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Set-off: Compensation in Taxation Rule 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.

PRINCIPLES AND DOCTRINES ON TAXATION Prepared by: Arnel D. Mateo I. PRINCIPLE OF NECESSITY The existence of the government is a necessity; the main source of revenue of the government is taxes. These are the life-blood of the government. The primary purpose of taxation is to generate funds for the State to finance the needs of the citizenry and to advance the common wealth. The government chiefly relies on taxation to obtain the means to carry on its operation. Cases: Commissioner vs. Pineda, 21 SCRA 105- Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need. CIR vs. Algue, 158 SCRA 8- The government will not be able to survive and continue to perform its functions without taxes.

II. TAXATION IS INHERENTLY LEGISLATIVE Along with police power ( for public good and welfare ) and eminent domain ( for public use ), taxation ( for revenue ) is an inherent power of the sovereignty. Cases: National Power Corporation vs. Albay, 186 SCRA 198- Power of taxation is legislative in character and is a legislative prerogative. Petro vs. Petilla, 198 SCRA 82- The legislative taxing power includes the authority: a. to determine the nature, object, extent, coverage, and situs of the tax imposition, b. to grant tax exemptions or condonations, and c. to specify or provide for the administrative, as well as judicial remedies that either the government or the taxpayers may avail themselves of in the proper implementation of the tax measure. III. TAXATION INCLUDES THE POWER TO DESTROY The power of taxation is sometime also called the power to destroy. Therefore, it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kills the hen that lays the golden egg. And, in order to maintain the general publics trust and confidence in the government, this power must be used justly and not treacherously. Cases: Roxas vs. CTA, 23 SCRA 276- The power of taxation includes the power to destroy if it is used validly as an implement of the police power of the state. If it is used solely for the purpose of raising revenue, it does not include the power to destroy. Standard Oil Co. vs. Posadas, 55 Phil 715- While ordinarily the government does not tax its own political subdivisions or its other entities, it may, however, do so by providing for it explicitly. IV. TAXATION IS FOR A PUBLIC PURPOSE The proceeds of the tax must be used a. for the support of the State or b. for some recognized objects of government or directly to promote the welfare of the community. Cases: Pascual vs. Sec. of Public Works, 110 Phil 331- The legislature is without power to appropriate public revenues for anything but a public purpose. Valentin Tio vs. Videogram Regulatory Board, 151 SCRA 208- The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. V. TAXPAYER SUIT It is the remedy available to a taxpayer when taxes are used for illegal activities or when the public funds are used by the government for projects which are not intended for a public purpose. Cases: Pascual vs. Sec. of Public Works, 110 Phil 331- It is only when an act complained of, which may include a legislative enactment, directly involves illegal disbursement of public funds derived from taxation. Maceda vs. Macaraig, 197 SCRA 771- When the issue involve the legality of expenditure of tax money, a taxpayer suit could be filed.

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