Western Union Tel. Co. v. Commissioner of Int. Rev.

• Decision Date: 18 December 1933
• Docket Number: No. 44.,44.
• Citation: 68 F.2d 16
• Parties: WESTERN UNION TELEGRAPH CO. v. COMMISSIONER OF INTERNAL REVENUE. COMMISSIONER OF INTERNAL REVENUE v. WESTERN UNION TELEGRAPH CO.
• Court: U.S. Court of Appeals — Second Circuit

68 F.2d 16 (1933)

WESTERN UNION TELEGRAPH CO. v. COMMISSIONER OF INTERNAL REVENUE.

COMMISSIONER OF INTERNAL REVENUE v. WESTERN UNION TELEGRAPH CO.

No. 44.

Circuit Court of Appeals, Second Circuit.

December 18, 1933.

Francis R. Stark, of New York City (Ralph H. Kimball, Francis N. Whitney, and Robert C. Barnett, all of New York City, of counsel), for the Western Union Telegraph Co.

Pat Malloy, Asst. Atty. Gen. (Sewall Key, Norman D. Keller, and F. Edward Mitchell, Sp. Assts. to Atty. Gen., of counsel), for the Commissioner.

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

SWAN, Circuit Judge.

Purporting to act pursuant to section 280 of the Revenue Act of 1926 (26 USCA § 1069 and note), the Commissioner of Internal Revenue assessed against the Western Union Telegraph Company (hereinafter referred to as Western Union) as transferee of Gold & Stock Telegraph Company (hereinafter referred to as G. & S. Co.) and of Pacific & Atlantic Telegraph Company (hereinafter referred to as P. & A. Co.) liability in respect to income taxes of the respective transferors for the year 1926. Deficiency notices were mailed to Western Union, and it appealed to the United States Board of Tax Appeals, where the two proceedings were consolidated for hearing. The opinion is reported in 27 B. T. A. 265. The Board entered orders determining Western Union's transferee liability as $20,700.36 in respect to the G. & S. Co. tax, and $8,237.70 in respect to the P. & A. Co. tax. Both parties have petitioned for review; Western Union contending that no liability should have been found against it, the Commissioner contending that liability should have been imposed in the amounts of $40,500 and $10,800, respectively, these sums being the taxes due from the transferors on the basis of the annual rentals stipulated for under long-term leases which they had respectively given to Western Union as lessee.

The G. & S. Co. lease was executed in December, 1881. All the properties of the lessor were leased to Western Union for a term of 99 years, beginning January 1, 1882, and the lessee agreed to pay an annual rental, payable quarterly, of $300,000, being a sum equal to $6 per share on the 50,000 shares (par value $100 each) of G. & S. Co. stock. The lease contained a provision "authorizing and requesting" payments of rental to be made pro rata to stockholders of record on the books of G. & S. Co. at the date when payment was due; but, within a month after the lease was executed, Western Union indorsed on every G. & S. Co. stock certificate its "guarantee" of the quarterly payment of 1½ per cent. upon the par value of the stock represented thereby, subject to the conditions of the lease. Under the law of New York, this gave the certificate holder a direct right of action against Western Union for a proportionate share of the quarterly rent payments. Bowers v. Interborough R. T. Co., 121 Misc. 250, 201 N. Y. S. 198, affirmed 208 App. Div. 768, 202 N. Y. S. 917; Peabody v. Interborough R. T. Co., 124 Misc. 801, 209 N. Y. S. 376, affirmed 213 App. Div. 857, 209 N. Y. S. 893, affirmed 240 N. Y. 708, 148 N. E. 768; Pennsylvania Steel Co. v. N. Y. City Ry. Co., 198 F. 721, 762 (C. C. A. 2). It may be assumed that the certificates were indorsed with the lessor's knowledge and consent, in view of the relations between the two companies, and we think that thereafter the rights of the parties to the lease were the same as though it had originally contained a direct covenant by the lessee to pay the rent to the lessor's shareholders, as did the lease of the P. & A. Co. hereafter to be mentioned. Both leases are, therefore, to be considered on the same basis: the shareholders of the lessor are donee beneficiaries of the lessee's promise; they may sue Western Union for the sums agreed to be paid to them; the lessor has no right to require rent to be paid to itself, and could not by arrangement with the lessee destroy the rights of the shareholders without their consent. See cases above cited; also, N. Y. Central Securities Corp. v. United States, 54 F.(2d) 122, 126 (D. C. S. D. N. Y.); Gifford v. Corrigan, 117 N. Y. 257, 22 N. E. 756, 6 L. R. A. 610, 15 Am. St. Rep. 508; Butler v. State Mut. Life Assur. Co., 55 Hun, 296, 8 N. Y. S. 411, affirmed 125 N. Y. 769, 27 N. E. 409; N. Y. Ins. Co. v. Aitkin, 125 N. Y. 660, 26 N. E. 732; Am. L. Inst. Restatement of Contracts, § 142. It is true that both lessors reserved the right of re-entry for breach of covenant by the lessee, but, as no default had occurred, this provision does not affect the legal relations as above outlined.

During the years 1926 and 1927, 20,524 shares of G. & S. Co. stock were owned by others than Western Union, and to these shareholders it paid $123,144 in each of said years. The remaining shares were owned by Western Union itself, and no payment was made upon them, but 3,920 shares were treated as being held in a voluntary sinking fund and $23,520, being $6 per share on said 3,920 shares, was added to the $123,144 paid shareholders to make a total of $146,664, which G. & S. Co. reported, under protest, as its net income for 1926. Upon the income so returned, an income tax of $19,799.64 was assessed against G. & S. Co. In 1928 the Commissioner assessed against it a deficiency of $20,700.36, based on the inclusion in income for 1926 of the remainder of the $300,000 of rent which had not been reported in its return because Western Union made no payment on the shares it held itself. No part of the original assessment or of the deficiency has been paid, and warrants for distraint have been returned unsatisfied. For the amount of the said deficiency, $20,700.36, transferee liability has been found against Western Union.

The facts respecting liability as to the P. & A. Co. tax are similar. This company leased its properties to Western Union under a lease for 999 years beginning January 1, 1874. It stipulated for an annual rental of $80,000 to be paid in semiannual installments to the lessor's shareholders ratably and in proportion to the number of shares held by each; the total number of shares (of the par value of $25 each)...