Harwood v. Eaton, 51.

• Decision Date: 18 December 1933
• Docket Number: No. 51.,51.
• Citation: 68 F.2d 12
• Parties: HARWOOD v. EATON, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Second Circuit

68 F.2d 12 (1933)

HARWOOD v. EATON, Collector of Internal Revenue.

No. 51.

Circuit Court of Appeals, Second Circuit.

December 18, 1933.

John Buckley, U. S. Atty., of Hartford, Conn. (George H. Cohen, Asst. U. S. Atty., of Hartford, Conn., and E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, and S. E. Blackham, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellant.

Henry F. Parmelee, of New Haven, Conn. (John H. Weir, of New Haven, Conn., of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

In 1890 the Empire & Bay States Telegraph Company leased its properties to the Western Union Telegraph Company for a term of 99 years and at a rental of $12,000 per annum payable quarterly. The lease provided that, if the lessor should retire its bonds and reduce its capital stock to $300,000, the lessee would indorse upon each of the certificates of stock of the lessor a covenant to pay the annual rental directly to said stockholders pro rata. The conditions were performed by the lessor, and the indorsement was made by the lessee during the year 1890, and ever since the lessee has paid the rent directly to the lessor's stockholders. During the year 1926 the plaintiff owned 200 shares of the lessor's stock upon which he received from the lessee the sum of $800. This sum he included in his income tax return for the year 1926, and he paid the tax assessed thereon. Subsequently the Commissioner of Internal Revenue assessed an income tax of $1,350 against the lessor upon the theory that rental payments to its stockholders constituted income to it, and, after exhausting efforts to collect the tax from it, assessed against the plaintiff as a transferee the full amount of $800 received by him in 1926 plus interest thereon in the sum of $186.10. This amount, $986.10, the plaintiff paid to the defendant on February 13, 1931. A claim for refund having been filed without result, the plaintiff then brought this suit. He recovered judgment for the sum paid with interest thereon from the date of payment.

This appeal presents a situation very similar to that considered in Western Union Telegraph Company v. Commissioner (C. C. A.) 68 F.(2d) 16, the opinion in which is handed down herewith. It is controlled by similar principles. Here, as there, we assume that the lessor corporation was subject to income tax in respect to the rental payments made direct to its stockholders in 1926. Such taxes the United States may collect from the corporation's property, if any can be reached; but it may not collect them from the corporation's stockholders merely as such. In general, the rule is that the corporation is an entity distinct from its stockholders for tax purposes. Dalton v. Bowers, 287 U. S. 404, 410, 53 S. Ct. 205, 77 L. Ed. 389. Hence a stockholder can be compelled to pay a tax assessed against his corporation only as might any third person who had in some way incurred liability therefor. We pass, therefore, to a consideration of the question of the plaintiff's liability as a "transferee" under section 280 of the Revenue Act of 1926 (26 USCA § 1069 and note).

In Hatch v. Morosco Holding Co., 50 F. (2d) 138, we expressed the view that section 280 imposes no new obligation upon the transferee of property of a taxpayer, but permits collection from him, by a summary procedure, to the extent that the municipal law makes him liable at law or in equity for the transferor's taxes. We think this is the necessary implication from the opinion of the Supreme Court in Phillips v. Commissioner, 283 U. S. 589, at page 594, 51 S. Ct. 608, 75 L. Ed. 1289, where the statute is referred to as providing "a new remedy for enforcing the existing `liability at law or in equity,'" despite the statement, on page 602 of 283 U. S., 51 S. Ct. 608, 610, that there is no occasion to decide whether the right of the United States to follow transferred assets is limited by any state laws. We adhere, therefore, to the view already expressed. Indeed, the appellant has not challenged it.

Under the municipal law we can find no basis for imposing liability upon the plaintiff to account to the United States as a creditor of the Empire Company for the payments received by him from Western Union during 1926. It is argued that, when the plaintiff received the $800 payment, he received property of his corporation. Consequently the appellant attempts to predicate liability upon the so-called trust fund theory, relying upon such cases as United States v. Fairall, 16 F.(2d) 328 (D. C. S. D. N. Y.), Hatch v. Morosco Holding Co. (C. C. A.) 50 F.(2d) 138, and Phillips v. Commissioner, 283 U. S. 589, 51 S. Ct. 608, 75 L. Ed. 1289. They do not support his argument, for in each of those cases assets of the corporation were distributed to a stockholder at a time when the corporation's liability for taxes already existed. As pointed out in the accompanying opinion in the Western Union Case, the New York law views payments made under the present circumstances as payments by the obligee under a contract for the benefit of a third person. Certainly the corporation could not require the plaintiff to account for the sum received. Upon what theory does a creditor of the corporation stand on higher ground? The payment was not a dividend paid by the lessor to its stockholder; no money of the Empire Company was distributed to the plaintiff in 1926. Until paid over, the money belonged to Western Union, and, upon payment, it became the plaintiff's money, thereby extinguishing his personal right of action against Western Union. It is true that the consideration for his right of action against Western Union was furnished by the lessor's demise. But that was made years before the lessor's liability for taxes arose. The arrangement to have rent paid direct to the stockholders was not a fraudulent conveyance; it did not defraud existing creditors, nor was it intended to defraud future creditors of the lessor, for none was in view; nor was it devised as a scheme to defeat the collection of future income taxes. Even a voluntary disposal of its assets by a corporation, if made without fraudulent intent, cannot be questioned by a subsequent creditor. Graham v. Railroad Co., 102 U. S. 148, 26 L. Ed. 106. It is one thing to say that the rents paid to shareholders may be deemed income of the corporation for purposes of determining the tax assessable against it; it is quite another to say that the receipt of such rental payments makes the stockholder liable to the corporation's creditors. Unless the plaintiff would be liable to any creditor of the Empire Company, for example, to a stock transfer agent whose services in 1926 were not paid for by the corporation, he was not liable to the United States for the taxes in question. If a transfer of the lessor's property can be deemed to have been made to him at any time, it was back in 1890 upon the creation of his rights as a third party beneficiary of the lessee's covenant. No recognized legal principle has been suggested by which a subsequent creditor of the lessor can reach such rights. We therefore agree with the District Court that no "transferee" liability was established. Accordingly the judgment is affirmed.

L. HAND, Circuit Judge (concurring).

If we must insist that for taxing purposes a corporation is...