HISTORY OF THE PHILIPPINE INCOME TAX LAW

MADRIGAL VS RARRERTY G.R. No. 12287 August 7, 1918

Facts: Plaintiffs Madrigal and Susana Paterno were legally married prior to January
1, 1914 under the provisions of the law concerning conjugal partnership of gains. In
1915, Madrigal filed a declaration showing his net income for the year 1914 in the
amount of Php 296, 302. 73 (wow! Thinking 1914 pa ni) However, subsequently,
Madrigal submitted the claim that said income was not his sole income but was in
fact the income of the conjugal partnership with his wife, thus, it should be divided
into two parts for purposes of taxation. The general question was first submitted to
the Attorney-General who held with Madrigal. Still unsatisfied, the question was
referred to the United States Treasury Department in Washington. The CIR of US
decided against the claim of Madrigal. After payment under protest, an action was
instituted by Madrigal in the CFI where the latter ruled against the former. Hence,
this petition.
Issue: Whether or not the net income should be divided into two equal parts
because of the conjugal partnership existing between Madrigal and Paterno.
Held: No, the net income should not be divided.
The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an
effect on the part of the legislators to put into statutory form the canon that income is the norm 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. The
income tax is supposed to reach the earnings of the entire non-governmental property of the country.
Such is the background of the Income Tax Law.
With regards to the notion that the income should be divided into two equal parts, Susana Paterno
has no absolute right to make a separate return in order to receive the benefit of an exemption.
During the existence of the conjugal partnership, Paterno only has an inchoate right, a mere
expectancy, in the property of her husband. She even has no right to one-half of the income conjugal
partnership. Moreover, the Income Tax Law does not look on the spouses as individual partners in
an ordinary partnership. The higher schedules of an additional tax directed on income of the wealthy
may not be defeated by reliance on provisions of the Civil Code.