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[No. 12287. August 7, 1918.]

VICENTE MADRIGAL and his wife, SUSANA PATERNO,


plaintiffs and appellants, vs. JAMES J. RAPFERTY,
Collector of Internal Revenue, and VENANCIO
CONCEPCION, Deputy Collector of Internal Revenue,
defendants and appellees.

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 nongovernmental property of the country.

2. ID.; ID.; INCOME CONTRASTED 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
flow. 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], 15 Off.
Gaz., 871, and Manuel and Laxamana vs. Losano [1918],
16 Off. Gaz., 1265, approved and followed. The provisions
of the Civil Cqde concerning conjugal partnerships have
no application to the Income Tax Law.

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Madrigal and Paterno vs. Rafferty and Concepcion.

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, onehalf 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
onehalf 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.

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, official 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.

APPEAL from a judgment of the Court of First Instance of


Manila. Campbell, J.
The facts are stated in the opinion of the court.
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.

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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 partner
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Madrigal and Paterno vs. Rafferty and Concepcion.

ships (sociedad de gananciales). On February 25, 1915,


Vicente Madrigal filed 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 ?=296,302.73 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, onehalf 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
Greneral 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 Interaal Revenue
reversed the opinion of the AttorneyGeneral, 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

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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
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Madrigal and Paterno vs. Rafferty and Concepcion.

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 for 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
=383,181.97, 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 it should be
divided into two equal parts, because of the conjugal
partnership existing between them. The learned argument
o counsel is mostly based upon the provisions of the Civil

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Code establishing the sociedad de gananciales. The counter


contentions of appeDee. are that the taxes imposed by

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Madrigal and Paterno vs. Rafferty and Conception.

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 five answers have been given in 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 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 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

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thought in the following figurative language: "The fact is


that property is a tree, income is the fruit; labor is a tree,

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Madrigal and Paterno vs. Rafferty and Concepcion.

income the fruit; capital is a tree, income the f ruit."


(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.
AttorneyGeneral [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

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Madrigal and Paterno vs. Rafferty and Concepcion.

per annum. They are jointly and separately liable for such
return and f or the payment of the tax. The single or
married status of the person claiming the specific
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 authoritie& 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 Paterao, 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 onehalf 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.
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Madrigal and Paterno vs. Rafferty and Concepcion.

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 AttorneyGeneral of the Philippine
Islands and the United States Treasury Department. The
decision of the latter overruling the opinion of the
AttorneyGeneral is as f ollows:
"TREASURY DEPARTMENT, Washington.

"Income Tax.
"FRANK MC!NTYRE,

"Chief, Bureau of Insular Affairs, War Depwrtment,


"Washington, D. C.
"SlR: .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 married persons/
"You advise that The GovernorGeneral, 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 additional tax provided
by the statute; that 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 f or 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 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

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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
AttorneyGeneral 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
GovernorGeneral 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 internalrevenue officers of the Philippine
Government. You are therefore advised that upon the facts as
stated, this office holds that for the Federa! 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 aceordance
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

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Madrigal and Paterno vs. Rafferty and Concepcion.

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

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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 official who is
charged with enforcing it has peculiar force for the
Philippines. It has come to be a wellsettled 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 [1903J,
2 Phil., 630; Government of the Philippine Islands vs.
Municipality of Binalonan, and Roman Catholic Bishop of
Nueva Segovia [1915], 32 Phil., 634.)

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Agoncillo and Marino vs. Javier.

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.

Judgment affirmed.

_______________

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