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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.


Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The
marriage was contracted under the provisions of conjugal partnerships. On 1915, Madrigal filed
a sworn declaration showing his total net income for the year 1914 the sum of P296,302.73.
Subsequently, Madrigal submitted the claim that it did not represent his income for the year
1914 but instead the income of the conjugal partnership existing between him and his wife

Petitioner averred that in computing and assessing the additional income tax provided by the
Act of Congress of October 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 the income of Susana.

The question had been submitted to the Attorney-General who in an opinion held in favor of
petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together
with this opinion was forwarded to US for a decision by the US Treasury Department. The US
Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus
decided against the claim of Madrigal.

Then, after payment under protest, an action was filed by Vicente and Susana in the CFI Manila
against the Collector of Internal Revenue and the Deputy Collector for the recovery of the sum
of P3,786.08, alleged to have been wrongfully and illegally assessed and collected from the
plaintiff, Madrigal, under the provisions of 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 and payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts to a total of P5,842.18 instead of P9,668.21, 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.

Respondent’s Initial Contention:

The income of Vicente Madrigal and his wife Susana Paterno for the year 1914 was made up of
three items:

(1)    P362,407.67, the profits made by Vicente Madrigal in his coal and shipping

(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 percent was assessed.
The normal tax thus arrived at was P2,716.15.

CFI- In favor of respondent commissioners.

Petitioner-plaintiff: Additional income tax, is that it should be divided into two equal parts,
because of the conjugal partnership existing between them


(NOTE) The appellees contend that the taxes imposed by the Income Tax Law are as the
name implies taxes upon income 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: WON the assessment on the income tax of Madrigal was proper.

RULING:           YES.

The Income Tax Law of the US, extended to the Philippines, is the result of an effect on the
part of 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.

(INCOME vs CAPITAL) Income as against capital or property is to be the test. The essential
difference between capital and income is that CAPITAL BEING 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, through payment of money or other benefit rendered by a fund of capital is called
income. Capital is wealth, while income is the service of wealth. "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."

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.
(Gist- They are jointly and separately liable for such return and for the payment of the
tax. Connected. Attaching each other’s income tax return whenever they have separate

Then, we turn for a moment to consider the provisions of the Civil Code dealing with the
conjugal partnership. "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."

Susana Paterno, wife, has an INCHOATE RIGHT in the property of her husband 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 has no absolute right to one-half the income of the conjugal partnership. Not
being seized of a separate estate,

(NOTE) Susana 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

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.

(NOTE) 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 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.

We conclude that the judgment should be as it is hereby AFFIRMED with costs against
appellants. So ordered.