Opinion
Docket Nos. 102344 102725.
1951-04-18
ESTATE OF IRVING SMITH, DECEASED, TRANSFEREE, IRVING SMITH, JR., AND THE STAMFORD TRUST COMPANY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Irving Smith, Jr., Esq., for the petitioners. Walt Mandry, Esq., for the respondent.
Irving Smith, Jr., Esq., for the petitioners. Walt Mandry, Esq., for the respondent.
Where the petitioners as executors of a decedent's estate permitted title to corporate stock to remain in their names as executors and in 1930 received, administered, and distributed the rental-dividends therefrom as executors of the decedent's estate rather than as trustees, held that the Commissioner did not err in determining that the petitioners as executors were liable as transferees for the unpaid income taxes of the corporation for 1930 under the provisions of section 311 of the Revenue Act of 1928.
The respondent has determined that the petitioners are liable as transferees for the unpaid income taxes of the Southern and Atlantic Telegraph Company and the Empire and Bay States Telegraph Company for the year 1930 in the amounts of $637.50 and $112, respectively.
The principal issue is whether the Commissioner has established the insolvency of the Southern and Atlantic Telegraph Company and the Empire and Bay States Telegraph Company and has shown that he has exhausted all reasonable remedies available to him for the collection of the unpaid tax from those companies before proceeding against the petitioners herein as transferees.
The second issue is whether the petitioners during 1930 held certain shares of stock in Southern and Atlantic Telegraph Company and Empire and Bay States Telegraph Company and received distributions of rental-dividends merely as nominees for other persons and, therefore, are not liable as transferees under section 311 of the Revenue Act of 1928.
FINDINGS OF FACT.
The petitioners, Irving Smith, Jr., and The Stamford Trust Company, are the executors of the Estate of Irving Smith.
The Southern and Atlantic Telegraph Company, hereinafter referred to as Southern and Atlantic, and the Empire and Bay States Telegraph Company, hereinafter referred to as Empire and Bay States, are New York corporations whose principal offices are and were at all times material to the issues herein located at 60 Hudson Street, New York, N.Y. Southern and Atlantic prior to July 10, 1876, and Empire and Bay States prior to March 1, 1890, were engaged in the business of transmitting messages by telegraph. The capital stock of Southern and Atlantic consists of 37,962 shares of common stock of the par value of $25 per share, and the capital stock of Empire and Bay States consists of 3,000 shares of common stock of the par value of $100 per share.
The Western Union Telegraph Company, hereinafter referred to as Western Union, is a New York corporation whose principal office is and was at all times material to the issues herein located at 60 Hudson Street, New York, N.Y.
On July 10, 1876, Southern and Atlantic leased its telegraph system and all of its other property to Western Union for a term of 92 years and thereafter for such further term as would make a full term of 999 years for the following consideration:
FOURTH. And in consideration of the premises the said party of the second part hereby covenants and agrees for itself its successors and assigns to pay to the said party of the first part during each and every year of the term herein created a rental equal to five per centum on the par value of so much of the Capital Stock of the party of the first part now outstanding and also of so much more thereof as the existing contracts and the actual and contingent liabilities of the party of the first part may require it to issue provided however that such sum so to be paid as the annual rental to the party of the first part shall not exceed five per centum on nine hundred and fifty thousand dollars capital stock; said payment to be made semi-annually at the office of the Treasurer of the WESTERN UNION TELEGRAPH COMPANY in the City of New York on the first days of April and October during the full term of this lease.
FIFTH. And it is further agreed that the party of the second part in lieu of making payment to the party of the first part through its Treasurer or other officer shall, except as hereinafter otherwise provided in sections fourteen and fifteen pay the rental herein reserved to the several stockholders of the party of the first part ratably and in proportion to the number of shares of stock held by each Stockholder respectively. Provided however, that payment to the several stockholders as aforesaid shall not affect or impair the right of the party of the first part to bring suit in its own name for any default by the said party of the second part in making any payment at the time specified in this agreement.
On February 28, 1890, Empire and Bay States leased its telegraph system and all of its other property to Western Union for a term of 99 years from March 1, 1890, for the following consideration:
SECOND. * * * the Lessee hereby covenants and agrees for itself the successors and assigns, to pay to the Lessor, or its successor Company, if one be organized, the annual rental or sum of twelve thousand dollars ($12,000.00) in equal quarterly installments of three thousand dollars ($3,000.00) the first payment to be made on the first day of December 1890 for the quarter ending November 30th, 1890, * * * .
If the Lessor shall retire its outstanding bonds and stock and form a new Company with a capital stock of $300,000.00 without any bonds or other liens or indebtedness, or shall reduce its outstanding stock and bonds to a capital of $300,000.00 in stock, without any bonds or other liens or indebtedness the Lessees will, at the request of the majority of the Stockholders of the Lessor, or of its successor Company, endorse in proper terms on the certificates of stock of the Lessor or of its successor Company and each of said certificates respectively a covenant to pay directly to said Stockholders pro rata, the said sum of twelve thousand dollars ($12,000.00) aforesaid; subject to the terms and conditions of t is agreement.
Prior to 1930, Western Union, as lessee, endorsed on the outstanding stock certificates of Empire and Bay States its covenant to pay the annual rental of $12,000 directly to the stockholders of Empire and Bay States.
After the effective dates of the aforementioned leases, Western Union took complete possession of the properties of Southern and Atlantic and Empire and Bay States covered by the leases and the latter companies ave at no time since then had possession of or operated their telegraph systems. The leased properties have been so intermingled with the properties of Western Union that they are not now subject to identification or segregation.
Since the leasing of their physical properties to Western Union, Southern and Atlantic and Empire and Bay States have had neither office space, books, records, nor bank accounts and the leased properties are reflected in the property accounts of Western Union without segregation from the other properties it operates. Western Union has in all years, including 1930, distributed the annual rental of $47,500 to the stockholders of Southern and Atlantic and the annual rental of $12,000 to the stockholders of Empire and Bay States in accordance with the terms of the lease agreements.
The $47,500 received by the stockholders of Southern and Atlantic in the year 1930 constituted taxable income to Southern and Atlantic and that company was liable for Federal income tax for the year 1930 in the amount of $5,700.
The $12,000 received by the stockholders of Empire and Bay States in the year 1930 constituted taxable income to Empire and Bay States and t at company was liable for Federal income tax for 1930 in the amount of $1,080.
The Commissioner assessed a deficiency in income tax for 1930 against Southern and Atlantic in the amount of $5,700, consisting of original tax of $3,347.55 and additional tax of $2,352.45. The collector of internal revenue for the second district of New York served notice and demand upon Southern and Atlantic for payment of the original tax of $3,347.55 on September 11, 1931, and for the payment of the additional tax of $2,352.45 on March 2, 1939, but Southern and Atlantic has paid no part of the tax. A warrant of distraint was issued by the collector with respect to the original tax of $3,347.55 on May 5, 1932, which was returned unsatisfied. No warrant of distraint was issued with respect to the additional tax of $2,352.45. Western Union, as a transferee, ad paid $2,345.85, and other persons, as transferees, have paid $368.99 of the total tax of $5,700, presently leaving an unpaid tax liability of Southern and Atlantic for 1930 in the amount of $2,985.16
The Commissioner assessed a deficiency in income tax for 1930 against Empire and Bay States in the amount of $1,080, consisting of original tax of $986.88 and additional tax of $93.12. The collector of internal revenue for the second district of New York served notice and demand upon Empire and Bay States for payment of the original tax of $986.88 on August 11, 1931, and for payment of the additional tax of $93.12 on March 2, 1939, but Empire and Bay States paid no part of the tax. A warrant of distraint was issued by the Collector with respect to the original tax of $986.88 on May 5, 1932, which was returned unsatisfied. No warrant of distraint was issued with respect to the additional tax of $93.12. Of the $1,080 constituting the income tax liability of Empire and Bay States for 1930, the sum of $511.96 remains unpaid, payments of $568.u4 having been made by Western Union and other persons as transferees.
Irving Smith, deceased, named The Stamford Trust Company and Irving Smith, Jr., as executors of his will and provided there that:
SIXTH: I give and bequeath to my executors hereinafter named the sum of two hundred thousand (200,000) dollars either in money or in securities of the value of said amount to be selected by them from any investments comprising my estate at the time of my decease, or partly in money and partly in such securities, as my executors shall determine, IN TRUST NEVERTHELESS, to and for the following uses and purposes, to wit:— to hold, manage, invest and reinvest the same and to keep the same invested, and to collect the income thereof to pay the sum of ten thousand (10,000) dollars annually, as nearly as conveniently may be in equal monthly payments, to my former wife, Harriet Mary Smith, during her life, and if in any year the net income of said fund shall not equal said sum, then to pay any deficiency from the accumulated surplus income of former years, and if such accumulations shall be insufficient then to make up the deficiency from the principal fund of said trust; * * * .
On June 1, 1922, The Stamford Trust Company and Irving Smith, Jr., as executors, filed an account of their administration of the Estate of Irving Smith with the Probate Court for the District of Stamford, which recited that 510 shares of Southern and Atlantic common stock and 28 shares of Empire and Bay States common stock had been transferred to the fund set up under Article ‘SIXTH‘ of the decedent's will to produce an annuity of $10,000 for Harriet M. Smith during her life.
On March 25, 1931, The Stamford Trust Company and Irving Smith, Jr., as ‘executors of the will of said decedent,‘ filed with the Probate Court ‘an account of their administration of the trust under t e sixth article of said will for the benefit of Harriet M. Smith, from January 1, 1930 to and including December 31, 1931,‘ showing 510 shares of Southern and Atlantic common stock and 28 shares of Empire and Bay States common stock as included in the ‘Estate on hand December 31, 1930.‘
During the year 1930, the petitioners, as executors of the Estate of Irving Smith, were the registered holders of 510 shares of Southern and Atlantic common stock and 28 shares of Empire and Bay States common stock and by reason thereof received in that year rental-dividends from Western Union in the amounts of $637.50 and $112, respectively.
A notice of transferee liability in the amount of $112 for the unpaid income taxes of Empire and Bay States for 1930 was issued by the Commissioner in the name of ‘Estate of Irving Smith, Deceased, Transferee, The Stamford Trust Company and Irving Smith, Jr., Executors‘ on February 9, 1940. A notice of transferee liability identically addressed was issued by the Commissioner in the amount of $637.50 for the unpaid income taxes of Southern and Atlantic for 1930 on February 21, 1940.
The present proceedings were instituted by the petitioners in petitioners filed with the Board of Tax Appeals on April 27, 1940, and May 18, 1940.
On or about February 27, 1950, the United States, at the request of the Commissioner, commenced civil actions against Western Union and Southern and Atlantic and Western Union and Empire and Bay States in the United States District Court for the Southern District of New York for income tax and interest due from Southern and Atlantic and Empire and Bay States for the years 1931 to 1939, inclusive, and praying that a decree be entered enjoining Western Union from paying rental-dividends to t e stockholders of Southern and Atlantic and Empire and Bay States until the income taxes due to the Government and the interest thereon have been satisfied in full. On or about March 10, 1950, preliminary injunctions to this effect were issued by the District Court.
The petitioners herein, The Stamford Trust Company and Irving Smith, Jr., executors of the Estate of Irving Smith, are liable transferees for the unpaid income taxes of Southern and Atlantic and Empire and Bay States for 1930 in the amounts of $637.50 and $112, respectively.
OPINION.
ARUNDELL, Judge.
We find no need to enter upon a discussion of the petitioners' contentions that the Commissioner has failed to establish the insolvency of Southern and Atlantic and Empire and Bay States and has not exhausted all reasonable legal remedies for the collection of the tax from those companies before proceeding against the petitioners as transferees for these same questions were considered and decided adversely to the petitioners in Samuel Wilcox, 16 T.C. 572.
However, the petitioners have advanced a secondary defense to transferee liability. Petitioners point out that the decedent under Article Sixth of his will bequeathed the sum of $200,000 in money or securities to his executors, ‘IN TRUST NEVERTHELESS,‘ for the benefit of Harriet M. Smith for her life. Petitioners maintain that apart from their status as executors of the decedent's estate they were also in fact and in law trustees of the fund established under Article Sixth for the benefit of Harriet M. Smith. They point out that the 510 shares of Southern and Atlantic stock and 28 shares of Empire and Bay States stock were placed in such fund at the time of the accounting filed on June 1, 1922, and remained therein through and including the year 1930. Therefore, petitioners argue that the rental-dividends paid in respect to this stock in 1930 inured to the benefit of the fund or ‘trust, established under Article Sixth and its beneficiary and not to the benefit of decedent's estate in any degree. Petitioners conclude t at the estate after June 1, 1922, held the stock as a mere ‘nominee‘ for the ‘trust‘ and received and passed on the rental-dividends as a mere ‘conduit.‘
We cannot accept petitioners' contention that the respondent erred in issuing the notice of transferee liability in the name of the petitioners as executors of the estate of Irving Smith rather than as trustees of the fund established under the will.
The Commissioner has been concerned with collecting the unpaid income taxes for 1930 due from Southern and Atlantic and Empire and Bay States and has been obliged to undertake transferee proceedings against the stockholders of those companies who received distributions of rental-dividends from Western Union in that year. Therefore, the Commissioner issued a notice of transferee liability to the petitioners who as fiduciaries in 1930 actually received, administered, and distributed such rental-dividends. Respondent chose the proper persons to proceed against, and the facts and circumstances in the instant case show that the respondent was justified in designating the petitioners as executors as he did.
The first claim made by the petitioners that they received the distribution of rental-dividends in 1930 as trustees rather than as executors was made at the hearing of this cause on March 21, 1950, approximately 10 years after they, as executors, had filed the petition herein. Petitioners have at all times permitted the stock of Southern and Atlantic and Empire and Bay States to remain registered in their names as executors and by reason of this fact it was under that designation that the rental-dividends were paid to them in 1930. Petitioners had never been discharged as the executors of the decendent's estate and in their accounting filed with the Probate Court in 1930, described themselves as executors and the ‘fund‘ or ‘trust‘ under Article Sixth of the will as a part of the estate of Irving Smith.
Petitioners, having received the rental-dividends in their fiduciary capacity, were the proper parties for the respondent to proceed against, and we do not think that they can at this late date in good faith contend that the respondent erred in designating them in the notice of transferee liability in the manner he did. The petitioners, as far as we can learn, have never seen fit to make any clear distinction between the estate and the ‘trust‘ or their duties as executors of the estate and those imposed under Article Sixth of the will. Nor have the petitioners been misled or handicapped in the prosecution of this cause by reason of the Commissioner's designation of them as ‘executors.‘
The comments of the Court of Appeals for the Ninth Circuit in Burnet v. San Joaquin Fruit & Investment Co., 52 F.2d 123, citing Casey v. Galli, 94 U.S. 673, are applicable here. In that case it was stated:
Parties must take the consequences of the position they assume. They are estopped to deny the reality of the state of things which they have made appear to exist, and upon which others have been led to rely. Sound ethics require that the apparent, in its effects and consequences, should be as if it were real, and the law properly so regards it.
The petitioners have of their own volition held title to the Southern and Atlantic and Empire and Bay States stock and have received and administered the dividends therefrom as executors and in the name of the estate for a period in excess of 28 years. We do not think that they can now avoid their liability as transferees by claiming that they are trustees rather than executors and that the Commissioner has determined the transferee liability in issue against the wrong parties.
Therefore, we hold that the petitioners, The Stamford Trust Company, and Irving Smith, Jr., executors of the Estate of Irving Smith, are liable as transferees under section 311 of the Revenue Act of 1928 for the unpaid income taxes of Southern and Atlantic and Emp.re and Bay States for 1930 in the amounts of $637.50 and $112, respectively.
Decisions will be entered for the respondent.