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RAFFERTY, Collector of
Internal Revenue
G.R. No. L-12287, August 7, 1918
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.
After payment under protest, and after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue. 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. The sum of these three items
(coal and shipping business, embroidery business, pawnshop) is P383,181.97, the gross income of
Vicente Madrigal and Susana Paterno for the year 1914.
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.
Madrigal argued that he was a married man, and his marriage contracted under the provisions
governing the conjugal partnership (sociedad de gananciales). CIR argued that it 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. Further, taxes imposed by the Income Tax Law are as the name implies taxes upon
income tax and not upon capital and property
Should the additional income tax, be divided into two equal parts, because of the conjugal
partnership existing between them?
No. The essential difference between capital and income is that capital is a fund; income is a flow. A
regulation of the United States Treasury Department stated that if a wife has a separate estate

managed by herself as her own separate property, and receives an income of more than $3,000,
and if the husband has other net income, making the aggregate of both incomes more than
$4,000she may make return of her own income so that a deduction of $4,000 may be made from
the aggregate of both incomes.
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. 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.
FREDERICK C. FISHER, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue
G.R. No. L-17518, October 30, 1922
In 1919 the Philippine American Drug Company was a corporation duly organized and existing under
the laws of the Philippine Islands, doing business in the City of Manila. Fisher was a stockholder in
said corporation and as result of the business for that year, declared a "stock dividend". The
proportionate share of said stock divided of the appellant was P24,800; that the stock dividend for
that amount was issued to the appellant. Upon demand of the appellee, paid under protest, and
voluntarily, unto the appellee the sum of P889.91 as income tax on said stock dividend.
Appellant cited cases that held stock dividends" were capital and not an "income" and therefore not
subject to the "income tax" law. CIR argued Act No. 2833, in imposing the tax on the stock dividend,
does not violate the provisions of the Jones Law and the statute of the United States providing for
tax upon stock dividends is different from the statute of the Philippine Islands, and therefore the
decision of the Supreme Court of the United States should not be followed in interpreting the statute
in force here.
Act No. 2833 defined stock dividend where it shall be considered income, to the amount of the
earnings or profits distributed. It is further argued by the appellee that there are no constitutional
limitations upon the power of the Philippine Legislature such as exist in the United States, and in
support of that contention, he cites a number of decisions. There is no question that the Philippine
Legislature may provide for the payment of an income tax, but it cannot, under the guise of an
income tax, collect a tax on property which is not an "income." The Philippine Legislature can not
impose a tax upon "property" under a law which provides for a tax upon "income" only.
Generally speaking, stock dividends represent undistributed increase in the capital of corporations or
firms, joint stock companies, etc., etc., for a particular period. They are used to show the increased
interest or proportional shares in the capital of each stockholder. In other words, the inventory of the
property of the corporation, etc., for particular period shows an increase in its capital, so that the
stock theretofore issued does not show the real value of the stockholder's interest, and additional

stock is issued showing the increase in the actual capital, or property, or assets of the corporation,

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