MADRIGAL vs.

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

FACTS: Madrigal filed a sworn declaration with the CIR, showing, as his total
net income for the year 1914, the sum of P296,302.73. Subsequently he
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. He submits that in computing and assessing the
additional income tax, the amount of P296K should be divided into two equal
parts, one-half to be considered the income of Madrigal and the other half of his
wife. The CIR countered that the taxes imposed by the Income Tax Law are
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.

ISSUE: W/N

RULING: Income as contrasted with capital or property is to be the test. The

essential difference between capital and income is that:

1. Capital is a fund; income is a flow;

2. 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.

3. 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.

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

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.

In this case, 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.