102.

Madrigal v Rafferty, supra (140) SUPRA

Facts: Madrigal & Paterno, married with Conjugal Partnership as their property relations. Madrigal filed his 1914 income
tax return but later claimed a refund on the contention that it was the income of the conjugal partnership. Later Madrigal
filed sworn declaration with the Collector of Internal Revenue, showing, as his total net income for the year 1914, claimed
that the income should be divided into two with each spouse filing a separate return. That each spouse should be entitled to
the P8,000 exemption, resulting in a lower amount of income tax due.

Issue: Whether capital and income are the same

Ruling: 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. The essential differences between capital and income are as follows:
1. Capital is a fund, while income flows;
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 income;
3. Capital is wealth, while income is the service of wealth;
4. Capital is the tree, while income is the fruit; labor is a tree, income the fruit; property is a tree, income the fruit;
5. Return or recovery of capital is not subject to income tax while income is subject to income tax.

103. Eisner v Macomber

Facts: The taxpayer owned 2,200 shares of stock in a company. The company declared a 50% stock dividend in 1916, so
the taxpayer received an additional 1,100 shares of which 198.77 shares represented the surplus of the company earned
between 1913 and 1916. The shares that represented the surplus had a par value of $19,877 and the Commissioner treated
the par value of these shares as income to the taxpayer. The taxpayer asserted that the stock dividend was not income under
the 16th amendment. The District court found for the taxpayer.

Issue: Is the payment of a stock dividend, as opposed to a cash or in kind dividend, to a stockholder of a company includable
as income to the stockholder?

Ruling: No. there is no taxable income until there is a separation from capital of something of exchangeable value, thereby
supplying the realization or transmutation which would result in the receipt of income.

Income being a 'gain derived from capital', 'capital' as being separate from 'income' in the way that a tree is separate from
its fruit. The taxpayer had not sold yet, and that his investment was still exposed to the business risks that could wipe it out.
The taxpayer does not realize increased worth in property unless he receives 'something of exchangeable value proceeding
from the property.' A stock dividend is different from a cash dividend which is subsequently reinvested because cash
dividends actually transfer the company's property to the stockholder. A stock dividend does not.

104. Fisher v Trinidad

Facts: Phil. Am. Drug Co was a corpn under the Phil laws in the City of Manila. Fisher was a stockholder in said corp. Said
corpn, declared a "stock dividend" and that the proportionate share of said stock divided of Fisher was P24,800. Trinidad
demanded payment of income tax for the stock dividend received by Fisher. Fisher paid under protest the sum of P889.91
as income taxon said stock dividend. Fisher filed an action for the recovery of P889.91. Trinidad demurred to the petition.

Issue: Whether or not the stock dividend was an income and therefore taxable.

Ruling: No. Stock dividends are not income subject to income tax on the part of the stockholder, because he merely holds
more shares representing the same equity interest in the corporation that declared the stock dividends. Generally speaking,
stock dividends represent undistributed increase in the capital of corporations or firms, jointstock companies, etc., etc., for
a particular period. The inventory of the property of the corporation for particular period shows an increase in its capital, so
that the stock theretofore issued does not show the real value of the stockholder's interest, and additional stock is issued
showing the increase in the actual capital, or property, or assets of the corporation.

105. Commissioner v Wilcox

Facts: R, a bookkeeper of a company in Reno, Nevada, converted $12,748.60 to his own use during 1941. He failed to
deposit this money and was convicted of the crime of embezzlement. The Commissioner determined that the taxpayer
was required to report the $12,748.60 embezzled in 1941 as income received in that year and asserted a tax deficiency
of $2,978.09. The Tax Court sustained the Commissioner but the court below reversed.

Issue: Whether the wrongful acquisition of funds by an embezzler should be included in his gross income

Ruling: No. A taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence
of a definite unconditional obligation to repay or return that which would otherwise constitute a gain. To collect a tax would
give the government an unjustified preference as to the part of the money that rightfully and completely belongs to the
victim. The embezzler’s title is void.

106. Commissioner v Javier (141)

Facts: V. Javier received a $1 Million remittance in her bank account from her sister abroad, Ventosa. M. Javier, the husband
of V. Javier, immediately withdrew the said amount and then appropriated it for himself. Later, the Mellon Bank, US bank
filed a complaint against the Javiers for estafa, bc Ventosa only sent $1,000.00 to her sister Victoria but due to a clerical
error in Mellon Bank, what was sent was the $1 Million. M. Javier filed his ITR stating that he was recipient of some money
received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation. The
Commissioner of Internal Revenue (CIR) then assessed Javier a tax liability amounting to P4.8 Million. The CIR also
imposed a 50% penalty against Javier as the CIR deemed Javier’s return as a fraudulent return.

Issue: Whether there was actual fraud which would justify the 50% penalty

Ruling: No, there was no actual fraud. Under sec 72 of the tax code, a taxpayer who files a false return is liable to pay the
fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of return
filed before the discovery of the falsity or fraud. The SC agrees with the CTA, quoted the latter: "Taxpayer was the
recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject
of litigation,” but they did not declare it as income. The Court ruled that the amount received is income subject to
tax, but the tax returnfiled cannot be considered as fraudulent because petitioner literally "laid his cards on the table
for respondent to examine. Error or mistake of fact or law is not fraud.