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 wherein Conjugal partnership was
the governing regime between the spouses
 Vicente filed a sworn declaration with the Collector of Internal Revenue, showing that the
sum of P296,302.73 is his total net income for the year 1914.
 Subsequently Vicente submitted the claim that the said amount 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 Attorney-General of the Philippine Islands held in favor of Vicente’s claim
 But the revenue officers were not satisfied so it 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 decided against the claim of Vicente
 Vicente protested but was decided adversely by the Collector of Internal Revenue
 Vicente and his wife then filed an action in the Court of First Intance against CIR for the
recovery of the sum alleged to have been wrongfully and illegally collected, under the
provisions of the Income Tax Law
 Vicente alleges 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, with the result that plaintiff Madrigal has paid
as income, P3,786.08, in excess of the sum lawfully due and payable.

ISSUE:

Whether or not the income reported by Vicente should be divided into 2 in computing for the
additional income tax because of the conjugal partnership existing between them

HELD:

The Court held NO.

It cannot be divided into two

The court emphasizes that Income Tax Law taxes upon income, and not upon capital and property.
The essential difference between capital and income is that:

capital - is a fund of property existing at an instant of time;

income - is 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

Capital is wealth, while income is the service of wealth

*The Supreme Court of Georgia even equates 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 is the fruit of the tree." (Waring vs. City of Savannah [1878], 60 Ga., 93.)

Q: If capital would be equated to a tree, what would it be? Branch, roots, leaves, fruits? Tree.

Q: What about income? Fruits of the tree.

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

A regulation of the United States Treasury Department relative to returns by the husband and wife
not living apart, states that:

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. It is only when a wife has a separate estate managed by herself as her own separate
property, and receives an income of more than $3,000, that she may make return of her own
income,

Taking this into consideration and the laws on conjugal partnership stated in the Civil Code, Susana
Paterno indeed 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

However, she 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.