This is a stockholder's derivative action in which it is sought to so construe a contract made more than 60 years ago that the lessee thereunder may be directed to assume and pay the Federal income taxes of the lessor upon the rent received by it. There is no mention of Federal taxes in the lease and no one came forward to testify that it was the intention of the contracting parties that such taxes should be paid by the lessee. The plaintiff, however, in pleadings and proof went beyond the terms of the contract in an attempt to establish factually such intention. He pleaded and proved a guarantee by the Western Union Telegraph Company (hereinafter referred to as W.U.) to the stockholders of Gold and Stock Telegraph Company (hereinafter referred to as G. S.) to pay quarterly 1 1/2% upon the par value of the stock represented by the certificates, which guarantee was not provided for in the contract of lease. The plaintiff also showed by the minutes of the annual meeting of G. S. on October 12, 1881 (two months before the contract of lease was executed) the capital stock, bonded indebtedness, net profits for the preceding year, the dividends and interest paid, the amount paid for construction of lines and purchase of patents and the amount and manner of the investment of surplus for the year.
G. S. then proved the care with which the contract of lease had been negotiated. There had been a committee of three from W.U. and one from G. . S. Originally W.U. had sought a lease in perpetuity of all the property and possessions of G. S. at an annual rental of 6% upon the outstanding stock of $5,000,000. That apparently was changed at the first meeting of the two committees to an offer to lease at a rental of "6% per annum payable quarterly, guaranteed, for the term of 99 years" upon the capital stock. That offer was rejected but the door left open for further negotiations and attention called to the dividend-paying assets of G. S. Thereafter W.U. made a new offer in these words: "Lease at 6 per cent. For 99 years with option of Western Union Telegraph Company *Page 389 to terminate at end of 15 years — Gold Stock to pay all liabilities and be entitled to divide all cash assets accruing as earned and on sale and transfer of telephones and royalties thereon to January 1st, 1882. Stock assets and franchises all to be turned over." Later W.U. added a provision that the G. S. treasury stock, amounting to par value of $105,600, be distributed to G. S. stockholders as part of the cash assets.
Thereafter at a meeting of the board of directors of G. S. the modified offer of W.U. was spread upon the minutes as we have just set it out and accepted on condition that W.U. eliminate the provision for termination of the agreement at the end of 15 years at the option of W.U. and provided W.U. assumed the payment of the outstanding bonded debt of G. S. amounting to $434,700 with interest from January 1, 1882. Those modifications were accepted by W.U. and a contract in conformity drawn, ratified and executed on December 14, 1881. Two weeks later on December 27, 1881, the minutes of the board of directors of G. S. show that W.U. was requested to indorse the obligation for the rental on the stock certificates of G. S. and that was later done.
On that proof it was clear to the point of demonstration that no one on either committee and none of the counsel drafting the contract mentioned or had in mind Federal income taxes. The contract followed the lines of the negotiations and so clear is it that there was no intention of the parties which was undisclosed by the words of the agreement and that there was no mistake made therein, that plaintiff has here sought no reformation of it.
On that state of the record as to what was in the minds of the parties, this court may not reverse the construction of the contract by the trial court and the Appellate Division unless we can say that no reasonable man could adopt it.
The contract is simple in its provisions. There was leased to W.U. the telegraph lines and business of G. S. including franchises, easements, stock in other telegraph and telephone companies, inventions and patents with possession thereof from January 1, 1882, for 99 years with "full right and authority to use, operate and enjoy the same and all and every part thereof as fully as the G. S.T. Co. might have done had this Agreement not been executed; * * *." G. S. covenanted *Page 390 and agreed that the property leased and conveyed was "free from all debts or encumbrance (except its bonded debt as hereinafter mentioned)." W.U. agreed to pay as rental "for said lines, business and other property hereby leased, a sum equal to six (6) per centum per annum on said capital stock of Five millions of dollars ($5,000,000) to wit, the sum of Three hundred thousand dollars during each and every year of the term of this agreement; payments thereof to be made in equal quarterly installments * * *; the G. S.T. Co. hereby authorizing and requesting the W.U.T. Co. to make the said quarterly payments of rental during the term of this agreement; so fast as the same shall accrue and become payable; by distribution pro rata among the several stockholders of the G. S.T. Co., as they may appear upon the books of the G. S.T. Co., at the date of payment; theG. S.T. Co., hereby agreeing to accept such distribution among its said stockholders as full payment by the W.U.T. Co., * * * And the W.U.T. Co. further agrees to pay to the G. S.T. Co., as an addition to the said rental, the further sum of Two thousand five hundred dollars ($2,500) per annum, during the term hereof, the same to be used by the officers of the G. S.T. Co. as and for an administration fund for the purpose of defraying the necessary expenses of maintaining the organization of the G. S.T. Co. as a corporation, and the payment of the same to be made in such manner and at such times as the officers of the G. S.T. Co. may desire."
G. S. had the option of terminating the agreement and resuming possession of the lines, business and property on default but W.U. remained liable nevertheless upon all of its covenants including the payment of rent. It was further covenanted and agreed that, upon any such surrender and restoration to G. S., the lines and property should be in as good condition as when received by W.U. "and as free from bondeddebt or other encumbrance".
Then we come to the Sixth paragraph which is the one construed by the trial court after the taking of the testimony to which reference has been made: "Sixth: The W.U.T. Co. will also assume and pay all taxes and assessments which may be lawfully imposed upon said property of the G. S.T. Co., or *Page 391 any part thereof, by any state or municipal authorities during the continuance hereof, and also all costs and expenses incurred in the operation and maintenance of the lines and business of the G. S.T. Co., and will keep the same clear from all incumbrances arising from tax, assessment or judgment liens or from any act of the W.U.T. Co. during the term hereof, and will also institute and maintain such proceedings if any, as may be necessary to protect and preserve said property and any franchises of the G. S.T. Co."
It is apparent that this was a one sentence paragraph in which the parties had in mind the payment of taxes and assessments imposed by State or municipal authorities. A break-down of the sentence into parts, only confirms that fact. It will aid us in that break-down if we remember that this is not an action upon a guarantee to an individual stockholder by W.U., for the contract said nothing about any guarantee. Such an action would not be a derivative one but by an individual stockholder and subject to defenses as to him. We may not construe paragraph "Sixth" in one fashion because there was a guarantee not mentioned in the contract and yet indicate that we would not so construe it had there been no guarantee, for it is the language of the contract we are construing and the contract did not provide for a guarantee. With that in mind we now take paragraph "Sixth" in detail.
By it W.U. assumed to pay taxes and assessments upon what? Upon the property or any part thereof of G. S. imposed by anyState or municipal authorities during the term of the agreement of lease. There was there nothing said about judgment liens. This was the substantive assurance of payment. What else? "And also" all costs and expenses incurred in operating and maintaining the lines and business of G. S. The additive clause beginning with the words "and also" clearly related only to operating expenses of the business. What else? To keep the lines and business clear from all incumbrances. How were those incumbrances to arise? From taxes, assessments, judgment liens or any act of W.U. upon or respecting the lines and business of G. S. Finally, W.U. as a matter of adjective assurance, agreed to institute and maintain any proceedings necessary to protect and preserve what? The lines, business and franchises of G. S. *Page 392
By paragraph "Tenth" W.U. covenanted to make such reports "to public municipal or state authorities as may be required by law to be made by or on behalf" of G. S.
Each and every provision of paragraph "Sixth" referred clearly to the property leased to W.U. This action seeks to write into the agreement the assumption and payment of Federal income taxes not upon the property leased or its operation but upon the rental paid by W.U. and received by G. S. as lessor. The applicable law has been very recently stated in Commissioner of InternalRevenue v. Western Union Telegraph Co. (A.N. HAND, J., N YL.J., June 17, 1944, p. 2333, col. 1, certiorari denied, May 29, 1944; 141 F.2d 774), as follows: "It has been settled by recent decisions that a corporation is taxable upon income constructively received by it when rentals due to it as lessor are paid directly to its stockholders. (United States v.Joliet Chicago RR., 315 U.S. 44). It is also settled that this rule is applicable in respect of rentals accruing upon stock of the lessor owned by the lessee (Gold Stock Tel. Co. v.Commissioner, 83 F., 2d 465, cert. denied 299 U.S. 564;Pacific Atlantic Tel. Co. v. Commissioner, 83 F., 2d 469, cert. denied 299 U.S. 564). We have heretofore held that taxes found to be due by the lessor under such circumstances, when it has no property with which to pay its income tax obligations, may be collected by means of an application by the government for an order enjoining the payment of the rental dividends to the lessor's stockholders until the collector shall have been able to satisfy the lessor's delinquent taxes therefrom (United States v. Warren R. Co., 127 F., 2d 134, C.C.A., 2; United States v. Morris Essex RR., 135 F., 2d 711, C.C.A., 2)."
It is argued that the agreement in paragraph Sixth by W.U. to keep the properties leased clear "from all incumbrances arising from tax, assessment or judgment liens or from any act of the W.U.T. Co." indicates that Federal income taxes must have been intended because failure to pay the Federal income taxes by G. S. results in liens upon the leased property under U.S. Internal Revenue Code, section 3670 (U.S. Code, tit. 26, § 3670). But that is not the fact and thus it is a complete non sequitur to say that since the lease provided that the lessee should keep the leased property free from judgment liens that the contracting parties must have had a lien such as is provided in section 3670 in *Page 393 mind. No such lien is permitted or provided by section 3670. By the express language of section 3670 the lien falls upon the property and rights to property of the person neglecting and refusing to pay it. No lien, judgment or otherwise, may be imposed upon the property leased to W.U. during the 99 year term of the lease. Such a lien is imposed upon the reversionary interest of G. S. Were it otherwise and the lessor could cause a lien to be imposed upon the property leased by reason of his own failure to pay income taxes upon the rental received by him, leases would be of little value.
We shall assume, however, despite the complete absence of testimony to support it, that the directors in 1881 did foresee the passage of a constitutional amendment and Federal income tax laws decades later. That assumption only weakens plaintiff's position. There can be no question but that parties may contract, if they wish, subject to legislative prohibition, that a lessee shall pay income taxes upon rental paid to the lessor. In this case it is clear that there was no such intention. If the parties had in mind that there had been income taxes in the American colonies, in the nation and in other States prior to 1881 and that there might be sometime during the term a Federal income tax, and then wrote into the contract provisions relating only to State and municipal taxes, upon the property leased, they clearly intended to exclude Federal income taxes on the rent money received by the lessor. If the parties had not in mind Federal income taxes, they, of course, did not intend toinclude in the lease a provision for the payment of them by the lessee. If they had in mind the payment of all taxes of whatever kind and description upon the leased property and upon the rental paid to the lessor and then wrote in provisions for the payment only of State and municipal taxes upon the leasedproperty by the lessee, they quite evidently intended toexclude payment of Federal income taxes upon rent received by the lessee. There seem to be no other alternative intentions and under each of those, plaintiff's action fails. We cannot rewrite the contract.
Obviously the debt for unpaid income taxes on the rental received may be paid by G. S. in the manner indicated inUnited States v. Warren R. Co., 127 F.2d 134, supra, andUnited *Page 394 States v. Morris Essex R. Co., 135 F.2d 711, supra, or, as was conceded by counsel for W.U. on the argument before us, by G. S. requesting the payment to it, instead of to its stockholders, of the rent as it becomes due and then paying the income taxes therefrom. However, those are details which have nothing to do with the construction of an unambiguous contract.
Finally the matter is put beyond all doubt by our own case ofBrainard v. N.Y.C.R.R. Co. (242 N.Y. 125). That was an action in which minority stockholders of Mahoning Coal Railroad Company brought a derivative action against N.Y. Central seeking to recover Federal income taxes assessed against the Mahoning Company for the year 1920. The action was predicated upon a lease entered into between the Mahoning Company and a predecessor of N Y Central whereby the predecessor company agreed: "That it [Lake Shore Company] will in due season pay all taxes and assessments which may be levied or become chargeable on the said road or property, or upon the said Mahoning Company, by reasonof its ownership thereof" (pp. 129-130). Prior to the 1920 tax involved, N.Y. Central had been paying those taxes. This court reversed the judgments of the courts below in favor of plaintiff and dismissed the complaint. We held that prior payments by N Y Central did not change the clear contract provisions which did not contemplate that the predecessor of N.Y. Central would be liable for Federal income taxes assessed against the Mahoning Company. As will be noted, that case was much stronger for the plaintiff than is the instant one. We laid down there the applicable rule in this State as follows: "`Unless the leaseexpressly 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'" (p. 132). Judge POUND said, further (p. 131): "In actions based on leases and working agreements like the one in question (which for convenience may be called a lease), where the lessee agrees to pay all taxes levied and assessed on or in respect to the property, the distinction between taxes on the income of property and taxes on the property itself has been repeatedly pointed out. With monotonous frequency the courts have held in this connection that a tax on the rents or income of real property is not considered a tax on the property itself. When the lessee is to pay all *Page 395 taxes, ordinary and extraordinary which shall be imposed on the demised premises or `in respect thereof,' the tax on rents is a tax not in relation to the property demised but in relation to the income thereof. (Woodruff v. Oswego Starch Factory,177 N.Y. 23.)" In the Woodruff case cited (1903) there was a covenant to pay, in addition to a yearly rent in cash: "All taxes, charges and assessments, ordinary and extraordinary, which shall be taxed, charged, imposed or assessed on the hereby demised premises and privileges, or any part thereof, or on thesaid parties of the first part, their heirs and assigns in respect thereof" (p. 26). As was said in United States vWarren R. Co. (127 F.2d 134, C.C.A. 2, 1942): "It has been universally held both by the courts of New York and other States that a covenant by a lessee to pay the income taxes of a lessor is not within the terms of the contracts unless the obligation isclearly and directly specified" (p. 136). If there is to be a change in those rules which have been followed for so long, it should come from the Legislature.
It is unnecessary to discuss the other point raised as to the necessity of segregation of the proceeds of the sale of securities by W.U. since we are in accord with the courts below in their disposition of it.
The judgment should be affirmed, with costs.
LEHMAN, Ch. J., LOUGHRAN and RIPPEY, JJ., concur with DESMOND, J.; CONWAY, J., dissents in opinion in which LEWIS, J., concurs; THACHER, J., taking no part.
Judgments reversed, etc. *Page 396