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.

FACTS: Vicente Madrigal and Susana Paterno were legally married. The marriage was
contracted under the provisions of law concerning conjugal partnerships. 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. 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.

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 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

ISSUE: Whether or not the additional income tax should be divided into two equal parts,
because of the conjugal partnership existing between them.

RULING: 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. A tax on income is not a tax on property. Income,
as here used, can be defined as "profits or gains.

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.