EN BANC

[G.R. No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO , plaintisappellants, 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.
SYLLABUS
1.
TAXATION; INCOME TAX; PURPOSES. The Income Tax Law of the
United States in force in the Philippine Islands has selected income as the test of
faculty in taxation. The aim has been to mitigate the evils arising from the
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 Law is supposed to reach the
earnings of the entire non-governmental property of the country.
2.
ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY.
Income as contrasted with capital or property is to be the test. The essential
dierence between capital and income is that capital is a fund; income is a ow.
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." (Waring vs. City of Savannah [1878], 60 Ga., 93.)
3.

ID.; ID.; "INCOME:," DEFINED. Income means profits or gains.

4.
ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in
Nable Jose vs. Nable Jose [1916], 16 O. Gaz., 871, and Manuel and Laxamana
vs. Losano [1918], 16 O. Gaz., 1265, approved and followed. The provisions of
the Civil Code concerning conjugal partnerships have no application to the
Income Tax Law.
5.
ID.; ID.; ID. M and P were legally married prior to January 1, 1914.
The marriage was contracted under the provisions concerning conjugal
partnerships. The claim is submitted that the income shown on the form
presented for 1914 was in fact the income of the conjugal partnership existing
between M and P, and that in computing and assessing the additional income
tax, the income declared by M should be divided into two equal parts, one-half to
be considered the income of M and the other half the income of P. Held: That P,

the wife of M, has an inchoate right in the property of her husband M during the
life of the conjugal partnership, but that P has no absolute right to one-half of the
income of the conjugal partnership.
6.
ID.; ID.; ID. The higher schedules of the additional tax provided by
the Income Tax Law 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. The aims and purposes of the Income Tax Law must be given effect.
7.
ID.; ID.; ID. The Income Tax Law does not look on the spouses as
individual partners in an ordinary partnership.
8.
ID.; ID.; STATUTORY CONSTRUCTION. The Income Tax Law, being
a law of American origin and being peculiarly intricate in its provisions, the
authoritative decision of the ocial charged with enforcing it has peculiar force
for the Philippines. Great weight should be given to the construction placed upon
a revenue law, whose meaning is doubtful, by the department charged with its
execution
DECISION
MALCOLM, J :
p

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 led a 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 the income 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 ocers being still unsatised, 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 the 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 assessed and collected by the defendants from the
plainti, 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 and payable by each of the plaintis the sum of P2,921.09, which taken
together amounts to a total of P5,842.18 instead of P9,668.21, erroneously and
unlawfully collected from the plainti Vicente Madrigal, with the result that
plainti 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 for the year 1914 was made up of three items: (1) P362,407.67, the
prots made by Vicente Madrigal in his coal and shipping business; (2) P4,086.50,
the prots made by Susana Paterno in her embroidery business; (3) P16,687.80,
the prots 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 specic deductions the following: (1) P16,687.80, the tax upon which
was to be paid at source, and (2) P8,000, the specic 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 plaintis 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 plaintis and appellants, having to do solely with the
additional income tax, is that it 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 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 ve
answers have been given in the course of history. The nal 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 eect 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.
Such is the background of the Income Tax Law.
Income as contrasted with capital or property is to be the test. The essential
dierence between capital and income is that capital is a fund; income is a ow.
A fund of property existing at an instant of time is called capital. A ow of
services rendered by that capital by the payment of money from it or any other
benet 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.
(See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia
expresses the thought in the following gurative 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 dened as
"prots 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 as 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 specic
exemption shall be determined as of the time of claiming such exemption if
such claim be made within the year for 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 O. Gaz., 871; Manuel and Laxamana vs. Losano [1918], 16 O.
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 benet 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,
specically 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 AttorneyGeneral is as follows:
"TREASURY DEPARTMENT, Washington.
"Income Tax.
"FRANK MCINTYRE,

"Chief, Bureau of Insular Affairs, War Department,

"Washington, D.C.

"SIR:
This oce 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 married persons.'
"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 sucient to require the
imposition of the additional tax provided by the statute; that 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 led there would be an escape from the additional tax; that
Araneta claims the returns are correct on the ground that 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 Aairs 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 ocers of the Philippine Government. You are
therefore advised that upon the facts as stated, this oce 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, or where the husband
and wife neither separately have an income of $3,000, but together they
have an income in excess of $4,000, in which 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 and makes return thereof, or where her income is
separately shown in the 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 ocial 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 armed with
costs against appellants. So ordered

Torres, Johnson, Carson, Street and Fisher, JJ.; concur.