# Brief for the Respondents in Opposition — Western Union Telegraph Co. v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA34806415_2080%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for the Respondents in Opposition - **Published:** January 1, 1944 - **Citation:** 322 U.S. 751 ## Text INDEX Page Opinions below......----------------. 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA34806415_2080%3A2. Public record. Not legal advice.