G.R. No.
L-12287 August 7, 1918 The answer of the defendants, together with an analysis of the tax declaration, the
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.
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.
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,
DAVID A. GATES.
levying an income tax.
Acting Commissioner.

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 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.
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 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,