G.R. No.

L-11976 August 29, 1961

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
ANTONIO PRIETO, ET AL., respondents.

Facts:

 Doña Teresa Tuason y de la Paz died in Manila on March 9, 1951, leaving a last will and
testament.
 The will provided for the distribution of her estate among 14 heirs, including respondents
Antonio, Benito, and Mauro Prieto.
 The probate court approved the project of partition, which valued the estate at
P3,513,073.63.
 The Collector of Internal Revenue evaluated the net estate at P3,757,286.22 for the
purpose of estate and inheritance taxes.
 The Prieto heirs agreed to reimburse their co-heirs in cash to equalize the shares due to
the unequal distribution of real properties among the heirs.
 The taxes paid by the Prieto heirs were based on the total value of the properties
inherited, including the cash payments made to their co-heirs.
Issue:
Whether there has been an overpayment in connection with the inheritance tax liability of the
Prieto heirs.
Ruling:
The Court of Tax Appeals ruled in favor of the Prieto heirs, ordering the Collector of Internal
Revenue to refund the excess payment with interest.
The court also held that the cash payments made by the heirs should be deducted from the value
of the properties received for the computation of their inheritance tax.
Ratio:

 The Court of Tax Appeals did not need to order the impleading of the executrix and other
heirs not affected by the refund claim, as they were not indispensable parties to the case.
 The court argued that the executrix and other heirs not affected by the refund claim were
not necessary parties to the case, as their presence or absence would not affect the
outcome of the case.
 Inheritance tax is paid based on the value of the properties inherited by an heir. Since the
taxes paid by the Prieto heirs included the cash payments made to their co-heirs, they are
entitled to a refund of the excess payment.
  The court reasoned that the inheritance tax should only be based on the value of the
properties inherited, and not on the cash payments made to equalize the shares among the
heirs.
 Therefore, the Prieto heirs should be refunded the excess payment they made, as it was
not necessary for the computation of their inheritance tax.
 Under the Internal Revenue Code, the Collector of Internal Revenue may be made to pay
interest on taxes ordered refunded if the assessment was arbitrary or clearly unjustified.
 The court cited the provision in the Internal Revenue Code that allows for the payment of
interest on refunded taxes if the assessment was arbitrary or clearly unjustified.
 In this case, the court found that the assessment made by the Collector of Internal
Revenue was clearly unjustified, as it included the cash payments made by the Prieto
heirs.
 When a tax is paid in installments, the prescriptive period of two years should be counted
from the date of the final payment.
 The court clarified that when a tax is paid in installments, the prescriptive period for
claiming a refund should be counted from the date of the final payment.
 In this case, the final payment was made by the Prieto heirs, and therefore, the
prescriptive period for claiming a refund should be counted from that date.
 The Collector of Internal Revenue may be liable for interest on improperly collected
taxes if the collection was attended with arbitrariness or was clearly unjustified.
 The court emphasized that the Collector of Internal Revenue may be held liable for
interest on improperly collected taxes if the collection was attended with arbitrariness or
was clearly unjustified.
 In this case, the court found that the collection of the inheritance taxes from the Prieto
heirs was clearly unjustified, as it included the cash payments made to their co-heirs.
Conclusion
The Supreme Court ruled in favor of the Prieto heirs, ordering the Collector of Internal Revenue
to refund the excess inheritance taxes paid with interest.
The court also affirmed that the cash payments made by the heirs should be deducted from the
value of the properties received for the computation of their inheritance tax.