Madrigal vs Rafferty

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 income. Capital
is wealth, while income is the service of wealth.
FACTS:
Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The
marriage was contracted under the provisions of law concerning conjugal partnership
On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of
P296,302.73
Vicente Madrigal was contending that the said declared income does not represent his
income for the year 1914 as it was the income of his conjugal partnership with Paterno. He
said that in computing for his additional income tax, the amount declared should be divided
by 2.
The revenue officer was not satisfied with Madrigals explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of Madrigal.
Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08
alleged to have been wrongfully and illegally assessed and collected by the CIR.
ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2
in computing for the additional income tax.
HELD:
No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes
upon income and not upon capital and property.
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 income. Capital
is wealth, while income is the service of wealth.
As Paterno has no estate and income, actually and legally vested in her and entirely
distinct from her husbands property, the income cannot properly be considered the
separate income of the wife for the purposes of the additional tax.
To recapitulate, Vicente wants to half his declared income in computing for his tax since
he is arguing that he has a conjugal partnership with his wife. However, the court ruled
that the one that should be taxed is the income which is the flow of the capital, thus it
should not be divided into 2.