VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs- community as a result of the liquidation and settlement.
e liquidation and settlement." (Nable Jose vs. Nable
appellants,
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.
G.R. No. L-12287 August 7, 1918
Facts
For the year 1914, Vicente submitted to the Collector of Internal Revenue a
total net income of 296,302.73 pesos. Vicente Madrigal submitted that the
amount is the income of the conjugal partnership existing between him and his
wife Susana Paterno, and that in computing and assessing additional income
tax as provided by law, the income declared by Vicente should be divided into
two equal parts, one half of his and the other for his wife.
The Attorney general agreed but the US commissioner of Internal Revenue
did not and hence reversed the decision.
Payment was made under protest which was followed by an action for the
recovery of the sum whom plaintiffs claim were wrongfully and illegally
collected by defendants. The contentions of plaintiffs and appellants having to
do solely with the additional income tax, is that is should be divided into two
equal parts, because of the conjugal partnership existing between them.
The counter contentions of appellees are that the taxes imposed by the Income
Tax Law are as the name implies taxes upon income tax 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.
Issue: WON the income should be divided between the spouses
Ruling:
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
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 only occasion for a wife making a return is where she has income from a
sole and separate estate in excess of $3,000, but together they have an
income in excess of $4,000, in which the 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
makes 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.
Notes: 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 an 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.)
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O.
MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME A.
SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 48533 August 31, 1992
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L.
DIMAYUGA, JAIME E. DY-LIACCO, MELQUIADES J. GAMBOA, JR.,
MANUEL L. GUZMAN, VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO,
ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP and
JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
G.R. No. 48532 August 31, 1992
Facts
Petitioner claim that the Commissioner of Internal revenue erroneously and
illegally collected certain incomes taxes and hence they are demanding a
refund.
Petitioners are employees of Proctor and Gamble Philippines with offices in
Makati, Rizal. The company is a subsidiary of a foreign corporation based on
the US. For periods 1970 and 1971, petitioners were assigned outside the
country and were paid in US dollars for compensation. When petitioners
computed their income tax, they applied the dollar to peso conversion rate
under BIR ruling no. 70-027.
This was followed by petitioners filing an amended income tax return alleging
overpayments by virtue of Section 48 of Republic Act No. 265 in relation to
Section 6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699. Without waiting for the Commissioners response
on the matter, petitioners filed for review of the mentioned case.
The CTA denied their petitioner and the review was dismissed.
Respondents claim that Petitioners being subject to Philippine income tax,
their dollar earnings should be converted into Philippine pesos in computing
the income tax due therefrom, in accordance with the provisions of Revenue
Memorandum Circular No. 7-71 dated February 11, 1971 for 1970 income and
Revenue Memorandum Circular No. 41-71 dated December 21, 1971 for 1971
income, which reiterated BIR Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of conversion
(Revenue Circulars Nos. 7-71 and 41-71) should be applied in order to
determine the true and correct value in Philippine pesos of the income of
petitioners. 3
Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt
from the coverage of such circulars.
Petitioners claim that public respondent Court of Tax Appeals erred in holding:
1. That petitioners' dollar earnings are receipts derived from foreign exchange
transactions.
2. That the proper rate of conversion of petitioners' dollar earnings for tax
purposes in the prevailing free market rate of exchange and not the par value
of the peso; and
3. That the use of the par value of the peso to convert petitioners' dollar
earnings for tax purposes into Philippine pesos is "unrealistic" and, therefore,
the prevailing free market rate should be the rate used.
Ruling:
This basically an income tax case. For the proper resolution of these cases
income may be defined as an amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest
or profit from investment. Unless otherwise specified, it means cash or its
equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are not
receipts derived from foreign exchange transactions. For a foreign exchange
transaction is simply that — a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one
country into an equivalent amount of money or currency of another." 6 When
petitioners were assigned to the foreign subsidiaries of Procter & Gamble, they
were earning in their assigned nation's currency and were ALSO spending in
said currency. There was no conversion, therefore, from one currency to
another.
Public respondent Court of Tax Appeals did err when it concluded that the
dollar incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular
No. 42. 7
The issue now is, what exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes.
Petitioners claim that since the dollar earnings do not fall within the
classification of foreign exchange transactions, there occurred no actual
inward remittances, and, therefore, they are not included in the coverage of
Central Bank Circular No. 289 which provides for the specific instances when
the par value of the peso shall not be the conversion rate used. They conclude
that their earnings should be converted for income tax purposes using the par
value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts
for export products, receipts of sale of foreign exchange or foreign borrowings
and investments but not income tax. He also claims that he had to use the
prevailing free market rate of exchange in these cases because of the need to
ascertain the true and correct amount of income in Philippine peso of dollar
earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 shows that the subject matters
involved therein are export products, invisibles, receipts of foreign exchange,
foreign exchange payments, new foreign borrowing and
investments — nothing by way of income tax payments. Thus, petitioners are
in error by concluding that since C.B. Circular No. 289 does not apply to them,
the par value of the peso should be the guiding rate used for income tax
purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which
came to them within a specified period of time of two yeas as payment for their
services.
Section 21 of the National Internal Revenue Code, amended up to August 4,
1969, states as follows:
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources by
every individual, whether a citizen of the Philippines residing therein or abroad
or an alien residing in the Philippines, determined in accordance with the
following schedule:
Petitioners argue that since there were no remittances and acceptances of
their salaries and wages in US dollars into the Philippines, they are exempt
from the coverage of such circulars. Petitioners forget that they are citizens of
the Philippines, and their income, within or without, and in these cases wholly
without, are subject to income tax. Sec. 21, NIRC, as amended, does not brook
any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under
the uniform rate of exchange prescribed under the aforestated Revenue
Memorandum Circulars, there is no reason for respondent Commissioner to
refund any taxes to petitioner as said Revenue Memorandum Circulars, being
of long standing and not contrary to law, are valid. 13
FREDERICK C. FISHER, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-
appellee.
G.R. No. L-17518 October 30, 1922
Facts
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; that he appellant was a stockholder in said corporation; that said
corporation, as result of the business for that year, declared a "stock dividend";
that the proportionate share of said stock.
Appellant was made to pay income tax for the said stock dividend leading to
the filing of the present action.
To support his arguments, appellant cites numerous decision from the
Supreme Court of the Unite states.
In each of said cases an effort was made to collect an "income tax" upon "stock
dividends" and in each case it was held that "stock dividends" were capital and
not an "income" and therefore not subject to the "income tax" law.
The defendant admits the doctrine established in the case of Eisner vs.
Macomber (252 U.S., 189) that a "stock dividend" is not "income" but argues
that said Act No. 2833, in imposing the tax on the stock dividend, does not
violate the provisions of the Jones Law. The appellee further argues that 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.
For the purpose of ascertaining the difference in the said statutes ( (United
States and Philippine Islands), providing for an income tax in the United States
as well as that in the Philippine Islands, the two statutes are here quoted for
the purpose of determining the difference, if any, in the language of the two
statutes.
Chapter 463 of an Act of Congress of September 8, 1916, in its title 1 provides
for the collection of an "income tax." Section 2 of said Act attempts to define
what is an income. The definition follows:
That the term "dividends" as used in this title shall be held to mean any
distribution made or ordered to made by a corporation, . . . which stock
dividend shall be considered income, to the amount of its cash value.
Act No. 2833 of the Philippine Legislature is an Act establishing "an income
tax." Section 25 of said Act attempts to define the application of the income
tax. The definition follows:
The term "dividends" as used in this Law shall be held to mean any distribution
made or ordered to be made by a corporation, . . . out of its earnings or profits
accrued since March first, nineteen hundred and thirteen, and payable to its
shareholders, whether in cash or in stock of the corporation, . . . . Stock
dividend 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.
Issue: WON stock dividends can be considered income for tax purposes
Ruling:
It becomes necessary in this connection to ascertain what is an "income in
order that we may be able to determine whether "stock dividends" are "income"
in the sense that the word is used in the statute. Perhaps it would be more
logical to determine first what are "stock dividends" in order that we may more
clearly understand their relation to "income." 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 actualcapital, or
property, or assets of the corporation, etc.
When a corporation or company issues "stock dividends" it shows that the
company's accumulated profits have been capitalized, instead of distributed to
the stockholders or retained as surplus available for distribution, in money or
in kind, should opportunity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from surplus to assets, and
no longer is available for actual distribution. The essential and controlling fact
is that the stockholder has received nothing out of the company's assets for
his separate use and benefit; on the contrary, every dollar of his original
investment, together with whatever accretions and accumulations resulting
from employment of his money and that of the other stockholders in the
business of the company, still remains the property of the company, and
subject to business risks which may result in wiping out of the entire
investment.
The stockholder who receives a stock dividend has received nothing but a
representation of his increased interest in the capital of the corporation. There
has been no separation or segregation of his interest. All the property or capital
of the corporation still belongs to the corporation. There has been no
separation of the interest of the stockholder from the general capital of the
corporation. The stockholder, by virtue of the stock dividend, has no separate
or individual control over the interest represented thereby, further than he had
before the stock dividend was issued. He cannot use it for the reason that it is
still the property of the corporation and not the property of the individual holder
of stock dividend. A certificate of stock represented by the stock dividend is
simply a statement of his proportional interest or participation in the capital of
the corporation.
There is a clear distinction between an extraordinary cash dividend, no matter
when earned, and stock dividends declared. The one is a disbursement to the
stockholders of accumulated earning, and the corporation at once parts
irrevocably with all interest thereon. The other involves no disbursement by
the corporation. It parts with nothing to the stockholders.
If the ownership of the property represented by a stock dividend is still in the
corporation and to in the holder of such stock, then it is difficult to understand
how it can be regarded as income to the stockholder and not as a part of the
capital or assets of the corporation. (Gibbsons vs. Mahon, supra.) the
stockholder has received nothing but a representation of an interest in the
property of the corporation and, as a matter of fact, he may never receive
anything, depending upon the final outcome of the business of the corporation.

In all of the foregoing argument we have not overlooked the decisions of a few
of the courts in different parts of the world, which have reached a different
conclusion from the one which we have arrived at in the present case.
Inasmuch, however, as appeals may be taken from this court to the Supreme
Court of the United States, we feel bound to follow the same doctrine
announced by that court.

Having reached the conclusion, supported by the great weight of the authority,
that "stock dividends" are not "income," the same cannot be taxes under that
provision of Act No. 2833 which provides for a tax upon income. Under the
guise of an income tax, property which is not an income cannot be taxed.