been appropriated for the purpose by a corresponding law (MELECIO R. DOMINGO

vs. LORENZO C. GARLITOS, ET AL. )

Cases:

REPUBLIC vs. MAMBULAO LUMBER COMPANY, ET AL.

G.R. No. L-17725. February 28, 1962

Facts:

Defendants have a liability for forest charges to the Republic of the Philippines. Defendants

contended that since the Republic of the Philippines has not made use of those reforestation

charges (RA 115) collected from it for reforesting the denuded area of the land covered by

its license, the Republic of the Philippines should refund said amount, or, if it cannot be

refunded, at least it should be compensated with what Mambulao Lumber Company owed

the Republic of the Philippines for reforestation charges.

Issue:

May reforestation charges be set-off to forest charges owed by defendants to the

government?

Ruling:

No. Appellant and appellee are not mutually creditors and debtors of each other.

Consequently, the law on compensation is inapplicable. The forest charges which the

defendant Mambulao Lumber Company has paid to the government, are in the coffers of the

government as taxes collected, and the government does not owe anything, crystal clear

that the Republic of the Philippines and the Mambulao Lumber Company are not creditors

and debtors of each other, because compensation refers to mutual debts.

MELECIO R. DOMINGO vs. LORENZO C. GARLITOS, ET AL.

G.R. No. L-18994. June 29, 1963

Facts:

The government has a claim against the estate of the Walter Scott Price of estate and

inheritance taxes, charges and penalties amounting to P40,058.55. The government is at the

same time indebted to the estate under administration in the amount of P262,200.

Issue:

May the claim by the government against the estate be deducted from its debt to the

estate? May compensation take place?

Ruling:

Yes. The claim of the estate against the Government has been recognized and an amount of

P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act

No. 2700). Under the above circumstances, both the claim of the Government for

inheritance taxes and the claim of the intestate for services rendered have already become

overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by

operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil

Code, and both debts are extinguished to the concurrent amount. compensation takes effect

by operation of law, and extinguished both debts to the concurrent amount.

ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT, ET AL.

G.R. No. L-67649. June 28, 1988

Facts:

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by

the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount

equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on

December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay

City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax

Code in order to satisfy a tax delinquency of P2,400.00.

Issue:

May compensation take place?

Ruling:

There can be no off-setting of taxes against the claims that the taxpayer may have against

the government. A person cannot refuse to pay a tax on the ground that the government

owes him an amount equal to or greater than the tax being collected. The collection of a tax

cannot await the results of a lawsuit against the government.

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.

Government and taxpayer are not mutually creditors and debtors of each other under Article

1278 of the Civil Code and a claim for taxes is not such a debt, demand, contract or

judgment as is allowed to be set-off.