of the Attorney-General, and thus decided against the
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
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
1
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.
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
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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 correctly
rendered, and that the refund should be allowed; and
thereupon the question at issue is submitted through
3
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 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.
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
[1915], 32 Phil., 634.)
We conclude that the judgment should be as it is
hereby affirmed with costs against appellants. So
ordered.
Torres, Johnson, Carson, Street and Fisher, JJ., concur.

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.