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1/3/2018 G.R. No.


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Republic of the Philippines


G.R. No. L-12287 August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants,
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.


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.


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.

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
normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15. 1/4

making the aggregate of both incomes more than $4. "The Nature of Capital and Income. 1918.1/3/2018 G. capital is a tree.. Recently in two elaborate decisions in which a long line of Spanish authorities were cited. 4 Tax Cas. 93. and if the husband has other net income. 26. N. of her heirs. Gaz. J. DECISION. public considerations have demanded an exemption roughly equivalent to the minimum of subsistence." Introduction. or his income should be included in her return. income the fruit. Income as contrasted with capital or property is to be the test. To carry out this idea. The contentions of plaintiffs and appellants having to do solely with the additional income tax. Rep." (London County Council vs. contains the following: The husband. 16 Off. because of the conjugal partnership existing between them. 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. and receives an income of more than $3. B.. and does not ripen into title until there appears that there are assets in the community as a result of the liquidation and settlement. income is the fruit. City of Savannah [1878]. The trial court in an exhausted decision found in favor of defendants. (See Seligman. Chapter VIII. 605. 49 Week.. a return of annual net income is required under the law. The learned argument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad de gananciales. income the fruit. 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." (Waring vs. A.000. Losano [1918]. 1265. 83 L. as the head and legal representative of the household and general custodian of its income. which places the burden on those best able to pay. should make and render the return of the aggregate income of himself and wife. that the fact that Madrigal was a married man. extended to the Philippine Islands. will be imposed only upon so much of the aggregate income of both shall exceed $4. second edition [1915]. this court in speaking of the conjugal partnership. wife of Vicente Madrigal." as here used. and Towne vs. Chapter IV. although neither one separately has an income of $3. Attorney- General [1901]. See further Foster's Income Tax. The tax in such case. which constitutes neither a legal nor an equitable estate. S.. If a wife has a separate estate managed by herself as her own separate property. She has an interest in the ultimate property rights and in the ultimate http://www. 77. no less than five answers have been given the course of history. and such return must include the income of both. The essential difference between capital and income is that capital is a fund.S. we turn for a moment to consider the provisions of the Civil Code dealing with the conjugal partnership. If either husband or wife separately has an income equal to or in excess of $3. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation. 60 Ga.000. From the point of view of test of faculty in taxation. Eisner. Such is the background of the Income Tax Law. and for the purpose of levying the income tax it is assumed that he can ascertain the total amount of said income. Capital is wealth.. 686. With these exceptions. L-12287 The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. If the aggregate net income of both exceeds $4. has an inchoate right in the property of her husband Vicente Madrigal during the life of the conjugal partnership. Gibbons vs. and his marriage contracted under the provisions governing the conjugal partnership. The final stage has been the selection of income as the norm of taxation. No. an annual return of their combined incomes must be made in the manner stated. decided by the United States Supreme Court. 265. Black on Income can be defined as "profits or gains. 549. 70 L.000 may be made from the aggregate of both incomes. in order that a deduction of $4. is an interest inchoate.000. otherwise the status at the close of the year.000.R. labor is a tree. decided that "prior to the liquidation the interest of the wife and in case of her death. C.html 2/4 . the income tax is supposed to reach the earnings of the entire non-governmental property of the country. while income is the service of wealth. (See Fisher." With these general observations relative to the Income Tax Law in force in the Philippine Islands. January 7. T.000..) A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart. Manuel and Laxamana vs. 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. has no bearing on income considered as income.) A tax on income is not a tax on property. "The Income Tax. is that is should be divided into two equal parts. without costs. Mahon [1890]..000 per annum. Nable Jose [1916]..lawphil. and in such case the return must be made even though the combined income of both be less than $4. a mere expectancy. ISSUES. S. A fund of property existing at an instant of time is called capital.) Susana Paterno. K. 871. "Income. 15 Off.000. They are jointly and separately liable for such return and for the payment of the tax. however. 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. second edition [1915]. N. income is a flow. she may make return of her own income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree. 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.) The Income Tax Law of the United States. 136 U." (Nable Jose vs. the wife's return should be attached to the return of her husband. Gaz.

000 or over for the taxable year shall make a return showing the facts. in which the latter event either the husband or wife may make the return but not both.lawphil. whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns were correctly rendered. FRANK MCINTYRE. in forwarding the papers to the Bureau. The decision of the latter overruling the opinion of the Attorney-General is as follows: TREASURY DEPARTMENT. this office holds that for the Federal Income Tax (Act of October 3.000 where the person making the return is a single person. so that under the returns as filed there would be an escape from the additional tax. but that where the husband and wife both make returns (they living together). and over which her husband has no right in equity. 1915.R.000. levying an income tax. actually and legally vested in her and entirely distinct from her husband's property.000. The husband and wife are only entitled to the exemption of P8. and that the application for refund was rejected. 1913).000 additional where the person making the return is married and living with No. that Araneta has dominion over the income and under the Philippine law. that from the net income so shown there shall be deducted $3. tax was assessed against the entire net income against Gregorio Araneta. L-12287 ownership of property acquired as income after such income has become capital. the entire net income in this case was taxable to Gregorio Araneta. transmitting copy of correspondence "from the Philippine authorities relative to the method of submission of income tax returns by marred person. The aims and purposes of the Income Tax Law must be given effect.1/3/2018 G. Chief. You are therefore advised that upon the facts as stated. one return for each half in the names respectively of the husband and wife. 1913. C. 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. It appears further from the correspondence that upon the foregoing explanation. that Araneta claims the returns are correct on the ground under the Philippine law his wife is entitled to half of his earnings." You advise that "The Governor-General. both for the normal and additional tax. the amount of deduction from the aggregate of their several incomes shall not exceed $4. but together they have an income in excess of $4. Washington. By paragraph M of the statute. the right to determine its use and disposition.000 specifically granted by the law. D. the Income Tax Law does not look on the spouses as individual partners in an ordinary partnership. SIR: This office is in receipt of your letter of June 22. 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. The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3. to be administered as in the United States but by the appropriate internal-revenue officers of the Philippine Government. 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. 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. the income cannot properly be considered the separate income of the wife for the purposes of the additional tax. and that the application for refund was properly rejected. Susana Paterno has no absolute right to one-half the income of the conjugal partnership. The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United States Treasury Department. married and living with his wife. Not being seized of a separate estate." From the correspondence it appears that Gregorio Araneta. and that the refund should be allowed. Income Tax. Moreover.000. 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. War Department. As she has no estate and income.html 3/4 . Bureau of Insular Affairs. that the tax was paid and an application for refund made. 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. In all instances the income of husband and wife whether http://www. that in this case the wife has no "separate estate" within the contemplation of the Act of October 3. and $1. 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. or married and not living with consort. It may consist of lands or chattels. Washington. its provisions are extended to the Philippine Islands.

while the incomes are added together for the purpose of the normal tax they are taken separately for the purpose of the additional tax. by the department charged with its execution. Acting Commissioner. The Income Tax Law was drafted by the Congress of the United States and has been by the Congress extended to the Philippine Islands. No. In connection with the decision above quoted. the authoritative decision of the official who is charged with enforcing it has peculiar force for the Philippines.S. DAVID A.html 4/4 . In re Allen [1903]. Respectfully.S. however. and Roman Catholic Bishop of Nueva Segovia [1915]. The Lawphil Project . Being thus a law of American origin and being peculiarly intricate in its provisions. 209 U. It has come to be a well-settled rule that great weight should be given to the construction placed upon a revenue (U. Street and Fisher. whose meaning is doubtful. is taken as a whole for the purpose of the normal tax.Arellano Law Foundation http://www.. concur. Johnson. Municipality of Binalonan.R. Government of the Philippine Islands vs. Carson. 338. JJ. So ordered. 630. L-12287 from separate estates or not.lawphil... vs. 32 Phil. Where the wife has income from a separate estate makes return made by her husband. the wife has no separate income within the contemplation of the Income Tax Law. In this case. GATES. Torres. it is well to recall a few basic ideas. 634. [1907]. 2 Phil.1/3/2018 G.. Cerecedo Hermanos y Cia.) We conclude that the judgment should be as it is hereby affirmed with costs against appellants.