EN BANC

[G.R. No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO,

plaintis-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
dierence 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 prots or gains.
4. ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in
Nable Jose vs. Nable Jose [1916], 16 O. Gaz., 871, and Manuel and Laxamana
vs. Losano [1918], 16 O. 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.
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 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 eect.
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 ocial 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
ocers being still unsatised, 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
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 defendants from the plainti, 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 plaintis
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 plainti
Vicente Madrigal, with the result that plainti 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 for the year 1914 was made up of three items: (1)
P362,407.67, the prots made by Vicente Madrigal in his coal and shipping
business; (2) P4,086.50, the prots made by Susana Paterno in her
embroidery business; (3) P16,687.80, the prots 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 specic deductions the
following: (1) P16,687.80, the tax upon which was to be paid at source, and
(2) P8,000, the specic 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 plaintis 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 plaintis 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 eect on the part of legislators to put into
statutory form this canon of taxation and of social reform. The aim has been
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 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 dierence 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 benet 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 gurative
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 dened as "prots 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 specic
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."
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 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 O. Gaz., 871; Manuel and Laxamana vs.
Losano [1918], 16 O. 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 benet 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, specically 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 eect.
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 Aairs, War Department,

"Washington, D.C.

"SIR: This oce 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
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 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 sucient 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 specic 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 Aairs for the advisory opinion of this oce.
"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 ocers of the Philippine Government. You
are therefore advised that upon the facts as stated, this oce 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
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 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 ocial 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 armed with
costs against appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.; concur.

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