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1. Domingo v.

GR No. L-18993 29 June 1963

F A C T S: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory the order of the
Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges and penalties amounting to
P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filed by the fiscal, however, was
denied by the lower court. The Court held that the execution is unjustified as the Government itself is indebted to the
Estate for 262,200; and ordered the amount of inheritance taxes be deducted from the Governments indebtedness to
the Estate.

I S S U E: Whether a tax and a debt may be compensated.

H E L D: The court having jurisdiction of the Estate had found that the claim of the Estate against the Government has
been recognized and an amount of P262,200 has already been appropriated by a corresponding law (RA 2700). Under
the 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 as well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and both debts are extinguished
to the concurrent amount. In other words, the estate and inheritance taxes are set off, by virtue of the governments
indebtedness to the estate.

REPUBLIC vs MAMBULAO LUMBERG.R. No. L-17725, February 28, 1962

Defendant-appellant company paid P9,127.50 to plaintiff-appellee as reforestationcharges from 1947 to 1956. It seeks
to set off or applied to the payment of the sum ofP4,802.37 as forest charges due and owing from appellant to appellee.
It is appellant'scontention that said sum of P9,127.50, not having been used in the reforestation of the areacovered by
its license, the same is refundable to it or may be applied in compensation ofsaid sum of P4,802.37 due from it as forest
Appellant maintains that the principleof a compensation in Article 1278 of the new Civil Code
is applicable, such that the sum ofP9,127.50 paid by it as reforestation charges may compensate its indebtedness to
appellee in the sum of P4,802.37 as forest charges.
ISSUE: Whether or not set off or compensation is admissible against demand for taxes levied.
But in the view we take of this case, appellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court correctly observed: .Under Article
1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each
other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government,
they 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. ..The general rule, based on grounds of public policy is well-settled that
no set-off is admissible against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature ofcontracts between the party and party but grow out
of a duty to, and are the positive acts ofthe government, to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when calledupon by the
Collector, because he has a claim against the governmental body which is notincluded in the tax levy, it is plain that
some legitimate and necessary expenditure must becurtailed. If the taxpayer's claim is disputed, the collection of the tax
must await and abidethe result of a lawsuit, and meanwhile the financial affairs of the government will be throwninto
great confusion. (47 Am. Jur. 766-767.)