4. Engracio Francia v. IAC, G.R. No. L-67649, June 28, 1988.

DOCTRINE: 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.

FACTS: Engracio Francia is the registered owner of a residential lot with a two-story house
built upon it situated at Barrio San Isidro (now District of Sta. Clara), Pasay City, Metro Manila.
On October 15, 1977, part of Francia’s property was expropriated by the Republic of the
Philippines for the sum of P4,116.00.

For 14 years or from 1963 up to 1977, Francia failed to pay his real estate taxes. Thus, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to the Real
Property Tax Code in order to satisfy a tax delinquency of P2,400.00. After bidding, Ho
Fernandez was issued with title to said property. In 1979, Francia filed a complaint to annul the
auction sale. Francia argues that the obligation to pay P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15,1977. Hence, his tax obligation had been set-off by operation of
law as of October 15, 1977.

ISSUE: WON the tax delinquency has been extinguished by legal compensation?

RULING: NO. The tax delinquency has not been extinguished by legal compensation. The
Court has consistently ruled that 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. Here, the
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: “(1)
that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other; xxx xxx xxx “(3) that the two debts be due. xxx xxx xxx.

This rule was reiterated in Cordero v. Gonda where the Court explained that taxes cannot be the
subject of compensation for the reason that government and taxpayer ‘are not mutually creditors
and debtors of each other’ under Article 1278 of the Civil Code. In addition, a “claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off.”

Other factors which compel the Court to rule against the petitioner are as follows:
a) The tax was due to the city government while the expropriation was effected by the
national government.
b) The amount of P4,116.00 paid by the national government for the portion of his lot was
deposited with the Philippine National Bank long before the sale at public auction of his
remaining property.