madrigal vs rafferty-full text

7/28/2019 Madrigal vs Rafferty-full Text

1/5

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

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

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 wascontracted under the provisions of law concerning conjugal partnerships ( sociedad de gananciales ). OnFebruary 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. SubsequentlyMadrigal submitted the claim that the said P296,302.73 did not represent his income for the year 1914, but wasin fact the income of the conjugal partnership existing between himself and his wife Susana Paterno, and thatin computing and assessing the additional income tax provided by the Act of Congress of October 3, 1913, theincome declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered theincome of Vicente Madrigal and the other half of Susana Paterno. The general question had in the meantimebeen submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17, 1915, heldwith the petitioner Madrigal. The revenue officers being still unsatisfied, the correspondence together with thisopinion was forwarded to Washington for a decision by the United States Treasury Department. The UnitedStates Commissioner of Internal Revenue reversed the opinion of the Attorney-General, and thus decidedagainst 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 FirstInstance of the city of Manila against Collector of Internal Revenue and the Deputy Collector of InternalRevenue for the recovery of the sum of P3,786.08, alleged to have been wrongfully and illegally collected bythe defendants from the plaintiff, Vicente Madrigal, under the provisions of the Act of Congress known as theIncome Tax Law. The burden of the complaint was that if the income tax for the year 1914 had been correctlyand 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 theyear 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 thestipulation, sets forth the basis of defendants' stand in the following way: The income of Vicente Madrigal andhis wife Susana Paterno of the year 1914 was made up of three items: (1) P362,407.67, the profits made byVicente 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 sumof 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


2/5

P296,302.73. For the purpose of assessing the normal tax of one per cent on the net income there wereallowed 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. Theremainder, P271,614.93 was the sum upon which the normal tax of one per cent was assessed. The normaltax thus arrived at was P2,716.15.

The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the IncomeTax 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 shouldbe divided into two equal parts, because of the conjugal partnership existing between them. The learnedargument of counsel is mostly based upon the provisions of the Civil Code establishing the sociedad degananciales . The counter contentions of appellees are that the taxes imposed by the Income Tax Law are asthe name implies taxes upon income tax and not upon capital and property; that the fact that Madrigal was amarried man, and his marriage contracted under the provisions governing the conjugal partnership, has nobearing 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 IncomeTax," Introduction.) The Income Tax Law of the United States, extended to the Philippine Islands, is the resultof 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 havedemanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the incometax is supposed to reach the earnings of the entire non-governmental property of the country. Such is thebackground 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 calledcapital. A flow of services rendered by that capital by the payment of money from it or any other benefitrendered by a fund of capital in relation to such fund through a period of time is called an income. Capital iswealth, while income is the service of wealth. ( See Fisher, "The Nature of Capital and Income.") The SupremeCourt 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 bedefined 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, secondedition [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 livingapart, 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 levyingthe income tax it is assumed that he can ascertain the total amount of said income. If a wife has a separateestate managed by herself as her own separate property, and receives an income of more than $3,000, shemay make return of her own income, and if the husband has other net income, making the aggregate of bothincomes more than $4,000, the wife's return should be attached to the return of her husband, or his incomeshould be included in her return, in order that a deduction of $4,000 may be made from the aggregate of bothincomes. The tax in such case, however, will be imposed only upon so much of the aggregate income of bothshall exceed $4,000. If either husband or wife separately has an income equal to or in excess of $3,000, a


3/5

return of annual net income is required under the law, and such return must include the income of both, and insuch case the return must be made even though the combined income of both be less than $4,000. If theaggregate net income of both exceeds $4,000, an annual return of their combined incomes must be made inthe manner stated, although neither one separately has an income of $3,000 per annum. They are jointly andseparately liable for such return and for the payment of the tax. The single or married status of the personclaiming the specific exemption shall be determined as one of the time of claiming such exemption which returnis 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 amoment to consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in twoelaborate decisions in which a long line of Spanish authorities were cited, this court in speaking of the conjugalpartnership, decided that "prior to the liquidation the interest of the wife and in case of her death, of her heirs, isan interest inchoate, a mere expectancy, which constitutes neither a legal nor an equitable estate, and does notripen into title until there appears that there are assets in the community as a result of the liquidation andsettlement." (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 VicenteMadrigal during the life of the conjugal partnership. She has an interest in the ultimate property rights and in theultimate 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 wouldarise by reason of the additional tax. As she has no estate and income, actually and legally vested in her andentirely 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 asindividual 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 thewealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugalpartnership and having no application to the Income Tax Law. The aims and purposes of the Income Tax Lawmust be given effect.

The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islandsand 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 "fromthe Philippine authorities relative to the method of submission of income tax returns by marredperson."

You advise that "The Governor-General, in forwarding the papers to the Bureau, advises that theInsular Auditor has been authorized to suspend action on the warrants in question until an authoritativedecision 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 anincome of an amount sufficient to require the imposition of the net income was properly computed andthen both income and deductions and the specific exemption were divided in half and two returnsmade, one return for each half in the names respectively of the husband and wife, so that under thereturns as filed there would be an escape from the additional tax; that Araneta claims the returns are


4/5

correct on the ground under the Philippine law his wife is entitled to half of his earnings; that Aranetahas dominion over the income and under the Philippine law, the right to determine its use anddisposition; 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 assessedagainst 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 tothe Attorney-General of the Islands who holds that the returns were correctly rendered, and that therefund 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 administeredas 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 IncomeTax (Act of October 3, 1913), the entire net income in this case was taxable to Gregorio Araneta, bothfor 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 whichbelongs 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 shallmake a return showing the facts; that from the net income so shown there shall be deducted $3,000where 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 wherethe husband and wife both make returns (they living together), the amount of deduction from theaggregate 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 estatein excess of $3,000, but together they have an income in excess of $4,000, in which the latter eventeither 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 theincomes are added together for the purpose of the normal tax they are taken separately for thepurpose of the additional tax. In this case, however, the wife has no separate income within thecontemplation 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 wasdrafted 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 isdoubtful, 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, andRoman Catholic Bishop of Nueva Segovia [1915], 32 Phil., 634.) We conclude that the judgment should be as itis hereby affirmed with costs against appellants. So ordered.

Torres, Johnson, Carson, Street and Fisher, JJ., concur.


5/5

madrigal vs rafferty-full text

Documents