Johnson v. Western Union Tel. Co.

• Decision Date: 12 October 1944
• Citation: 293 N.Y. 379,57 N.E.2d 721
• Court: New York Court of Appeals Court of Appeals
• Parties: Johnson v. Western Union Tel. Co.

293 N.Y. 379

57 N.E.2d 721

JOHNSON

v.WESTERN UNION TELEGRAPH CO. et al.

Court of Appeals of New York.

Oct. 12, 1944.

MCONWAY and LEWIS, JJ., dissenting.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Norman Johnson, on behalf of himself and all other stockholders of Gold & Stock Telegraph Company similarly situated, against the Western Union Telegraph Company and others for the construction of a lease, and that defendants be directed to pay the federal income tax of the Gold & Stock Telegraph Company upon rent received by it from defendants.From a judgment of the Appellate Division of the Supreme Court in the First Judicial Department, 267 App.Div. 757, 45 N.Y.S.2d 927, unanimously affirming a judgment of the Supreme Court, New York County, for defendants, entered upon a decision of the court on a trial at Special Term, Schmuck, J., plaintiff appeals by permission of the Court of Appeals.

Judgments reversed for a new trial.Arthur Garfield Hays and Alan S. Hays, both of New York City, for appellant.

John F. MacLane and Benjamin C. Milner, both of New York City, for respondent.

DESMOND, Judge.

On December 14, 1881, Gold and Stock Telegraph Company, on whose behalf plaintiff brings this suit, leased all its assets, tangible and intangible, to defendant for a term of ninety-nine years from January 1, 1882.The agreed rental was a sum equal to 6% per year (i.e., $300,000 per year) on the par value of the lessor's outstanding stock.That sum was to be paid quarter-annually, direct to the stockholders of the lessor.The lessee assumed and agreed to pay the whole of the lessor's outstanding bonded indebtedness, with interest.As part of the transaction, defendant-lessee indorsed on lessor's stock certificates a guarantee of payment of 6% annual dividends thereon.The lessor agreed to preserve its corporate existence and franchise and the lessee agreed to pay, in addition to rent, $2,500 per year to cover the expense of keeping lessor alive as a corporation.The scheme of the lease, as further described in subsequent paragraphs hereof, left the lessor with no property of any sort in its possession, no income except the agreed rental, and no actual money receipts from any source, since the rental installments were to go, for the whole ninety-nine years, direct to lessor's stockholders.It is plain beyond controversy that the intent was that the lessor corporation, thus left without any funds, property or actual income, was to have all its obligations, of every sort, discharged during the term of the lease, by defendant as lessee.In 1913, a Federal income tax law was passed.Who, under this lease, is obligated to pay the Federal income taxes now being assessed annually against the lessor?

Prior to the leasing, Gold and Stock Telegraph Company had carried on a “telegraph ticker service.”The lease here under scrutiny went beyond a mere letting of the physical properties theretofore used in that enterprise.The indenture listed, also, as leased assets, “the telegraph lines and business” of the lessor.Defendant was to have for itself all the revenues thereof.It agreed, at its own cost and expense, thereafter to “operate the said lines and appurtenant facilities for business” and to keep them in condition suitable for the transaction of the kind of business theretofore conducted by the lessor.Besides the rental provisions above alluded to, and covenants to which we shall refer hereafter, for keeping the property clear of taxes, incumbrances and liens, defendant promised in the lease to assume and pay “all costs and expenses incurred in the operation and maintenance of the lines and business of the G. & S.T. Co. ***”.It was a complete, functioning business enterprise that was leased.At the end of the term, lessor was to have its properties back not only intact and in good condition, but “as free from *** encumbrance thereon as they were, when received.”In so many words, defendant covenanted to keep the whole property and business of Gold and Stock Telegraph Company“clear from all incumbrances arising from tax, assessment or judgment liens.”

Federal income taxes are now being assessed annually against this lessor and remain unpaid.Those delinquencies result in liens on the leased property.U.S. Internal Revenue Code, § 3670,U.S.Code, tit. 26, § 3670, 26 U.S.C.A.Int.Rev.Code, § 3670.Those liens may attach only to the lessor's interest in the leased assets and may, as a practical matter, be enforcible by the Government only by sale of the lessor's reversionary interest, but they are liens just the same.(See45 Yale Law Journal, pp. 183, 184.)As has been authoritively determined in respect to this very lease, those income taxes on the rents cannot be collected by the United States from lessor's stockholders nor can the lessee be required by the United States to withhold the taxes out of the rents.Western Union Tel. Co. v. Commissioner of Int. Rev., 2 Cir., 68 F.2d 16;Gold & Stock Tel. Co. v. Commissioner of Internal Revenue, 2 Cir., 83 F.2d 465, certiorari denied299 U.S. 564, 57 S.Ct. 26, 81 L.Ed. 415, seeUnited States v. Western Union Tel. Co., 8 Cir., 50 F.2d 102.Furthermore, it is held that, under this form of lease, each of the lessor's stockholders has an individual, direct claim against the lessee for his full and undiminished share of the annual rents; that share must be paid to the individual stockholder without interference by the lessor, the tax-collecting agency, or anyone else.Western Union Tel. Co. v. Commissioner of Internal Revenue, supra;United States v. Northwestern Tel. Co., 2 Cir., 83 F.2d 468, 469, certiorari denied299 U.S. 565, 57 S.Ct. 27, two cases, 81 L.Ed. 416;seePeabody v. Interborough Rapid Transit Co., 124 Misc. 801, 209 N.Y.S. 376, affirmed213 App.Div. 857, 209 N.Y.S. 893, affirmed240 N.Y. 708, 148 N.E. 768, also Rensselaer & S.R. Co. v. Irwin, 2 Cir., 249 F. 726.The guarantee indorsed on the stock certificates has the same effect.Since the agreed rent must go direct to lessor's stockholders without deductions, how can lessee possibly fulfill its promise to keep the leased assets unaffected by liens or incumbrances, unless it pays these income taxes from its own funds?

Defendant's reliance is on the first part of the Sixth paragraph of the lease.Therein it bound itself to pay “all taxes and assessments which may be lawfully imposed upon said property of the G. & S.T. Co., or any part thereof, by any state or municipal authorities.”That language, says defendant, marks out the limit of its tax burden under the lease.If that were so, and if the lease said nothing else on the subject, the lessor's Federal income taxes could not be charged against the lessee.Those income taxes are not taxes on “property” but are a levy in personam and they are of course, not imposed by “state or municipal authorities”.Brainard v. New York Cent. R. Co., 242 N.Y. 125, 151 N.E. 152, 45 A.L.R. 751;Van Rensselaer v. Dennison, 8 Barb. 23.But the same Sixth paragraph of the lease contains also an explicit promise by defendant to “keep the same [leased property] clear from all incumbrances arising from tax, assessment or judgment liens.”If State and municipal taxes alone had been under consideration, they would have been covered adequately by the express provision at the beginning of the Sixth paragraph, for the payment by the lessee, of such imposts.The later provision, in the same paragraph, as to keeping the property free from all tax or judgment liens must have been meant to be all-inclusive (seeSchlafly v. D'Arcy, 8 Cir., 1 F.2d 297).Applicable here is the language of this court in a different situation: “these words are sufficient to cover, and must have been intended to cover, all possible forms of taxation.”Ward v. Union Trust Co., 224 N.Y. 73, 79,120 N.E. 81, 82, 3 A.L.R. 1154, quoting fromWalker v. Whittemore, 112 Mass. 187.

We are mindful of the general rule that a lessor must ordinarily pay his own income taxes on his rents.We have not overlooked the long line of cases rejecting demands of lessors for payment of such taxes by their lessees.But those were cases where the taxes which the lessee promised to pay were in one way or another specified in the lease, in terms which excluded the idea of income taxes.See, for instance, Boston & P.R. Corp. v. Old Colony R. Co., 269 Mass. 190, 169 N.E. 157;Stony Brook, etc., v. Boston & M.R.R., 260 Mass. 379, 381, 157 N.E. 607, 53 A.L.R. 700;Catawissa R. Co. v. Philadelphia & R.R. Co., 255 Pa. 269, 99 A. 807;Sharon R. Co. v. Erie R. Co., 268 Pa. 396, 112 A. 242;Woodruff v. Oswego Starch Factory, 177 N.Y. 23, 68 N.E. 994.All of the decisions just above cited turn on limiting language in the leases themselves.In each of those cases the lessee's promise was not to pay all taxes or to remove all tax incumbrances but only to pay taxes specified.Likewise inapplicable here are the decisions which pass on language which amounts to specific promises to pay lessors' income taxes or taxes imposed on the rents.(E.g., Peart v. Phipps, 1807, 4 Yeates 386;Suter v. Jordan Marsh Co., 225 Mass. 34, 113 N.E. 580;Philadelphia City P.R. Co. v. Philadelphia R.T. Co., 263 Pa. 561, 107 A. 329;Wendel Foundation v. Moredall Realty Corp., 282 N.Y. 239, 26 N.E.2d 241.We are here enforcing covenants which with utter clarity and positiveness bind the lessee to keep the property free from all tax liens and to return it to the lessor in that unblemished state.

Defendant cites Brainard v. N.Y.C.R.R. Co., supra, as holding that, to impose on a lessee liability for his lessor's income taxes, the lease itself must refer to “income taxes”, in so many words.The Brainard decision goes to no such extreme.Under construction in that lawsuit was a contract of lease (or management) quite unlike the one we are construing here.The lessee in the Brainard case had covenanted to pay all taxes “on the said road or property, or...