VICENTE MADRIGAL vs. JAMES J.

RAFFERTY, CIR (1918, MALCOLM, J) FACTS: Vicente Madrigal and Susana Paterno were married prior to January 1, 1914. Their marriage was under the provisions of law concerning conjugal partnerships (sociedad de gananciales). On February 25, 1915, Vicente Madrigal filed a declaration with the Collector of Internal Revenue, showing, as his total net income for 1914, the sum of P296,302.73. Madrigal contends that because the P296,302.73 was the income of the conjugal partnership between himself and his wife, in computing and assessing the additional income tax (provided by the Act of Congress of October 3, 1913 aka the Income Tax Law) the income ought to be divided into two equal parts, one-half to be considered the income of Vicente Madrigal and the other half of his wife. Under the income tax law, The burden of the complaint was that if the income tax for the year 1914 had been correctlyIf the income were divided in half first and lawfully then taxed, the total tax due would be P5,842.18 (each spouse paying P2,921.09). However, if the entire income was taxed as a whole then the amount due would be computed there would have been due payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of 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 Collector of Internal Revenue decided against Madrigal. Madrigal paid under protest, and filed an action in the CFI of Manila against Collector of Internal Revenue to recover the excess sum of P3,786.08, alleged to have been wrongfully and illegally collected from Madrigal, under the provisions of 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 payable by each of the plaintiffs the sum of P2,921.09, which taken together amounts of 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. Defendant CIR sets forth its argument: The income of Vicente Madrigal and his wife Susana Paterno of 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. Madrigal Arguments: The income should be divided into two equal parts, because of the conjugal partnership existing between them. CIR arguments: 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 under CPG, 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. TC: The dispute concerned the additional tax provided for in the Income Tax Law. The trial court found in favor of CIR ISSUE(s): Whether or not the additional income tax should be divided into two equal parts because of the conjugal partnership HELD/RATIO: No Background of the Income Tax Law The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the 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. 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. 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." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." Regarding conjugal partnerships, two elaborate decisions, in which a long line of Spanish authorities were cited, 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." 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. DISPOSITIVE: