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Madrigal vs.

Rafferty
Facts: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914, contracted under the
provisions of law concerning conjugal partnerships. In 1915, Madrigal filed a sworn declaration with the CIR showing
that his total net income for the year 1914 was P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income
tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into
two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno.
After payment under protest, and after the protest of Madrigal had been decided adversely by the CIR, action was
begun by Madrigal and his wife Paterno in the CFI of Manila against Collector of Internal Revenue and the Deputy
Collector
of Internal
Revenue.
CFI
decided
against
Madrigal
and
Paterno.
Appellees contend that the taxes imposed by the Income Tax Law are as the name implies taxes upon income tax and
not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted under the
provisions governing the conjugal partnership, has no bearing on income considered as income, and that
the distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of
spouses resulting from the relation of marriage.
Issue: Whether or not the additional income tax should be divided into two equal parts because of the conjugal
partnership
Held: Income as contrasted with capital or property is to be the test. The essential difference between capital and
income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow
of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital
in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of
wealth.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during
the life of the conjugal partnership. She has an interest in the ultimate propertyrights and in the ultimate ownership
of property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half
the income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate
return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income
cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover,
the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and
wifeare only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional
tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code
dealing with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of
the Income Tax Law must be given effect.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-12287

August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,


vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal
Revenue, defendants-appellees.
Gregorio Araneta for appellants.
Assistant Attorney Round for appellees.
MALCOLM, J.:
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil Code, a
law of Spanish origin.
STATEMENT OF THE CASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was contracted under
the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente

Madrigal filed sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net
income for the year 1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said
P296,302.73 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in computing and assessing the additional income tax
provided by the Act of Congress of October 3, 1913, the income declared by Vicente Madrigal should be divided into two
equal parts, one-half to be considered the income of Vicente Madrigal and the other half of Susana Paterno. The general
question had in the meantime been submitted to the Attorney-General of the Philippine Islands who in an opinion dated
March 17, 1915, held with the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence
together with this opinion was forwarded to Washington for a decision by the United States Treasury Department. The
United States Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decided against
the claim of Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal
Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of
Manila against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum
of P3,786.08, alleged to have been wrongfully and illegally collected by the defendants from the plaintiff, Vicente
Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was
that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable
by each of the plaintiffs the sum of P2,921.09, which taken together amounts of a total of P5,842.18 instead of
P9,668.21, erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff
Madrigal has paid as income tax for the year 1914, P3,786.08, in excess of the sum lawfully due and payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets
forth the basis of defendants' stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno of
the year 1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and
shipping business; (2) P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the
profits made by Vicente Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross
income of Vicente Madrigal and Susana Paterno for the year 1914. General deductions were claimed and allowed in the
sum of P86,879.24. The resulting net income was P296,302.73. For the purpose of assessing the normal tax of one per
cent on the net income there were allowed as specific deductions the following: (1) P16,687.80, the tax upon which was
to be paid at source, and (2) P8,000, the specific exemption granted to Vicente Madrigal and Susana Paterno, husband
and wife. The remainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The
normal tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law.
The trial court in an exhausted decision found in favor of defendants, without costs.
ISSUES.
The contentions of plaintiffs and appellants having to do solely with the additional income tax, is that is should be
divided into two equal parts, because of the conjugal partnership existing between them. The learned argument of
counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. The counter
contentions of appellees are that the taxes imposed by the Income Tax Law are as the name implies taxes upon income
tax and not upon capital and property; that the fact that Madrigal was a married man, and his marriage contracted
under the provisions governing the conjugal partnership, has no bearing on income considered as income, and that the
distinction must be drawn between the ordinary form of commercial partnership and the conjugal partnership of
spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given the course of history. The
final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax," Introduction.)
The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the
legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils
arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to
pay. To carry out this idea, public considerations have demanded an exemption roughly equivalent to the minimum of
subsistence. With these exceptions, the income tax is supposed to reach the earnings of the entire non-governmental
property of the country. Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is
that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation
to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following
figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a
tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or gains." (London County Council vs. Attorney-General [1901], A. C.,
26; 70 L. J. K. B. N. S., 77; 83 L. T. N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Foster's Income Tax, second

edition [1915], Chapter IV; Black on Income Taxes, second edition [1915], Chapter VIII; Gibbons vs. Mahon [1890], 136
U.S., 549; and Towne vs. Eisner, decided by the United States Supreme Court, January 7, 1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart,
contains the following:
The husband, as the head and legal representative of the household and general custodian of its income, should make
and render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is
assumed that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as
her own separate property, and receives an income of more than $3,000, she may make return of her own income, and
if the husband has other net income, making the aggregate of both incomes more than $4,000, the wife's return should
be attached to the return of her husband, or his income should be included in her return, in order that a deduction of
$4,000 may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so
much of the aggregate income of both shall exceed $4,000. If either husband or wife separately has an income equal to
or in excess of $3,000, a return of annual net income is required under the law, and such return must include the income
of both, and in such case the return must be made even though the combined income of both be less than $4,000. If the
aggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner
stated, although neither one separately has an income of $3,000 per annum. They are jointly and separately liable for
such return and for the payment of the tax. The single or married status of the person claiming the specific exemption
shall be determined as one of the time of claiming such exemption which return is made, otherwise the status at the
close of the year."
With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment
to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in
which a long line of Spanish authorities were cited, this court in speaking of the conjugal partnership, decided that "prior
to the liquidation the interest of the wife and in case of her death, of her heirs, is an interest inchoate, a mere
expectancy, which constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears
that there are assets in the community as a result of the liquidation and settlement." (Nable Jose vs. Nable Jose [1916],
15 Off. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 Off. Gaz., 1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during
the life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of
property acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the
income of the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate
return in order to receive the benefit of the exemption which would arise by reason of the additional tax. As she has no
estate and income, actually and legally vested in her and entirely distinct from her husband's property, the income
cannot properly be considered the separate income of the wife for the purposes of the additional tax. Moreover, the
Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. The husband and wife
are only entitled to the exemption of P8,000 specifically granted by the law. The higher schedules of the additional tax
directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing
with the conjugal partnership and having no application to the Income Tax Law. The aims and purposes of the Income
Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the
United States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as
follows:
TREASURY DEPARTMENT, Washington.
Income Tax.
FRANK MCINTYRE,
Chief, Bureau of Insular Affairs, War Department,
Washington, D. C.
SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence "from the
Philippine authorities relative to the method of submission of income tax returns by marred person."
You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that the Insular Auditor
has been authorized to suspend action on the warrants in question until an authoritative decision on the points
raised can be secured from the Treasury Department."
From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of
an amount sufficient to require the imposition of the net income was properly computed and then both income
and deductions and the specific exemption were divided in half and two returns made, one return for each half
in the names respectively of the husband and wife, so that under the returns as filed there would be an escape
from the additional tax; that Araneta claims the returns are correct on the ground under the Philippine law his
wife is entitled to half of his earnings; that Araneta has dominion over the income and under the Philippine law,

the right to determine its use and disposition; that in this case the wife has no "separate estate" within the
contemplation of the Act of October 3, 1913, levying an income tax.
It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the
entire net income against Gregorio Araneta; that the tax was paid and an application for refund made, and that
the application for refund was rejected, whereupon the matter was submitted to the Attorney-General of the
Islands who holds that the returns were correctly rendered, and that the refund should be allowed; and
thereupon the question at issue is submitted through the Governor-General of the Islands and Bureau of Insular
Affairs for the advisory opinion of this office.
By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the
United States but by the appropriate internal-revenue officers of the Philippine Government. You are therefore
advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of October 3, 1913),
the entire net income in this case was taxable to Gregorio Araneta, both for the normal and additional tax, and
that the application for refund was properly rejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs
to her solely and separate and apart from her husband, and over which her husband has no right in equity. It
may consist of lands or chattels.
The statute and the regulations promulgated in accordance therewith provide that each person of lawful age
(not excused from so doing) having a net income of $3,000 or over for the taxable year shall make a return
showing the facts; that from the net income so shown there shall be deducted $3,000 where the person making
the return is a single person, or married and not living with consort, and $1,000 additional where the person
making the return is married and living with consort; but that where the husband and wife both make returns
(they living together), the amount of deduction from the aggregate of their several incomes shall not exceed
$4,000.
The only occasion for a wife making a return is where she has income from a sole and separate estate in excess
of $3,000, but together they have an income in excess of $4,000, in which the latter event either the husband or
wife may make the return but not both. In all instances the income of husband and wife whether from separate
estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has income from a
separate estate makes return made by her husband, while the incomes are added together for the purpose of
the normal tax they are taken separately for the purpose of the additional tax. In this case, however, the wife
has no separate income within the contemplation of the Income Tax Law.
Respectfully,
DAVID A. GATES.
Acting Commissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted by
the Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of
American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged
with enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight should be
given to the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its
execution. (U.S. vs. Cerecedo Hermanos y Cia. [1907], 209 U.S., 338; In re Allen [1903], 2 Phil., 630; Government of the
Philippine Islands vs. Municipality of Binalonan, and Roman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We
conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered.
Torres, Johnson, Carson, Street and Fisher, JJ., concur.