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
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 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 AttorneyGeneral 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 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 affirmed with costs
against appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.; concur.
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(Madrigal v. Rafferty, G.R. No. 12287, August 07, 1918)