Vous êtes sur la page 1sur 6

EN BANC

[G.R. No. 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.

SYLLABUS

1. TAXATION; INCOME TAX; PURPOSES. — The Income Tax Law of the United
States in force in the Philippine Islands has selected income as the test of faculty in
taxation. The aim has been to mitigate the evils arising from the 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 Law
is supposed to reach the earnings of the entire non-governmental property of the
country.
2. ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY. — 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 ow. Capital is wealth, while
income is the service of wealth. "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.)
3. ID.; ID.; "INCOME:," DEFINED. — Income means profits or gains.
4. ID.; ID.; CONJUGAL PARTNERSHIPS. — The decisions of this court in Nable
Jose vs. Nable Jose [1916], 16 Off. Gaz., 871, and Manuel and Laxamana vs. Losano
[1918], 16 Off. Gaz., 1265, approved and followed. The provisions of the Civil Code
concerning conjugal partnerships have no application to the Income Tax Law.
5. ID.; ID.; ID. — M and P were legally married prior to January 1, 1914. The
marriage was contracted under the provisions concerning conjugal partnerships. The
claim is submitted that the income shown on the form presented for 1914 was in fact
the income of the conjugal partnership existing between M and P, and that in
computing and assessing the additional income tax, the income declared by M should
be divided into two equal parts, one-half to be considered the income of M and the
other half the income of P. Held: That P, the wife of M, has an inchoate right in the
property of her husband M during the life of the conjugal partnership, but that P has no
absolute right to one-half of the income of the conjugal partnership.
6. ID.; ID.; ID. — The higher schedules of the additional tax provided by the Income
Tax Law 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. The aims
and purposes of the Income Tax Law must be given effect.

CD Technologies Asia, Inc. © 2018 cdasiaonline.com


7. ID.; ID.; ID. — The Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership.
8. ID.; ID.; STATUTORY CONSTRUCTION. — The Income Tax Law, being a law of
American origin and being peculiarly intricate in its provisions, the authoritative decision
of the o cial charged with enforcing it has peculiar force for the Philippines. Great
weight should be given to the construction placed upon a revenue law, whose meaning
is doubtful, by the department charged with its execution

DECISION

MALCOLM , J : p

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 led a
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 the income 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 o cers being still
unsatis ed, 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
the 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
assessed and 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 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.
The answer of the defendants, together with an analysis of the tax declaration,
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
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 for the year
1914 was made up of three items: (1) P362,407.67, the pro ts made by Vicente
Madrigal in his coal and shipping business; (2) P4,086.50, the pro ts made by Susana
Paterno in her embroidery business; (3) P16,687.80, the pro ts 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 speci c deductions the following: (1)
P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the speci c
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 it 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 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 ve answers
have been given in the course of history. The nal 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 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.
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 ow. A fund
of property existing at an instant of time is called capital. A ow of services rendered
by that capital by the payment of money from it or any other bene t 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. (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,
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
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
de ned as "pro ts 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 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, 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 speci c 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."
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
bene t 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
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
look on the spouses as individual partners in an ordinary partnership. The husband and
wife are only entitled to the exemption of P8,000, speci cally 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 o ce 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 married persons.'
"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 su cient to require the
imposition of the additional tax provided by the statute; that the net income was
properly computed and then both income and deductions and the speci c
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 led
there would be an escape from the additional tax; that Araneta claims the returns
are correct on the ground that 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 correctly rendered,
and that the refund should be allowed; and thereupon the question at issue is
submitted through the Governor-General of the Islands and Bureau of Insular
Affairs for the advisory opinion of this office.
"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 o cers of the Philippine Government. You are
CD Technologies Asia, Inc. © 2018 cdasiaonline.com
therefore advised that upon the facts as stated, this o ce 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, or 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. 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. 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
o cial 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 [1915], 32 Phil., 634.)
We conclude that the judgment should be as it is hereby a rmed with costs
against appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.; concur.

CD Technologies Asia, Inc. © 2018 cdasiaonline.com