MADRIGAL v RAFFERTY  Rafferty et al.
’s Answer
Capital vs Income | August 7, 1918 | J. Malcolm
Nature of Case: Petition for review on certiorari
Digest maker: IT
SUMMARY: Petitioner husband declared his total net income and was made to pay
accordingly, however he later claimed that said total net income wasn’t his, but that of
his conjugal partnership with his wife. Thus, for the purpose of assessing the additional
income tax, said income should be divided into two equal parts. He filed a complaint for
refund against the defendants, but the TC ruled against him. The Supreme Court
affirmed the judgment.
DOCTRINE: The CC provisions on conjugal partnership are not applicable to the
Income Tax Law and that the wife, having no separate estate or income, cannot make
a separate tax return.
FACTS:
 Prior to Jan. 1, 1914: Vicente Madrigal and Susana Paterno were legally married
 The marriage was contracted under the provisions of law concerning conjugal
partnerships
 Feb. 25, 1915: Madrigal filed a sworn declaration, which showed as his total net
income for 1914, the sum of P296,302.73
 Subsequently, Marfirgal submitted a claim, which stated that said P296K did not
represent his income for the year 1914
 Rather, it was the income of the conjugal partnership between himself and his
wife, Paterno
 Argued that in computing and assessing the additional income tax under
the Income Tax Law, the income declared by him should be divided into
two equal parts, ½ to be considered his income, and the other half
Paterno’s
 The issue was submitted to the Attorney-General of the Philippine Islands
 March 17, 1915: The Attorney-General issued an opinion, wherein he ruled in favor
of Madrigal
 The revenue officers forwarded said opinion to Washington for a decision by the
U.S. Treasury Department
 The U.S. Commissioner of Internal Revenue reversed the opinion of the Attorney-
General, and decided against Madrigal’s claim
 Madrigal made paid P9,668.21 under protest
 The Collector, James Rafferty, dismissed Madrigal’s protest
 Madrigal and Paterno filed an action in the CFI of Manila against Rafferty and the
Deputy Collector for the recovery of the sum of P3.786.08
 Said amount is alleged to have been wrongfully and illegally assessed and
collected by the CIR from Madrigal under the provisions of the Income Tax Law
 Argued that 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.
 MAIN CONTENTION: Additional income tax should be divided into two equal
parts, because of the conjugal partnership existing between them, based upon
the provisions of the Civil Code establishing the sociedad de gananciales.
 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.
 MAIN CONTENTION: Taxes imposed by the Income Tax Law are 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.
 CFI found in favor of the Collector, Rafferty
ISSUE/S & RATIO:
1. W/N Additional income tax should be divided into two equal parts, because of
the conjugal partnership existing between Madrigal and Paterno – NO
 The background of the Income Tax Law is that the income tax is supposed to
reach the earnings of the entire non governmental property of the country
 A tax on income is NOT a tax on property
 Income as contrasted with capital or property is to be the test
CAPITAL INCOME
A fund of property A flow of services rendered by a fund of capital
existing at an instant of  by the payment of money from it, or
time  by any other benefit rendered by a fund
of capital
Wealth Service of wealth
The tree The fruit: profits or gains
 US Treasury Dept. general observations on the returns by husband and wife under
the Income Tax Law
 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
 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
 Such return must include the income of both
 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
 Provisions of the CC on Conjugal Partnership
 The court, in speaking of the conjugal partnership, has 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
 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
 APPLICATION IN THE CASE: 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.
 (IMPT!!) 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
DISPOSITIVE PORTION
which would arise by reason of the additional tax.
We conclude that the judgment should be as it is hereby affirmed with costs against
 SC RULING: As she has no estate and income, actually and legally vested in her
appellants
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 Income Tax Law was drafted by the Congress of the United States
and has been by the Congress extended to the Philippine Islands.
 "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;
o 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;
o 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:
o Where she has income from a sole and separate estate in
excess of $3,000, or
o 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.
o 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.
o In this case, however, the wife has no separate income within the
contemplation of the Income Tax Law.
o 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.