1. Madrigal vs.

Rafferty
GR 12287, 8 Aug 1918

FACTS: Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. Conjugal partnership
was the governing regime between the spouses.
Vicente filed a sworn declaration with the CIR, showing as his total net income for the year 1914, the sum of P296,
302.73.
Subsequently, he submitted the claim that the said amount 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, the income declared by Vicente should be divided into two
equal parts, one-half to be considered the income of Vicente and the other half the income of Susana.
Hence, both filed with the court a recovery of the sum alleged to have been wrongfully and illegally assessed and
collected by the defendants from plaintiff under the provisions of the Act of Congress known as the Income Tax
Law.

Allegation of Vicente: 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, with the
result that plaintiff Vicente has paid as income tax P3, 786.08, in excess of the sum lawfully due and payable.

ISSUE: Whether or not the income reported by Vicente should be divided into two (2) in computing for the
additional income tax because of the conjugal partnership existing between them.

RULING: No, it cannot be divided into two.

Income Tax Law taxes upon income, and not upon capital and property. 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. Income is defined as profits or gains.
As Susana has no estate and income, actually and legally vested in her and entirely distinct from her husbands
property, the income cannot properly be considered the separate income of the wife for the purposes of the
additional tax.
The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to
her solely and separately and apart from her husband, and over which her husband has no right in equity.
Moreover, 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 (now 5k).