[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 126 [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 128 In the latter decades of the nineteenth century plaintiff Western Union Telegraph Company, absorbed into its own telegraph system a number of independent telegraph companies, formerly its competitors. This absorption was accomplished through long term leasing of all the assets of its erstwhile competitors. The lawyers and businessmen who made these arrangements, and drew the leases, devised covenants to take care of such contingencies as they could foresee, but, not being prophets, they did not forecast the high income taxes of the twentieth century. When these imposts grew to important size, controversies arose as to whether, under the leases, the income tax on the rentals was an obligation of lessor or lessee. In 1944, we answered that question, as to one such Western Union lease, in Johnson v.Western Union Tel. Co. (293 N.Y. 379, 383). There we held that Western Union, by agreeing to keep that particular leased property "`clear from all incumbrances arising from tax * * * liens'" and to deliver it back at the end of the time "`as free from * * * incumbrance thereon as they were, when received'" had, without mentioning the lessor's income taxes, obligated itself to pay them. In 1926, interpreting a railroad lease in Brainard v.N.Y.C.R.R. Co. (242 N.Y. 125, 129), this court had ruled that a covenant by the lessee to "`pay all taxes and assessments which may be levied or become chargeable on the said road or property, or upon the said [lessor] Mahoning Company, by reason of its ownership thereof'" described property taxes only and had no reference to income taxes. Essentially, the question in the three cases now before us is whether the bargains as to taxes written into these three leases, are governed by the Brainard case (supra) or by the Johnson case (supra).
The Pacific and Atlantic lease was made in 1873 to run for 999 years, while the Southern and Atlantic and Empire and BayStates grants were for 99 years and were made in 1876 and 1890, respectively. In all three agreements (as in the lease in theJohnson case, supra) the annual rental was to be a stated percentage of the owner corporation's outstanding capital stock, which amounts were to be paid direct to the lessor's stockholders, ratably in proportion to their holdings of stock. In all four cases (Johnson and these three) the lessor corporation was to be preserved as a mere shell without inner substance, *Page 132 the cost of such bare existence to be paid by Western Union. None of the three agreements in our present cases included any clause like the ones we construed in the Johnson case, binding. lessee Western Union to keep the property free of tax liens and to hand it back with the title similarly unclouded.
The sole references to taxes in the three documents now before us are in an entirely different form. In the Western Union v.Pacific and Atlantic case plaintiff promised to pay the yearly accruals "without any deduction or abatement for or on account of taxes or assessments or for any other purpose whatsover" while in the other two writings (Southern and Atlantic and Empire andBay States cases) the stated obligation of Western Union was to make the annual payments "without any deduction or abatement for or on account of taxes or assessments on the aforesaid demised property". (In the Southern and Atlantic lease the covenant goes on to say: "or for any other purpose whatsoever".) Those forms of words, whatever be their precise purpose, were certainly not promises by the lessee to pay all lessors' taxes, including their income taxes. They amount to no more than assurance that each stockholder will get his share of the rent, with nothing taken out by the lessee for taxes. Inferentially, those clauses, above quoted from these three leases, call upon the lessee to pay all property taxes on the demised telegraph systems. Such covenants, as held in the Brainard case (supra) and restated in the Johnson case (supra) do not include income taxes. TheBrainard rule is still the law: "Unless the lease expressly provides for the payment of taxes on the income from rentals received under the lease, the imposition of such a burden on the lessee is not justified." (242 N.Y. at p. 132.) In the Johnson lease we found no mention of income taxes by name, but a promise to keep and return the telegraph line unspotted by tax liens, an undertaking which could not be performed unless the lessee paid the lessor's income taxes.
A careful examination of the other language in each of the three leases here under scrutiny brings to light nothing which could be treated as an engagement by the lessee to assume and pay lessors' own income taxes. No such meaning can be given to the recitals, in the preambles of the Pacific and Atlantic and *Page 133 Southern and Atlantic writings: "Whereas the interests both of stockholders and of the public demand unity of action to the end that said stockholders may receive a proper return from their investment". Nor are defendants in the Empire and Bay States case helped by the fact that Western Union agreed to, and did, indorse on each Empire and Bay States stock certificate a guarantee of the quarterly payment of 1% on the par value of the stock "subject to the terms and provisions of the lease".
Special Term, while deciding the present cases in favor of defendants, came to the same conclusion as we do herein, as to the meaning of the several references to taxes in the three leases. The tax clauses here, held Special Term, were not sufficient, as the tax covenant was in the Johnson case (supra), to transfer the income tax obligation. But, said Special Term in these cases, this court in the Johnson case gave a separate and independent reason for construing theJohnson lease as requiring Western Union to pay its lessor's income taxes. In the Johnson case, according to the Special Term opinions in the present litigations, this court found Western Union's liability for the income taxes not only in the specific language as to taxes, but also in "the general plan of the contract." So, reasoned Special Term, while there is no "Johnson case" tax lien covenant in the three cases now before us, the "general plan" of these three grants is the same as the "general plan" of the Johnson contract, and the result therefore must be the same.
That was not the meaning of our opinion in Johnson v.Western Union Tel. Co. (supra). The majority opinion in that case grounded the income tax liability flatly on the clauses as to tax liens. We looked at and wrote about the "general plan of the contract" in the Johnson case only to show that the plain meaning of the tax clauses therein was not altered or affected by anything in the lease's "general plan". The Brainard case's holding (supra), not overruled but reaffirmed in the Johnson case, was that such lessors must pay their own income taxes unless there be found forthright language whereby the lessee assumes that obligation. Such language was in the Johnson case lease. It is not in any of the three leases now before us. *Page 134
Besides asking for a declaratory judgment that it need not pay these taxes in addition to the agreed rents — a declaration to which we hold it entitled — plaintiff demands a decree that it may, nevertheless, deduct lessor's income taxes, ratably, from the rental payments to lessor's stockholders, and pay them into the Federal Treasury, for the lessor's account. The reason plaintiff seeks this relief is that plaintiff is itself a substantial stockholder in each of the lessor corporations, and fears that it, as such stockholder, may in the end be compelled by the Treasury, to pay lessor's income taxes, or part of them, under a "transferee" theory (see Commissioner of InternalRevenue v. Western Union Tel. Co., 141 F.2d 774, certiorari denied 322 U.S. 751). Whether or not some such arrangement is to be ordered made, and what formula, if any, is to be used, is for Special Term to decide and the cases must be sent back for that purpose. On such retrial Special Term will pass also on plaintiff's prayer for an injunction.
It appears that in some past years Western Union has paid its lessors' income taxes, sometimes under stipulations that such payments should be regarded as advances by the lessee to the lessor. The courts below, responsive to a counterclaim, ordered those loan agreements cancelled. We hold those agreements valid. Since, as we conclude, Western Union was not bound as lessee to make any income tax payments, for the lessors, such payments could not amount to a "practical construction" of the lease, against the lessee (see Brainard case, supra, 242 N.Y. at p. 133).
In each case the judgments should be reversed, with costs to the appellant in all courts, and each case remitted to the Special Term for further proceedings not inconsistent with this opinion.
LOUGHRAN, Ch. J., LEWIS, CONWAY, FULD and DYE, JJ., concur; THACHER, J., taking no part.
Judgment accordingly. *Page 135