of property existing at an instant of time is called capital.

A flow of services rendered by that capital by

MADRIGAL VS. RAFFERTY- Difference Between Capital and Income
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.
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.
• As Paterno 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.
• To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing
that he has a conjugal partnership with his wife. However, the court ruled that the one that should be
taxed is the income which is the flow of the capital, thus it should not be divided into 2.

FACTS:

• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage
was contracted under the provisions of law concerning conjugal partnership
• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73
• Vicente Madrigal was contending that the said declared income does not represent his income for the
year 1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for
his additional income tax, the amount declared should be divided by 2.
• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United States
Commissioner of Internal Revenue decided against the claim of Madrigal.
• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have
been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in
computing for the additional income tax.

HELD:

• No! The point of view of the CIR is that the Income Tax Law, as the name implies, 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
Page 1 of 4
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-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.
MALCOLM, J.:
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 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 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 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 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 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 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 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.
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 is
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 tax 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 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 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. Such is the background of the Income Tax Law.
Page 2 of 4
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. (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 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 one of the time of claiming such exemption 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 Attorney-General 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 marred person."
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 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 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
Page 3 of 4
 correctly rendered, and that the refund should be allowed; and thereupon the question at issue [1915], 32 Phil., 634.) We conclude that the judgment should be as it is hereby affirmed with costs
is submitted through the Governor-General of the Islands and Bureau of Insular Affairs for the against appellants. So ordered.
advisory opinion of this office.
Torres, Johnson, Carson, Street and Fisher, JJ., concur.
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, but together they have an income in excess of $4,000, in
which the 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
makes 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
Page 4 of 4