United States v. Warren R. Co.

• Decision Date: 01 May 1941
• Parties: UNITED STATES v. WARREN R. CO. et al. SAME v. SYRACUSE BINGHAMTON & N. Y. R. CO. et al. SAME v. PASSAIC & D. R. CO. et al.
• Court: U.S. District Court — Southern District of New York

39 F. Supp. 135

UNITED STATES v. WARREN R. CO. et al.

SAME v. SYRACUSE BINGHAMTON & N. Y. R. CO. et al.

SAME v. PASSAIC & D. R. CO. et al.

District Court, S. D. New York.

May 1, 1941.

Mathias F. Correa, U. S. Atty., of New York City (Myles J. Lane, Asst. U. S. Atty., of New York City, of counsel), for plaintiff.

Austin J. McMahon and Douglas Swift, both of New York City, for defendant Delaware, L. & W. R. Co.

INCH, District Judge.

These three actions, Civ. 5 — 316, relating to the Warren Railroad Company, Civ. 5 — 317, relating to the Syracuse Binghamton & New York Railroad Company, and Civ. 5 — 318, relating to the Passaic & Delaware Railroad Company, and the action against the Delaware, Lackawanna & Western Railroad Company as co-defendant in each case, were duly tried together.

There is no material dispute as to the facts. The issues in each action being the same, can be decided in one decision, although, of course, separate findings and judgments must be made and entered.

The United States brings these three actions for the recovery of income taxes duly assessed against the above first mentioned railroads, and against the Delaware, Lackawanna & Western Railroad, because of the claimed liability of that railroad also to pay such taxes.

The complaint in each action alleges that the Delaware, Lackawanna & Western Railroad Company leased the entire railroad property and franchises of these three first named railroad companies. A copy of each lease is attached to and made a part of the complaint in each action. The income taxes in question are those assessed against the Syracuse, Binghamton & New York Company for the years 1933, 1934 and 1935. Against the Passaic & Delaware Company and the Warren Railroad Company for the years 1934 and 1935.

There is no dispute as to the liability of these railroads for the income tax. No appearance has been made in any of the actions on their behalf.

The controversy is really between the United States and the Delaware, Lackawanna & Western Railroad Company which is the lessee of each of these companies.

Accordingly, from now on, the parties will be identified as the lessor and lessee.

There is no necessity, in this opinion, to set forth more than the facts on which the liability, if any, of this lessee depends. The various income tax assessments and similar details will appear in the separate findings.

The leases in the action against the Syracuse and against the Passaic Railroad Companies contain the same tax covenant. That of the Warren Company differs somewhat. The Warren lease is dated October 1, 1857, the Syracuse lease is dated October, 1912, and the Passaic lease is dated November 1, 1882.

The leases are attached to the respective complaints and marked Exhibit A. The leases of the Syracuse and the Passaic contain the following: "And that the said party of the second part (Delaware, Lackawanna & Western Railroad Company) will, during the enjoyment of the demised property and estate under this lease, pay and discharge all taxes and assessments which are or may be imposed, levied or assessed on any property hereby granted, leased or demised, or intended so to be, or on the business, or any of the business done on or with said property, or on the income or profits of the said business, or any of the business done on or with said property, or on the income or profits of the said business, or on the said party of the first part as a corporation, or on any of its rights, privileges or franchises by the United States, or any state, county, township, municipality or other authority having legal authority to impose, assess, levy and collect taxes, imposts or duties."

The lease between the Warren Railroad Company and the Delaware, Lackawanna & Western Railroad Company contains the following:

"Fifth, That they will from time to time and at all times during the continuance of this indenture, pay and discharge all taxes, assessments and impositions which shall or may be legally taxed, assessed or imposed upon the premises and property hereinbefore leased, granted and demised, or upon any part or parcel thereof whenever the same shall become due and payable."

"Tenth, That they will pay and discharge all claims now existing against the said Warren Railroad Company connecting with or relating to the construction of the said Warren Railroad or the right of way therefor, and that they will also pay and discharge all legal claims and demands which now may exist or hereafter accrue against the said railroad."

In all the leases the lessor directed that the rental be paid to its stockholders. This rental consisted in each case of a fixed percentage on the stock of each railroad accompanied by the covenants as to freedom from taxes as set forth above.

On or about January 31, 1938, the Government through the Collector of Internal Revenue duly served notices of lien and notices of levy upon the lessee, Delaware, Lackawanna & Western Railroad with respect to the aforesaid tax deficiency and interest assessed upon the income of the lessor, and also duly served notice and demand upon the lessee for the payment of the income tax in question.

The lessee has not paid the income tax, or any part thereof.

Section 3670, 26 U.S.C.A., the Internal Revenue Code, and Section 3671, gives a lien in favor of the United States upon all property and rights to property of a person liable but who has refused to pay the proper tax, and such lien arises at the time the assessment list was received by the Collector.

Section 3690, gives the Collector authority to distrain property of a person owing taxes who neglects or refuses to pay same after demand.

As I see it the Government approaches this question of liability of the lessee from two angles: First, the comprehensive one that the expressed intention of the parties to the lease was that the lessee should pay the income taxes in question. Second, that the lessee possesses property, both tangible and intangible, and which has been duly attached sufficient to pay the said income taxes.

We will briefly discuss the claims in the above order.

First: Did the lessee agree to pay these taxes? I think it did.

These leases were for all practical purposes conveyances in fee. Anderson v. Morris & Essex R. Co., 2 Cir., 216 F. 83-91.

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