Brief for the Respondents in Opposition — Western Union Telegraph Co. v. Commissioner

INDEX

Page

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Question presented . - -..----------------------5 07000700" 2

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CITATIONS

Cases:

Phillips v. Commissioner, 283 S660: =. 2-5 n5.neeoss- 8

United States v. Joliet & Chicago R. Co., 315 U.S. 44..--- 7

United States v. Morris & Essex R. Co., 135 F. 2d 711,certi-

orari denied, 320 U. 8. 754- ---- - - - -----------------7- 9

United States v. Pelzer, 312 U. 8. 399. ------------------ 9

Statutes:

Revenue Act of 1928, ¢. 852, 45 Stat. 791, Sec. 311__---- 2,8,9

Revenue Act of 1932, c. 209, 47 Stat. 169, Sec. 311_----- 3, 8,9

(1)

587464—44

Ee Re

Ynthe Supreme Court of the United States

OctToBeR TERM, 1943

No. 933

THE WESTERN UNION TELEGRAPH COMPANY,

PETITIONER

V..

CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the United States Board of

Tax Appeals (R. 160-164) is not officially re-

ported. The opinion of the Circuit Court of

Appeals (R. 457-465) is not yet reported.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on April 12, 1944 (R. 466). The

petition for a writ of certiorari was filed April

26, 1944. The jurisdiction of this Court is

invoked under Section 240 (a) of the J udicial

Code, as amended by the Act of February 13, 1925.

(1)

QUESTION PRESENTED

The respective taxpayers executed long-term

contracts leasing all of their properties to the

petitioner in consideration of stipulated rentals

to be paid by the lessee quarterly or semian-

nually directly to the lessors’ stockholders of rec-

ord as dividends upon their shares of stock. In

addition to being lessee, petitioner was a ma-

jority or substantial stockholder of each of the

lessors. The taxpayers have not paid the income

taxes due in respect of their rental incomes and

have no properties upon which levies may be

made, the leased properties having been so inter-

mingled with properties of petitioner that segre-

gation is impossible. The question is whether

petitioner is liable as transferee for the unpaid .

taxes under Section 311 (a) (1) of the Revenue

Acts of 1928 and 1932 by reason of the rental

dividends received by it as stockholder of the

respective lessors.

STATUTES INVOLVED

Revenue Act of 1928, ¢. 852, 45 Stat. 791:

Sec. 311. TRANSFERRED ASSETS.

(a) Method of collection—The amounts

of the following liabilities shall, except as

hereinafter in this section provided, be as-

sessed, collected,~and paid in the same

manner and subject to the same -provisions

and limitations as in the case of a deficiency

in a tax imposed by this title (including the

provisions in case of delinquency in pay-

ment after notice and demand, the provi-

sions authorizing distraint and proceed-

ings in court for collection, and the

provisions prohibiting claims and suits for

refunds) :

(1) Transferees.—The liability, at law or

in equity, of a transferee of property of a

taxpayer, in respect of the tax (including

interest, additional amounts, and additions

to the tax provided by law) imposed upon

the taxpayer by this title.

* * * * *

Any such liability may be either as to the

amount of tax shown on the return or as

to any deficiency in tax.

* * * * *

(f) Definition of ‘““transferee.’’—As used

in this section, the term ‘‘transferee’’ in-

cludes heir, legatee, devisee, and distributee.

Section 311 of the Revenue Act of 1932, ¢. 209,

47 Stat. 169, is identical.

STATEMENT

The Commissioner of Internal Revenue deter-

mined that petitioner was liable as transferee

under Section 311 of the Revenue Acts of 1928

and 1932 for unpaid income taxes due and owing

for 1931, 1932, and 1933 from six corporations of

which it was a stockholder. (R. 23-25, 180.)’

In the interest of brevity, record references are limited

herein to the evidence and proceedings relating to the Gold

LORRI I PORN TS LIE RRL MEAT RY APNE RONN ae AIRRY ee

4

The taxes which the Commissioner has thus

assessed against the petitioner are the >. See

(R. 24-25, 161):

Taxpayer 1931 1932 1933

Gold & Stock Telegraph Co_-......-....---------- $36, 000 $41, 250. 00 $41, 250. 00

Pacific & Atlantic Telegraph Co...........-...-.-- 9, 600 11, 000. 00 11, 000. 00

New York Mutual Telegraph Co--........------- 18, 000 20, 625. 00 20, 625. 00

Franklin Telegraph Co--....--..----.-.---------- 2, 640 3, 437. 50 3, 437. 50

Southern and Atlantic Telegraph Co............-|------------ 6, 531. 25 6, 531. 25

Empire and Bay States Telegraph Co.!......-.--- 776 776. 00 776. 00

1 The amount of the taxes of the Empire and Bay States Telegraph Company sought to be

collected from petitioner has been limited to the dividends received for the respective years

. from this corporation, the taxpayer’s liability for each year having exceeded petitioner's

dividends on the shares of stock owned by it in the lessor company (R. 143-146, 424, 426),

The amount of petitioner’s annual dividends exceeded the liabilities of the respective tax

payers in ihe companion cases.

The foregoing taxes were assessed and war-

rants of distraint issued against the respective

lessor corporations but no part thereof was col-

lected (R. 180). Thereupon the deficiencies listed

above were asserted against petitioner as trans-

feree (R. 180). The Commissioner’s determina-

tion that petitioner was liable as transferee was

based upon its receipt of dividends upon the

stock which it owned in the taxpayer corpora-

tions (R. 173-174). It is conceded that the tax-

payers primarily liable have no property or funds

with which to satify their own obligations (R.

173-174).

The following schedule shows in the case of

each taxpayer the amount of its outstanding

and Stock Telegraph Company, unless differences or pecu-

liarities make references to the companion proceedings

desirable.

| ,

5

capital stock, the number of shares owned by

petitioner and the annual dividends allocable

to those shares (R. 172, 177, 263, 269, 300, 309,

346-347, 353, 380-381, 387, 418, 419, 424).

Total shares of tax- Annual divi-

payer outstanding Shares | dends allo-

Taxpayer owned by] cable to

petitioner} petitioner’s

No. Par value shares

Gold & Stock Telegraph Co.........-------] 50,000 | $5,000, 000 20,476 | 1 $176, 856.00

Pacific and Atlantic Telegraph Co. ......-- 80,000 | 2,000,000 | 58,877 58, 877.00

New York Mutual Telegraph Co-......--- 100,000 | 2, 500,000 96, 372 144, 558. 00

Franklin Telegraph Co-.--.....-.-.--------- 9, 961 996, 100 6, 320 15, 800. 00

Southern and Atlantic Telegraph Co-.....- 37, 962 949, 050 15, 639 19, 548. 75

Empire and Bay States Telegraph Co-...-. 3, 000 300, 000 194 776.00

| The amount of the annual dividends upon Western Union’s stock in the Gold and Stock

Telegraph Company amounted to $153,336 for the year 1931 and to $176,856 for 1932 and 1933

(R. 177).

The earliest lease involved was that of the

Pacific and Atlantic Company, which was ex-

ecuted in 1873 for a period of 999 years (R. 282-

286) ; and the latest lease was that of the Empire

and Bay States Telegraph Company, executed in

1890 for a period of 99 years (R. 436-441). The

other leases were for periods of either 99 years

or 999 years (R. 189-196, 320-326, 364-367, 400-

407). The respective instruments provided that

in consideration of the lease of the properties, the

lessee was to pay an amount equivalent to a speci-

fied percentage on the capital stock of the lessor

corporations, and that these payments should

be made directly to the stockholders of the lessors

in proportion to their stock holdings as shown

by the books at the time the payments were due

(R. 191). In some instances the rental dividends

6

were payable quarterly (R. 191, 438), and in other

instances semiannually (R. 283, 322, 365, 403).

Since petitioner was both lessee and a_ stock-

holder of the lessors, the payment of the rentals

and collection of its share of the dividends was

handled in the following manner: the total

rental was charged upon the books as an ex-

pense to a rental account (R. 177). The portion

of the total payable to stockholders other than

petitioner was deposited in a special account,

upon which dividend checks were drawn payable

directly to each of the stockholders (R. 177).

The portion belonging to petitioner by reason of

the shares of stock owned by it in each of the

lessor corporations was credited to its dividend

income account (R. 177).

The properties leased to petitioner have been

so intermingled with its own properties that seg-

regation is admittedly impossible (R. 173, 263-

264, 301, 347, 382, 420). The payment of divi-

dends upon the stock of the lessor companies was

guaranteed by petitioner and this was evidenced

in some instances by endorsements on each certifi-

eate (R. 173).

The United States Board of Tax Appeals stated

that it felt constrained to follow certain decisions

of the Second Circuit which it cited and held ac-

cordingly that petitioner was not liable as trans-

feree, sustaining petitioner’s contention here, in-

dicating that its own opinion was otherwise (R.

161-164). The Second Circuit, overruling its own

7

earlier decisions followed by the Board, agreed

with that tribunal and thy Commissioner that

petitioner was liable (R. 457-464). As to taxes

owed by two of the lessor companies, however, the

court affirmed the decision of the Board because

of prior decisions of the court that petitsoner was

not liable for taxes owed by the same companies

in earlier years, which rendered the issues as to

liability for taxes upon the incomes of those com-

panies res judicata (R. 464-465).

ARGUMENT

The taxpayer lessors leased all of their prop-

erties to petitioner for terms of 99 years or 999

years. Petitioner agreed to pay rent in the form

of dividends directly to the lessors’ stockholders

of record as their interests should appear at the

dates the rental dividends became payable. The

properties leased have been so intermingled with

the properties of petitioner that segregation is

admittedly impossible and the taxpayers have no

other assets upon which levies may be made to

effect collection of the income taxes due from the

taxpayers in respect of the rentals thus paid.

That such rentals constituted income taxable to

the lessors is settled (United States v. Joliet &

Chicago R. Co., 315 U. 8. 44). Under these cir-

cumstances the Commissioner’s determination to

pursue the dividend distributions into the hands

of petitioner, the majority stockholder of four of

the taxpayers and a substantial stockholder of

8

the other two, was proper under the provisions of

Section 311 of the Revenue Ac«s of 1928 and 1932

(Phillips v. Commissioner, 283 U. 8. 589). The

decision below holding petitioner liable as trans-

feree is correct and there is no occasion for

further review.

In effect the taxpayers declared dividends in

the amount of their entire incomes and petitioner

urges that by such action a corporation can create

rights in its stockholders superior to the tax

claims of the Government. This view has been

correctly rejected by the court below, overruling

its own earlier decisions to the contrary. It is

strenuously urged, however, that the decision be-

low construing and applying the federal revenue

statute encroaches upon and is in conflict with the

general rule that property rights must be deter-

mined under local law. (Pet. Br. 12-15.)

There is no conflict. The federal law grants

to the Government certain rights in the case of

transferred assets as an aid in tax collections, but

this does not preclude the operation of state law

in the event of any controversy concerning the

property rights of the parties interested in the

leases. We are not concerned here with any con-

flict of interest between the lessor and the lessee or

the stockholders of the lessor, and we are not con-

tending that the transfers by the lessors of their

properties to the lessee were invalid. It is be-

cause the conveyances to the lessee were valid

9

that it is now necessary to collect the lessors’

annual income taxes from the instant distributee,

which, together with other stockholders, has been

siphoning off the rental incomes of the lessors

before they reached the tills of these companies.

We think it clear that distributions of dividends

by a corporation without any provision for the

payment of annual income taxes make the re-

cipients distributees within the meaning of Sec-

tion 311 (f) of the federal statutes, and it matters

not whether the distributions were authorized by

the directors before or after they knew of the

incidence of such taxes. However, if there were

any inconsistency between the federal and local

law, it is settled that federal revenue statutes are

to be construed in the light of their general pur-

pose to establish a nation-wide scheme of taxation

uniform in their application, and not subject to

state limitation unless the language of the statute,

or its necessary implication, makes its application

dependent on state law (United States v. Pelzer,

312 U.S. 399).

The fact that the Government may have an

alternative remedy through applications for in-

junctions (United States v. Morris & Essex R.

Co., 1385 F. 2d 711 (C. C. A. 2d), certiorari denied,

320 U.S. 754) does not indicate that the statutory

remedy invoked here is improper.

We are here concerned only with the simple

fact that annual transfers were made to the stock-

10

holders of the full amounts of the taxpayers’ in-

omes without provision for the sovereign’s taxes.

[his is the conventional situation in which a

transferee liability arises.

CONCLUSION

| The petition for a writ of certiorari should be!

denied.

Respectfully submitted.

CHARLES FAHY,

Solicitor General.

SAMUEL O. CuLaRK, Jr.,

Assistant Attorney General.

SEWALL KEY,

J. Louis MonaRCH,

Pau. R. RUSSELL,

Special Assistants to the Attorney General.

May 1944.

U. S. GOVERNMENT PRINTING OFFICE: 1944