(Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918, 38 Phil.

414)
EN BANC
[G.R. No. 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.
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 difference between capital and income is that capital is a fund;
income is a flow. 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 Off. Gaz., 871, and Manuel and
Laxamana vs. Losano [1918], 16 Off. 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 official 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 filed 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 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 AttorneyGeneral, 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 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 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, 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 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
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 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 five
answers have been given in 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 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 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 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 specific 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 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 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 sufficient 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 filed 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 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,
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 official who is charged with
enforcing it has peculiar force for the Philippines. It has come to be a wellsettled 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.