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GR No. L-67649
June 28, 1988

DOCTRINE: The obligation to pay taxes cannot be compensated by any other claim a taxpayer may have against the government.

Francia Fernandez
 Engracio Francia is registered owner of a residential lot, and a two-story house situated in Pasay.
 October 1977 - A portion of Francia's property was expropriated by the Republic for P4,116.
 Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
 Thus, Francia’s property was sold at a public auction pursuant to Section 73 of PD 464 known as ‘Real Property Tax Code’ in order to
satisfy a tax delinquency of P2,400. Ho Fernandez was the highest bidder for the property.

 Francia filed a complaint to annul the auction sale.

o Francia later amended his complaint. Francia seeks to set aside the auction sale of his property, and to allow him to recover a
203 sqm lot which was sold at public auction to Ho Fernandez and ordered titled in the latter's name.
o He further averred that his tax delinquency of P2,400.00 has been extinguished by legal compensation since the government
owed him P4, 116.00 when a portion of his land was expropriated.
 Lower Court: rendered a decision in favor Fernandez
 IAC: affirmed Lower Court ruling.
 Francia elevated case with SC thru petition for review.

ISSUE: WON the obligation to pay real estate taxes was extinguished via legal compensation. --NO

Francia averred: His tax delinquency of P2,400 has been extinguished by legal compensation since gov’t owed him P4,116 from the
expropriation + he was not properly notified of auction sale (NOT IMPT) + price for wc land was very low (NOT IMPT)
Court ruled (with IAC, Fernandez):
 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 tax on the ground that the government owes him an amount equal to or greater than the
tax being collected. The collection of tax cannot await the results of a lawsuit against the government.
o In Republic v Mambulao Lumber Co. – “The tax was due to city government while the expropriation was affected by national
government. The requisites of legal compensation found in NCC 1279 are not present in this case. The payment for the land was
deposited to PNB long before the auction sale, so the petitioner could have gotten the payment for the taxes from PNB.
Moreover, it is due to his fault that he did not read the notice of auction sale when he received it, hence he was not denied his
right to due process.”
o This rule was reiterated in Corders v. Gonda where Court stated "... internal revenue taxes cannot be the subject of
compensation; reason being that 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."

 In legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished, pursuant to Art. 1278, Civil Code. As per Art 1279, in order that compensation may be proper, it is necessary: “(1) That
each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (3) That the two debts
be due x x x.”
o In this case, the government and taxpayer are not mutually creditors and debtors of each other, so there is no compensation.
The tax was due to the city government while the expropriation was effected by the national government. (ELAM: creditor for
P4116 is Francia; while creditor for the tax is city government = not mutually creditors/debtors of each other.)

 On Francia’s averment that he was not properly informed of the auction sale
o In this case, the amount of P4,116 paid by national government for the 125 sqm portion of lot was deposited with PNB long
before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by
Francia on September 30, 1977. Francia admitted in his testimony that he knew about the P4,116 deposited with the bank but he
did not withdraw it. It would have been an easy matter to withdraw P2,400 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction. (ELAM: IOW – Francia was long paid from the expropriation)
o Francia, therefore, was notified about the auction sale. It was negligence when he ignored such notice, and that he was in a
hurry he didn’t read it. By his very own admission that he received the notice, his now coming to court that he was not
properly notified of the auction, and assailing the validity of the auction sale loses its force.

On Francia’s averment that price for wc the property was sold to cover for taxes was very low
 Finally, Court ruled that “When there is the right to redeem, inadequacy of price should not be material, because the judgment
debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of
the price obtained at the auction sale."

The petition for review was dismissed.