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RepublicofthePhilippines
SUPREMECOURT
Manila
ENBANC
G.R.No.L12287August7,1918
VICENTEMADRIGALandhiswife,SUSANAPATERNO,plaintiffsappellants,
vs.
JAMESJ.RAFFERTY,CollectorofInternalRevenue,andVENANCIOCONCEPCION,DeputyCollectorof
InternalRevenue,defendantsappellees.
GregorioAranetaforappellants.
AssistantAttorneyRoundforappellees.
MALCOLM,J.:
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil
Code,alawofSpanishorigin.
STATEMENTOFTHECASE.
Vicente Madrigal and Susana Paterno were legally married prior to January 1, 1914. The marriage was
contractedundertheprovisionsoflawconcerningconjugalpartnerships(sociedaddegananciales).OnFebruary
25,1915,VicenteMadrigalfiledsworndeclarationontheprescribedformwiththeCollectorofInternalRevenue,
showing,ashistotalnetincomefortheyear1914,thesumofP296,302.73.SubsequentlyMadrigalsubmittedthe
claimthatthesaidP296,302.73didnotrepresenthisincomefortheyear1914,butwasinfacttheincomeofthe
conjugalpartnershipexistingbetweenhimselfandhiswifeSusanaPaterno,andthatincomputingandassessing
the additional income tax provided by the Act of Congress of October 3, 1913, the income declared by Vicente
Madrigalshouldbedividedintotwoequalparts,onehalftobeconsideredtheincomeofVicenteMadrigalandthe
otherhalfofSusanaPaterno.ThegeneralquestionhadinthemeantimebeensubmittedtotheAttorneyGeneral
ofthePhilippineIslandswhoinanopiniondatedMarch17,1915,heldwiththepetitionerMadrigal.Therevenue
officersbeingstillunsatisfied,thecorrespondencetogetherwiththisopinionwasforwardedtoWashingtonfora
decision by the United States Treasury Department. The United States Commissioner of Internal Revenue
reversedtheopinionoftheAttorneyGeneral,andthusdecidedagainsttheclaimofMadrigal.
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
InstanceofthecityofManilaagainstCollectorofInternalRevenueandtheDeputyCollectorofInternalRevenue
for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected by the
defendantsfromtheplaintiff,VicenteMadrigal,undertheprovisionsoftheActofCongressknownastheIncome
TaxLaw.Theburdenofthecomplaintwasthatiftheincometaxfortheyear1914hadbeencorrectlyandlawfully
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,inexcessofthesumlawfullydueandpayable.
Theanswerofthedefendants,togetherwithananalysisofthetaxdeclaration,thepleadings,andthestipulation,
setsforththebasisofdefendants'standinthefollowingway:TheincomeofVicenteMadrigalandhiswifeSusana
Paternooftheyear1914wasmadeupofthreeitems:(1)P362,407.67,theprofitsmadebyVicenteMadrigalin
hiscoalandshippingbusiness(2)P4,086.50,theprofitsmadebySusanaPaternoinherembroiderybusiness
(3)P16,687.80,theprofitsmadebyVicenteMadrigalinapawnshopcompany.Thesumofthesethreeitemsis
P383,181.97,thegrossincomeofVicenteMadrigalandSusanaPaternofortheyear1914.Generaldeductions
wereclaimedandallowedinthesumofP86,879.24.TheresultingnetincomewasP296,302.73.Forthepurpose
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
grantedtoVicenteMadrigalandSusanaPaterno,husbandandwife.Theremainder,P271,614.93wasthesum
uponwhichthenormaltaxofonepercentwasassessed.ThenormaltaxthusarrivedatwasP2,716.15.

ThedisputebetweentheplaintiffsandthedefendantsconcernedtheadditionaltaxprovidedforintheIncomeTax
Law.Thetrialcourtinanexhausteddecisionfoundinfavorofdefendants,withoutcosts.
ISSUES.
Thecontentionsofplaintiffsandappellantshavingtodosolelywiththeadditionalincometax,isthatisshouldbe
dividedintotwoequalparts,becauseoftheconjugalpartnershipexistingbetweenthem.Thelearnedargumentof
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
taxesuponincometaxandnotuponcapitalandpropertythatthefactthatMadrigalwasamarriedman,andhis
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
partnershipandtheconjugalpartnershipofspousesresultingfromtherelationofmarriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given the course of
history. The final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income
Tax,"Introduction.)TheIncomeTaxLawoftheUnitedStates,extendedtothePhilippineIslands,istheresultof
aneffectonthepartofthelegislatorstoputintostatutoryformthiscanonoftaxationandofsocialreform.The
aimhasbeentomitigatetheevilsarisingfrominequalitiesofwealthbyaprogressiveschemeoftaxation,which
places the burden on those best able to pay. To carry out this idea, public considerations have demanded an
exemptionroughlyequivalenttotheminimumofsubsistence.Withtheseexceptions,theincometaxissupposed
to reach the earnings of the entire nongovernmental property of the country. Such is the background of the
IncomeTaxLaw.
Income as contrasted with capital or property is to be the test. The essential difference between capital and
incomeisthatcapitalisafundincomeisaflow.Afundofpropertyexistingataninstantoftimeiscalledcapital.A
flowofservicesrenderedbythatcapitalbythepaymentofmoneyfromitoranyotherbenefitrenderedbyafund
ofcapitalinrelationtosuchfundthroughaperiodoftimeiscalledanincome.Capitaliswealth,whileincomeis
the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia
expressesthethoughtinthefollowingfigurativelanguage:"Thefactisthatpropertyisatree,incomeisthefruit
laborisatree,incomethefruitcapitalisatree,incomethefruit."(Waringvs.CityofSavannah[1878],60Ga.,
93.) A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains."
(LondonCountyCouncilvs. AttorneyGeneral [1901], A. C., 26 70 L. J. K. B. N. S., 77 83 L. T. N. S., 605 49
Week.Rep.,6864TaxCas.,265.SeefurtherFoster'sIncomeTax,secondedition[1915],ChapterIVBlackon
Income Taxes, second edition [1915], Chapter VIII Gibbons vs. Mahon [1890], 136 U.S., 549 and Towne vs.
Eisner,decidedbytheUnitedStatesSupremeCourt,January7,1918.)
AregulationoftheUnitedStatesTreasuryDepartmentrelativetoreturnsbythehusbandandwifenotlivingapart,
containsthefollowing:
Thehusband,astheheadandlegalrepresentativeofthehouseholdandgeneralcustodianofitsincome,should
make and render the return of the aggregate income of himself and wife, and for the purpose of levying the
incometaxitisassumedthathecanascertainthetotalamountofsaidincome.Ifawifehasaseparateestate
managedbyherselfasherownseparateproperty,andreceivesanincomeofmorethan$3,000,shemaymake
returnofherownincome,andifthehusbandhasothernetincome,makingtheaggregateofbothincomesmore
than$4,000,thewife'sreturnshouldbeattachedtothereturnofherhusband,orhisincomeshouldbeincluded
inherreturn,inorderthatadeductionof$4,000maybemadefromtheaggregateofbothincomes.Thetaxin
suchcase,however,willbeimposedonlyuponsomuchoftheaggregateincomeofbothshallexceed$4,000.If
eitherhusbandorwifeseparatelyhasanincomeequaltoorinexcessof$3,000,areturnofannualnetincomeis
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
neitheroneseparatelyhasanincomeof$3,000perannum.Theyarejointlyandseparatelyliableforsuchreturn
andforthepaymentofthetax.Thesingleormarriedstatusofthepersonclaimingthespecificexemptionshallbe
determinedasoneofthetimeofclaimingsuchexemptionwhichreturnismade,otherwisethestatusattheclose
oftheyear."
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,decidedthat"priortotheliquidationtheinterestofthewifeandincaseofherdeath,ofherheirs,is
aninterestinchoate,amereexpectancy,whichconstitutesneitheralegalnoranequitableestate,anddoesnot
ripen into title until there appears that there are assets in the community as a result of the liquidation and
settlement."(NableJosevs.NableJose[1916],15Off.Gaz.,871ManuelandLaxamanavs.Losano[1918],16
Off.Gaz.,1265.)

SusanaPaterno,wifeofVicenteMadrigal,hasaninchoaterightinthepropertyofherhusbandVicenteMadrigal
duringthelifeoftheconjugalpartnership.Shehasaninterestintheultimatepropertyrightsandintheultimate
ownership of property acquired as income after such income has become capital. Susana Paterno has no
absoluterighttoonehalftheincomeoftheconjugalpartnership.Notbeingseizedofaseparateestate,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
distinctfromherhusband'sproperty,theincomecannotproperlybeconsideredtheseparateincomeofthewife
forthepurposesoftheadditionaltax.Moreover,theIncomeTaxLawdoesnotlookonthespousesasindividual
partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000
specificallygrantedbythelaw.Thehigherschedulesoftheadditionaltaxdirectedattheincomesofthewealthy
maynotbepartiallydefeatedbyrelianceonprovisionsinourCivilCodedealingwiththeconjugalpartnershipand
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
Generalisasfollows:
TREASURYDEPARTMENT,Washington.
IncomeTax.
FRANKMCINTYRE,
Chief,BureauofInsularAffairs,WarDepartment,
Washington,D.C.
SIR:ThisofficeisinreceiptofyourletterofJune22,1915,transmittingcopyofcorrespondence"fromthe
Philippineauthoritiesrelativetothemethodofsubmissionofincometaxreturnsbymarredperson."
You advise that "The GovernorGeneral, in forwarding the papers to the Bureau, advises that the Insular
Auditorhasbeenauthorizedtosuspendactiononthewarrantsinquestionuntilanauthoritativedecisionon
thepointsraisedcanbesecuredfromtheTreasuryDepartment."
FromthecorrespondenceitappearsthatGregorioAraneta,marriedandlivingwithhiswife,hadanincome
ofanamountsufficienttorequiretheimpositionofthenetincomewasproperlycomputedandthenboth
incomeanddeductionsandthespecificexemptionweredividedinhalfandtworeturnsmade,onereturn
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
under the Philippine law his wife is entitled to half of his earnings that Araneta has dominion over the
incomeandunderthePhilippinelaw,therighttodetermineitsuseanddispositionthatinthiscasethewife
hasno"separateestate"withinthecontemplationoftheActofOctober3,1913,levyinganincometax.
Itappearsfurtherfromthecorrespondencethatupontheforegoingexplanation,taxwasassessedagainst
theentirenetincomeagainstGregorioAranetathatthetaxwaspaidandanapplicationforrefundmade,
and that the application for refund was rejected, whereupon the matter was submitted to the Attorney
GeneraloftheIslandswhoholdsthatthereturnswerecorrectlyrendered,andthattherefundshouldbe
allowedandthereuponthequestionatissueissubmittedthroughtheGovernorGeneraloftheIslandsand
BureauofInsularAffairsfortheadvisoryopinionofthisoffice.
ByparagraphMofthestatute,itsprovisionsareextendedtothePhilippineIslands,tobeadministeredas
intheUnitedStatesbutbytheappropriateinternalrevenueofficersofthePhilippineGovernment.Youare
therefore advised that upon the facts as stated, this office holds that for the Federal Income Tax (Act of
October3,1913),theentirenetincomeinthiscasewastaxabletoGregorioAraneta,bothforthenormal
andadditionaltax,andthattheapplicationforrefundwasproperlyrejected.
The separate estate of a married woman within the contemplation of the Income Tax Law is that which
belongstohersolelyandseparateandapartfromherhusband,andoverwhichherhusbandhasnoright
inequity.Itmayconsistoflandsorchattels.
The statute and the regulations promulgated in accordance therewith provide that each person of lawful
age(notexcusedfromsodoing)havinganetincomeof$3,000oroverforthetaxableyearshallmakea
return showing the facts that from the net income so shown there shall be deducted $3,000 where the
personmakingthereturnisasingleperson,ormarriedandnotlivingwithconsort,and$1,000additional
wherethepersonmakingthereturnismarriedandlivingwithconsortbutthatwherethehusbandandwife
both make returns (they living together), the amount of deduction from the aggregate of their several
incomesshallnotexceed$4,000.

Theonlyoccasionforawifemakingareturniswhereshehasincomefromasoleandseparateestatein
excessof$3,000,buttogethertheyhaveanincomeinexcessof$4,000,inwhichthelattereventeitherthe
husbandorwifemaymakethereturnbutnotboth.Inallinstancestheincomeofhusbandandwifewhether
from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the wife has
incomefromaseparateestatemakesreturnmadebyherhusband,whiletheincomesareaddedtogether
for the purpose of the normal tax they are taken separately for the purpose of the additional tax. In this
case,however,thewifehasnoseparateincomewithinthecontemplationoftheIncomeTaxLaw.
Respectfully,
DAVIDA.GATES.
ActingCommissioner.
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was
draftedbytheCongressoftheUnitedStatesandhasbeenbytheCongressextendedtothePhilippineIslands.
BeingthusalawofAmericanoriginandbeingpeculiarlyintricateinitsprovisions,theauthoritativedecisionofthe
officialwhoischargedwithenforcingithaspeculiarforceforthePhilippines.Ithascometobeawellsettledrule
thatgreatweightshouldbegiventotheconstructionplaceduponarevenuelaw,whosemeaningisdoubtful,by
thedepartmentchargedwithitsexecution.(U.S.vs.CerecedoHermanosyCia.[1907],209U.S.,338InreAllen
[1903], 2 Phil., 630 Government of the Philippine Islands vs. Municipality of Binalonan, and Roman Catholic
BishopofNuevaSegovia[1915],32Phil.,634.)Weconcludethatthejudgmentshouldbeasitisherebyaffirmed
withcostsagainstappellants.Soordered.
Torres,Johnson,Carson,StreetandFisher,JJ.,concur.
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