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Tax Law I: Nature of Income Madrigal V Rafferty Facts:: Divided Into 2 in Computing For The Additional Income Tax

Vicente Madrigal reported P296,302.73 in income for 1914. He argued this should be divided in half when calculating additional income tax since it was income from his conjugal partnership with his wife Susana Paterno. However, the court ruled that only Madrigal's individual income should be taxed, not income jointly owned with his wife, because Paterno had no separate estate or income of her own. The key difference between capital and income is that capital is a stored fund of wealth while income is the flow of services from that capital over time. A tax on income is not a tax on the capital or property itself.

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48 views2 pages

Tax Law I: Nature of Income Madrigal V Rafferty Facts:: Divided Into 2 in Computing For The Additional Income Tax

Vicente Madrigal reported P296,302.73 in income for 1914. He argued this should be divided in half when calculating additional income tax since it was income from his conjugal partnership with his wife Susana Paterno. However, the court ruled that only Madrigal's individual income should be taxed, not income jointly owned with his wife, because Paterno had no separate estate or income of her own. The key difference between capital and income is that capital is a stored fund of wealth while income is the flow of services from that capital over time. A tax on income is not a tax on the capital or property itself.

Uploaded by

Kevin Ken Sison Ganchero
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Tax Law I: Nature of Income

Madrigal v Rafferty
Facts:
Vicente Madrigal and Susana Paterno were legally married prior to
Januray 1, 1914. The marriage was contracted under the provisions of law
concerning conjugal partnership. On 1915, Madrigal filed a declaration of his
net income for year 1914, the sum of P296,302.73. Vicente Madrigal was
contending that the said declared income does not represent his income for
the year 1914 as it was the income of his conjugal partnership with Paterno.
He said that in computing for his additional income tax, the amount declared
should be divided by 2 thereby making the income tax to be paid less than
when it is charged to the original, undivided amount. However, The revenue
officer was not satisfied with Madrigals explanation and ultimately, the
United States Commissioner of Internal Revenue decided against the claim of
Madrigal.
Madrigal paid under protest, and the couple decided to recover the
sum of P3,786.08 alleged to have been wrongfully and illegally assessed and
collected by the CIR.

Issue: Whether or not the income reported by Madrigal on 1915 should be


divided into 2 in computing for the additional income tax.
Held:
No. The point of view of the CIR is that the Income Tax Law, as the
name implies, taxes upon income and not upon capital and property. As
Paterno has no estate and income, actually and legally vested in her and
entirely distinct from her husbands property, the income cannot properly be
considered her separate income for the purposes of the additional tax.
Vicente wants to reduce his declared income in computing for his tax since
he is arguing that he has a conjugal partnership with his wife. However, the
court ruled that the one that should be taxed is the income which is the flow
of the capital, thus it should not be divided into 2 since the capital solely
belongs to madrigal, so does the income.
Doctrine: 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 an income. Capital is wealth,


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

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