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SYLLABUS
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
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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
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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.)
"FRANK MCINTYRE,