*1097 1. The case of Gold & Stock Telegraph Co.,26 B.T.A. 914">26 B.T.A. 914, followed on the question of income to the taxpayer.
2. The petitioner held liable as transferee. The taxpayer corporations many years ago parted with all of their property under a long term lease to the petitioner, which lease provided for a certain rental and provided further than this rental should be paid directly to the stockholders of the taxpayer. The petitioner had been a stockholder of the taxpayer at least during the taxable year and thereafter. During those years the petitioner distributed a portion of the rent to those stockholders other than itself. The portion of the agreed rental which was not distributed to stockholders other than itself was in excess of the amount of the taxes in controversy.
*265 The Commissioner determined that the petitioner was liable as transferee for deficiencies for the year 1926 as follows:
| Docket No. | Taxpayer | Deficiency |
| 48955 | Gold and Stock Telegraph Co | $20,700.36 |
| 48956 | Pacific and Atlantic Telegraph Co. of the United States | 8,237.70 |
*1098 Two issues are raised: one, whether the taxpayers received any income under the leases with the Western Union Telegraph Company, and if so, how much, and the other, whether the petitioner, a stockholder of the taxpayers, is liable as a transferee for the taxes in question.
FINDINGS OF FACT.
The petitioner has its principal office in New York City.
The parties entered into a stipulation as follows:
1. The Gold and Stock Telegraph Company was incorporated under the laws of the State of New York August 10, 1867, for a period of fifty years, and its charter was thereafter extended for a period of one hundred years from August 10, 1917. Its capital stock consists of 50,000 shares of common stock *266 of a par value of $100.00 per share. Its principal office during the times material hereto was 195 Broadway, New York, New York.
2. On or about December 14, 1881, the entire operating property and assets of the company were leased to the Western Union Telegraph Company for a term of ninety-nine years beginning January 1, 1882, by an agreement made and executed in the City and State of New York. A copy of said agreement is attached as Exhibit A hereto.
3. Pursuant*1099 to said lease the Western Union Telegraph Company, the petitioner herein, a corporation organized and existing under the laws of the State of New York and engaged in the business of transmitting messages by telegraph lines and cables within and to and from the United States, and so engaged at all times mentioned in these proceedings, as lessee received and took complete possession and control of the telegraph system and all of the property and assets of the Gold and Stock Telegraph Company at or about the date of the said lease; and continually since has managed, operated and maintained the same for its, the Western Union Telegraph Company's, own profit and at its own cost and risk of profit or loss during said period to the present time. That the property of the Gold and Stock Telegraph Company leased to the petitioner has, ever since it has been in possession and control of the petitioner, been so intermingled with the property of the petitioner that it has been impossible of segregation. Since the effective date of the lease dated December 14, 1881, the Gold and Stock Telegraph Company has not had in its possession property of any description upon which the Government might levy*1100 to enforce payment of any Federal income taxes which might be due.
4. The Western Union Telegraph Company, the petitioner herein, during the term of the lease dated December 14, 1881, regularly and punctually as provided in said lease and in the endorsement on stock certificates hereinafter mentioned, has paid the rentals direct to the stockholders thereof other than itself by depositing checks therefor in the mail in the City of New York, addressed to such stockholders at the addresses designated by them for that purpose, and has made no payments to anyone of the rentals in respect of the stock of the lessor corporation which it, the Western Union Telegraph Company, has itself held.
5. The certificates of capital stock of the lessor company have been during said period, and are in the usual form negotiable by endorsement and delivery, and the stock has been freely transferred and traded in by the general public, and the fact that payments at a fixed rate per annum per share were "guaranteed" or promised by the Western Union Telegraph Company on said stock was and is known to the general public trading in said shares. During the years 1926 and 1927 stockholders other than*1101 the Western Union Telegraph Company held 20,524 shares of the capital stock of the Gold and Stock Telegraph Company to whom payments or accruals in the amount of $123,144.00 were made as aforesaid by the Western Union Telegraph Company in each of said year; and the Western Union Telegraph Company owned 29,476 shares of the capital stock of the Gold and Stock Telegraph Company on which no payments were made, in respect to which six dollars a share amounted to $176,856.00 per year.
6. On or shortly after the fourth day of January, 1882, the Western Union Telegraph Company caused to be endorsed on each certificate of capital stock of the Gold and Stock Telegraph Company, its, the Western Union Telegraph Company's agreement to pay quarterly one and one-half (1 1/2) per cent of the par value of the stock represented by the certificate, and caused said agreement to be sealed with its corporate seal and signed by its secretary. Said *267 agreements have been endorsed upon all certificates of stock of said Gold and Stock Telegraph Company issued from said date until the present time, and were upon the certificates of stock which were outstanding at the times material to these proceedings. *1102 Said agreements or endorsements on said stock certificates were in the following words and figures:
GUARANTEE.
The Western Union Telegraph Company hereby, for value received, guarantees the quarterly payment of one and one-half per cent. upon the par value of the stock represented by the within Certificate, to be paid on the first days of January, April, July and October in each year, subject to the conditions and provisions of the lease made by The Gold and Stock Telegraph Company to the Western Union Telegraph Company dated the 14th day of December, A.D. 1881.
In Witness Whereof the Western Union Telegraph Company has caused its corporate seal to be hereto affixed, and the same to be signed by its Secretary.
Secretary.
7. The Gold and Stock Telegraph Company filed with the Collector of Internal Revenue for the Second District of New York a corporation income tax return for the calendar year 1926, which return included a memorandum of protest. A photostat copy of said return, including said memorandum of protest, is attached hereto and made a part hereof and marked Exhibit B.
8. The item "Net Income", appearing on line 24 of this return, in the amount of $146,664.00, *1103 was composed of the sum of $123,144.00, hereinabove recited to have been paid by the Western Union Telegraph Company during 1926 at the rate of six dollars per share to stockholders other than the Western Union Telegraph Company who held, 20,524 shares of the capital stock of said Gold and Stock Telegraph Company, and $23,520.00, which was six dollars per share on 3,920 shares of said capital stock which were in fact owned by the Western Union Telegraph Company but which it held in a voluntary sinking fund and in respect of which shares the Western Union Telegraph Company paid or accounted to no one except itself. Said 3,920 shares are included among the 29,476 shares mentioned in paragraph 5 hereinabove as owned by the Western Union Telegraph Company, but said 3,920 shares were in the making of said return considered as though owned by third parties.
9. The said sum of $19,799.64 computed on the said return was duly and regularly assessed and payment therefor demanded. No part of this assessment has been paid and still remains outstanding and unpaid. Warrant for distraint was duly issued by the Collector of Internal Revenue and was returned unsatisfied.
10. On April 6, 1928, the*1104 Commissioner of Internal Revenue duly and regularly assessed against the Gold and Stock Telegraph Company a deficiency in corporation Federal income taxes for the year 1926 the sum of $20,700.36 plus interest thereon as provided by law. That notice and demand for the payment of the above assessment was duly and regularly made. No part of the said assessment has been paid and still remains outstanding and unpaid. That the Collector of Internal Revenue issued a warrant for distraint which was returned unsatisfied.
11. The statements in paragraphs 9 and 10 hereof to the effect that a tax and a deficiency were duly and regularly assessed are not to be understood or taken *268 as admissions by petitioner that the sums in respect of which said taxes were assessed were income of the Gold and Stock Telegraph Company or that said assessments had any basis in that regard.
12. Pacific and Atlantic Telegraph Company of the United States was incorporated as the Pacific and Atlantic Telegraph Company under the laws of the State of New York February 5, 1866, and consolidated with Monongahela Valley Telegraph Company which had been chartered by a special act of the Pennsylvania Legislature*1105 approved March 14, 1865, by agreement dated July 30, 1866, and filed in the office of the Secretary of the Commonwealth of Pennsylvania July 31, 1866. Its capital stock consists of 80,000 shares of common stock of a par value of $25 per share. Its principal office during the times material hereto was 195 Broadway, New York, New York.
13. On or about December 16, 1873, the entire operating property and assets of the company were leased to the Western Union Telegraph Company for a term of nine hundred ninety-nine years beginning January 1, 1874, by an agreement made and executed in the City and State of New York. A copy of said agreement is attached as Exhibit C hereto.
14. Pursuant to said lease the Western Union Telegraph Company, the petitioner herein, as lessee received and took complete possession and control of the telegraph system and all of the property and assets of the Pacific and Atlantic Telegraph Company of the United States at or about the date of the said lease; and continually since has managed, operated and maintained the same for its, the Western Union Telegraph Company's, own profit and at its own cost and risk of profit or loss during said period to the*1106 present time. That the property of the Pacific and Atlantic Telegraph Company of the United States leased to the petitioner has, ever since it has been in possession and control of the petitioner, been so intermingled with the property of the petitioner that it has been impossible of segregation. Since the effective date of the lease dated December 16, 1873, the Pacific and Atlantic Telegraph Company of the United States has not had in its possession property of any description upon which the Government might levy to enforce payment of any Federal income taxes which might be due.
15. The Western Union Telegraph Company, the petitioner herein, during the term of the lease dated December 16, 1873, regularly and punctually as provided in said lease has paid the rentals direct to the stockholders of the lessor corporation other than itself by depositing checks therefor in the mail, in the City of New York, addressed to such stockholders at the addresses designated by them for that purpose, and has made no payments to anyone of the rentals in respect of the stock of the lessor corporation which it, the Western Union Telegraph Company, has itself held.
16. The certificates of capital*1107 stock of the lessor company have been during said period, and are in the usual form negotiable by endorsement and delivery, and the stock has been freely transferred and traded in by the general public, and the fact that payments at a fixed rate per annum per share were "guaranteed" or promised by the Western Union Telegraph Company on said stock was and is known to the general public trading in said shares. During the years 1926 and 1927 stockholders other than the Western Union Telegraph Company held 20,980 shares of the capital stock of the Pacific and Atlantic Telegraph Company of the United States to whom payments or accruals in the amount of $20,980.00 were made as aforesaid by the Western Union Telegraph Company in each of said years; and the Western Union Telegraph Company owned 58,877 shares of the capital stock of the Pacific and Atlantic Telegraph Company of the United States on which no payments were made, in respect to which four per centum on the par value amounted to $58,877.00 *269 per year; and the ownership of 143 shares of said stock was unknown, and no accruals were made in respect of $143.00 per year attributable to said shares.
17. The Pacific and*1108 Atlantic Telegraph Company of the United States filed with the Collector of Internal Revenue for theSecond District of New York a corporation income tax return for the calendar year 1926, which return included a memorandum of protest. A photostat copy of said return, including said memorandum of protest, is attached hereto and made a part hereof and marked Exhibit D.
18. The item "Net Income", appearing on line 24 of this return, in the amount of $20,980.00 was the sum of $20,980.00 hereinabove recited to have been paid by the Western Union Telegraph Company during 1926 at the rate of four per centum on the par value per share to stockholders other than the Western Union Telegraph Company who held 20,980 shares of the capital stock of said Pacific and Atlantic Telegraph Company of the United States.
19. The said sum of $2,562.30 computed on the said return was duly and regularly assessed and payment therefor demanded. No part of this assessment has been paid and still remains outstanding and unpaid. Warrant for distraint was duly issued by the Collector of Internal Revenue and was returned unsatisfied.
20. On February 2, 1929, the Commissioner of Internal Revenue duly*1109 and regularly assessed against the Pacific and Atlantic Telegraph Company of the United States a deficiency in corporation Federal income taxes for the year 1926 the sum of $8,218.40 plus interest thereon as provided by law. That notice and demand for the payment of the above assessment was duly and regularly made. No part of the said assessment has been paid and still remains outstanding and unpaid. That the Collector of Internal Revenue issued a warrant for distraint which was returned unsatisfied.
21. The statements in paragraphs 19 and 20 hereof to the effect that a tax and a deficiency were duly and regularly assessed are not to be understood or taken as admissions by petitioner that the sums in respect of which said taxes were assessed were income of the Pacific and Atlantic Telegraph Company of the United States or that said assessments had any basis in that regard.
22. The Gold and Stock Telegraph Company and the Pacific and Atlantic Telegraph Company of the United States were included with the Western Union Telegraph Company in consolidated returns filed for the years 1920 and 1921, respectively, as well as for prior years. These companies, among others, were excluded*1110 from consolidation with the Western Union Telegraph Company for said years and subsequent years. Incident to the exclusion of said corporations from consolidation and to the assertion against them of income tax liability for said years and subsequent years, and from the year 1922 to the present time, there has existed between the Western Union Telegraph Company on its own behalf and on behalf of said subsidiaries, on the one hand, and the respondent, on the other hand, a continuous controversy in which the Western Union Telegraph Company has contended and still contends that the only taxable income involved in the rental payments under said leases was the net amount actually paid by the Western Union Telegraph Company to stockholders other than itself, and has contended and contends that the amount of rental attributable to the shares of stock owned by the Western Union was cancelled by its ownership of said stock, and has contended and contends that no part of said rental was income of the lessor companies. The respondent's rulings, however, have been contrary to the contentions of the Western Union and in accordance with the respondent's contentions in these cases. For the purpose*1111 of current tax administration while this controversy has been pending, the Western Union Telegraph Company*270 has made its returns in the forms insisted on by the respondent. In making its income tax return for the year with which these cases are concerned, 1926, the Western Union Telegraph Company included in the deductions from income to determine net income the sums of -
(a) $300,000.00 as rental for the properties of the Gold and Stock Telegraph Company for the year 1926; and
(b) $79,857.00 as rental for the properties of the Pacific and Atlantic Telegraph Company of the United States for the year 1926 (being the rental reserved, $80,000.00, less the amount which would have been paid on 143 shares the ownership of which was unknown).
In said return it included and reported as dividends received from domestic corporations, the sums of -
(c) $176,856.00, which was that portion of the $300,000.00 described in sub-paragraph (a) hereof attributable to shares of stock of the Gold and Stock Telegraph Company owned by the Western Union Telegraph Company; and
(d) $58,877.00, which was that portion of the $79,857.00 described in sub-paragraph (b) hereof attributable*1112 to shares of stock of the Pacific and Atlantic Telegraph Company of the United States owned by the Western Union Telegraph Company.
No final disposition of the 1926 tax liability of the Western Union Telegraph Company has been made by the respondent.
Exhibit A is a lease dated December 14, 1881, between the Gold and Stock Telegraph Company (herein called G. & S.T. Co.), and the Western Union Telegraph Company (herein called W.U.T. Co.), whereby in consideration of a rental G. & S.T. Co. leased its property to W.U.T. Co. for a term of 99 years from January 1, 1882, during which term W.U.T. Co. could operate the properties either in its own name or in the name of G. & S.T. Co., and constituting W.U.T. Co. agent of G. & S.T. Co. for the purpose of the business. The capital stock of G. & S.T. Co. was to remain fixed at $5,000,000, divided into 50,000 shares, each having a par value of $100. W.U.T. Co. agreed to pay an annual rental of $300,000, payable quarterly, being a sum equal to 6 per cent per annum on the G. & S.T. Co. capital stock. G. & S.T. Co. requested and authorized W.U.T. Co. to pay the rental by pro rata distributions to the several stockholders of G. & S.T. Co. *1113 as they appeared on the books at the time of payment and agreed to accept such distributions in full payment of the rental. There was also an additional rental of $2,500 per annum to be used by the officers of G. & S.T. Co. for administration expenses of the corporation which was to be maintained. In case of default in payment, G. & S.T. Co. had the option to terminate the agreement and resume possession of the property. The property was to be surrendered in good condition upon termination of the agreement. W.U.T. Co. agreed to pay taxes lawfully imposed upon the property and to "keep the same clear from all incumbrances arising from tax, assessment, or judgment liens or from any act of W.U.T. Co. during the term of the *271 agreement. W.U.T. Co. was to assume and pay the principal and interest of certain bonds of G. & S.T. Co. and could require the issuance of other bonds under the same arrangement.
Exhibit C is a lease dated December 16, 1873, between The Pacific and Atlantic Telegraph Company of the United States (herein called P. and A.) and Western Union Telegraph Company (herein called W.U.T. Co.) reciting that the two owned and operated competing lines where cooperation*1114 was needed and providing for the leasing of the P. and A. properties by W.U.T. Co. for the term of 999 years from January 1, 1874, in consideration of the payment by W.U.T. Co. of $80,000 per annum, being 4 per cent per annum on the P. and A. capital stock, payable semiannually. It further provided that, in lieu of making the payments to P. and A., W.U.T. Co. should pay the rental to the P. and A. stockholders in proportion to the shares held in accordance with semiannual lists furnished by P. and A. W.U.T. Co. was also to pay the necessary expenses of maintaining the organization of P. and A., not to exceed $2,500 per annum. These payments were to be made without deduction for taxes or assessments incurred after the first Tuesday of May, 1874. In case of default, P. and A. could terminate the lease. The agreement recited that it was made in pursuance of resolutions of the board of directors and with the written consent of the holders of three-fourths of the stock of P. and A.
The petitioner is liable as a transferee of property of each taxpayer for the respective deficiencies.
OPINION.
MURDOCK: In the case of *1115 Gold & Stock Telegraph Co.,26 B.T.A. 914">26 B.T.A. 914, we held that the entire rental for the years 1920 and 1921, provided for in the agreements which Western Union Telegraph Company had with Gold & Stock Telegraph Company and Pacific and Atlantic Telegraph Company of the United States, was income to the lessors. In the present proceedings similar questions are raised in regard to rental under these two leases for the year 1926. On this point we adhere to our prior decision and the cases therein mentioned, without further discussion.
There is no contention in this case that the petitioner is liable in law under any contract or agreement for the taxes in controversy. The question whether the petitioner is liable in equity as a transferee of property of these taxpayers in respect of the tax imposed upon the taxpayers for this year remains. Section 280 created no new liability. Phillips v. Commissioner,283 U.S. 589">283 U.S. 589. The term "transferee" includes a distributee. Sec. 280(f). In proceedings *272 before the Board the burden is upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer. See section 602 of*1116 the Revenue Act of 1928.
The petitioner relies very strongly upon United States v. Western Union Telegraph Co., 50 Fed.(2d) 102, and Harwood v. Eaton, 59 Fed.(2d) 1009, as well as upon two decisions of the courts of New York cited in these two Federal court cases. We digress, therefore, so that our consideration of the present cases may be had with a proper appreciation of these cases and their effect, or lack of effect, upon the question which we must decide. The New York cases to which we refer are Bowers v. Interborough Rapid Transit Co. and Peabodyv. Interborough Rapid Transit Co. The Bowers case was first decided by Judge Gavegan of the Supreme Court of New York County, 201 N.Y.S. 198">201 N.Y.S. 198, and affirmed by the Appellate Division, First Department, without opinion, 202 N.Y.S. 917">202 N.Y.S. 917. Thereafter, the Peabody case came before Judge Ford of the Supreme Court of New York County, 209 N.Y.S. 376">209 N.Y.S. 376, was affirmed without opinion by the AppellateDivision, First Department, 209 N.Y.S. 893">209 N.Y.S. 893, and was finally affirmed without opinion by the Court of *1117 Appeals, 240 N.Y. 708">240 N.Y. 708; 148 N.E. 768">148 N.E. 768. One must look, apparently, to the opinion of Judge Gavegan for the rationale of these decisions. We are unable to perceive how these two cases have any bearing upon the question before us. In each, individual stockholders of a lessor corporation brought suit against the lessee to require it to pay them amounts which the lessee had agreed and guaranteed to pay directly to the stockholders of the lessor corporation. Decisions in favor of the rights of the individual stockholders to sue the lessee directly were based upon the presence in the lease of what was termed a "guaranty." Judge Gavegan, in his opinion, merely interpreted the provisions of this guaranty and held that it was an undertaking additional to the agreement to pay the rent to the lessor, intended to give the stockholders additional rights and remedies, and, whereas the failure to pay the rent was a breach affecting the stockholders indirectly, the guaranty was an undertaking running directly to them. Cases such as *1118 Beveridge v. New York Electric Ry. Co.,112 N.Y. 1">112 N.Y. 1; 19 N.E. 489">19 N.E. 489, and Flagg v. Manhattan Ry. Co.,10 Fed. 413, were distinguished on the ground that in those cases there was no express agreement with or direct obligation to the stockholders. The present petitioner, like Bowers and Peabody, is a stockholder in the lessor companies, but, unlike Bowers and Peabody, it is also the lessee and so-called guarantor. It may legally occupy the dual position of lessee and stockholder in the lessor. But a paradoxical situation arose in so far as it purported to make any guarantee on the stock which it held itself. So long as it held shares of stock in the lessor companies, its so-called guaranty, in relation to those *273 particular shares of stock, was vacuous. Therefore, in deciding the present case, we can obtain no benefit from the Bowers and Peabody cases. For the reasons already given, we should likewise disregard the two Federal court decisions in so far as they rely upon the two New York cases.
There are other reasons why the Western Union Telegraph Co. case is not direct authority here. It was a suit by*1119 the Government to impress a lien for taxes due for the years 1917 to 1920 from the North Western Telegraph Company upon funds in the possession of the Western Union Telegraph Company, which, by agreement, the latter paid to the shareholders of the former. The court held that no lien could be impressed upon the payments in the hands of the lessee. Our question is a different one. Here the Government contends that, since the payments have constructively passed through the lessor and into the hands of its stockholders, the petitioner is liable as a stockholder-transferee for the tax imposed upon the lessor. Furthermore, the report does not show that Western Union was a stockholder of North Western, whereas in our cases Western Union was not only the lessee and guarantor, but also owned a majority of the stock of the lessor corporations. The Harwood decision, to which we have had reference, was on a demurrer. The case has been decided on the merits since the preparation of this report. 59 Fed.(2d) 1009. It may or may not be distinguishable, but at least it differs from our cases in that Harwood was simply a stockholder, not also lessee, and the lease made no mention*1120 of dividends. There is no indication in the report that Western Union was a stockholder of the Empire and Bay State Telegraph Company. We must, therefore, decide the present cases without giving undue regard to the two cases just mentioned.
The respondent contends that the petitioner is liable in equity under what he calls the "trust fund theory." The liability of a transferee in equity may arise in various ways, and it is unfortunate that one or all of these ways was ever called the "trust fund theory." The alleged liability here does not result from a distribution to stockholders of the amount paid in for their stock, nor from a situation where a corporation transfers its assets for stock without proper provision for its existing debts, as sometimes arises in connection with consolidations or mergers. Cf. Fostoria Milling & Grain Co.,11 B.T.A. 1401">11 B.T.A. 1401. The petitioner, as a stockholder, has received or retained property of the taxpayer. Under municipal law, is the petitioner liable, to the extent of the property received, for taxes of the taxpayer which were imposed by Federal law for the year 1926?
*1121 There is a distinction between transfers by a going solvent corporation and those made by a corporation when it is insolvent or when it becomes insolvent as a result of the particular transfer in *274 question. Courts have said that property transferred under the latter circumstances is a trust fund for the benefit of creditors, who may take it from the hands of the transferee to the extent of the property received or the debt, whichever is smaller; that is, that an equitable lien in favor of creditors attaches to the property of the corporation. Hollins v. Brierfield Coal & Iron Co.,150 U.S. 371">150 U.S. 371; McDonald v. Williams,174 U.S. 397">174 U.S. 397; In re Feckheimer Fishel Co.,212 Fed. 357. See also Wood v. Dummer, 3 Mason 308, where the words "trust fund" were first used in this connection. A reason sometimes given for such a rule is that the transfer amounts to a fraud, either actual or constructive, upon those to whom the corporation is obligated. But on one ground or another courts have attempted persistently to give equitable relief to those having a superior right to corporate property. Cf. *1122 Bailey v. Hornthal,154 N.Y. 648">154 N.Y. 648; 49 N.E. 56">49 N.E. 56. Application of the rule depends upon the meaning which attaches to the word "insolvent" as used therein. This word has several different meanings. Toof v. Martin,80 U.S. 40">80 U.S. 40. The Bankruptcy Act of 1898 specifies that it means an excess of debts over the aggregate of the debtor's property when the latter is fairly valued. Some courts have held that this is the general and usual meaning. Marvin v. Anderson,111 Wis. 387">111 Wis. 387; 87 N.W. 226">87 N.W. 226; Grunsfeld v. Brownell,12 N.M. 192">12 N.M. 192; 76 Pac. 310. However, the word need not be so narrowly defined in connection with transferee liability. It may also mean an inability to meet obligations as they mature in the regular course of business by means of available assets or a legitimate use of credit. Cf. Toof v. Martin, supra;Hayden v. Chemical National Bank,84 Fed. 874; Brower v. Harbeck,9 N.Y. 589">9 N.Y. 589, 594; *1123 Baker v. Emerson,38 N.Y.S. 576">38 N.Y.S. 576; Lodi Chemical Co. v. Charles H. Pleasants Co.,54 N.Y.S. 668">54 N.Y.S. 668; French v. Andrews,30 N.Y.S. 796">30 N.Y.S. 796. Another definition is that a debtor has no property which a creditor can reach by legal process for the satisfaction of his debt. The latter rule is sometimes stated as a rule of evidence, i.e., proof that there is no property which a creditor can reach, is evidence of insolvency on the part of the debtor. Terry v. Tubman,92 U.S. 156">92 U.S. 156; Bartlett v. Drew,57 N.Y. 587">57 N.Y. 587; Fletcher Cyclopedia Corporations, vol. 8, §§ 5008-9.
The petitioner contends that each lessor was a solvent going concern when it entered into the lease with Western Union; the taxes in question had not accrued and were not even contemplated; the transfers were made at those times by the lessor corporations to their stockholders and did not render the corporations insolvent; at least the evidence does not show any insolvency at those times; the stockholders of the taxpayer companies derived their rights to receive the payments from these leases; these rights came to partial *275 *1124 fruition in 1926 without any further act upon the part of the taxpayers; thus, the Commissioner has failed to show that the petitioner is liable as a transferee for the 1926 taxes. The taxes for the year 1926 had first to accrue before any transferee liability could arise. The Commissioner relies upon transfers in 1926 and early 1927, resulting from the distribution of the rental payments for 1926. Moreover, he may be able to follow the income of the taxpayers even if there was no technical transfer of this property. Cf. Hatch v. Morosco Holding Co., 50 Fed.(2d) 128. We know that taxes for the year 1926 were assessed, payment was demanded, warrants for distraint were returned unsatisfied, and the entire assessments remain unpaid. Yet these circumstances do not show that the taxpayers were insolvent when the 1926 rental was distributed. Determination and assessment of and distraint for the 1926 taxes took place long after the 1926 rentals were discharged. Thus, the time element robs these facts of any importance which they might have otherwise in showing insolvency when the 1926 payments became due. However, the contract was carried out as to later years*1125 and later rentals retained by Western Union, as a stockholder, exceeded the amount of the deficiencies.
Although the case of United States v. Western Union Telegraph Co., supra, is not directly in point, nevertheless that opinion indicates that the Government has no remedy at law. Counsel for the present petitioner makes no contention that the taxpayers had any property which the Government could reach by legal process for the satisfaction of the taxes due it. Cf. United States v. Fairall, 16 Fed.(2d) 328; Rensselaer & S.R.R. Co. v. Irwin,249 Fed. 726; certiorari denied, 246 U.S. 671">246 U.S. 671. The stipulation shows that the property of the taxpayers is not being managed by and is not in the possession of the taxpayers; it has been intermingled with that of Western Union; and at no time has either taxpayer had in its possession property of any description upon which the Government might levy to enforce payment of any Federal income taxes which might be due. In the light of the facts as stipulated, the decision in the Western Union case, supra, and the petitioner's brief, we are justified in holding, for*1126 the purpose of this case, that the taxpayers at no time had property which the Government could reach by legal process for the satisfaction of the tax liability of the two taxpayers for the year 1926. The taxpayers have not met their tax obligations and without the rent payments they apparently had no way to pay their income taxes, had they desired to pay. In short, if they are to be tested by either of the two latter definitions of insolvency given above, they were insolvent.
The Government, seeking payment of income taxes, is not like a creditor of a corporation who extended credit with full knowledge *276 of the lease agreement. Cases involving rights of such a creditor are not in point. Debts are obligations for the payment of money founded upon contract, express or implied. Taxes are imposts levied for the support of the Government. Taxes operate in invitum. Meriwether v. Garrett,102 U.S. 472">102 U.S. 472, 513. They are of a higher nature than debts. United States v. McHatton,266 Fed. 602. Stockholders "do not occupy the position of strangers, who have taken for value, in good faith, and without notice of corporate obligations*1127 either fixed or potential." United States v. Updike, 8 Fed.(2d) 913; certiorari denied, 271 U.S. 661">271 U.S. 661. Cf. Pierce v. United States,255 U.S. 398">255 U.S. 398. The two New York decision discussed above had to do with the rights of stockholders under a lessee's guarantee and their remedies against the lessee. But the rights of stockholders to the property of their corporation are entirely different. Cf. American Telegraph & Cable Co. v. United States,61 Ct.Cls. 326. A corporation can not directly or indirectly distribute its assets among its stockholders nor allow stockholders to withdraw its assets, except in the payment of dividends out of profits and after lawful obligations have been met. Bartlett v. Drew, supra.The right to contract is not absolute in all matters. Knoxville Iron Co. v. Harbison,183 U.S. 13">183 U.S. 13. The lease agreements were legal and effective for many purposes and no doubt gave the stockholders certain rights even as against the corporations. Cf. *1128 Scovill v. Thayer,105 U.S. 143">105 U.S. 143. But the rights of the stockholders to corporate property at all times were subject to a superior potential right on the part of the Government to impose taxes upon the corporation and collect those taxes from the income of the corporation. Cf. Louisville & Nashville R.R. Co. v. Motley,219 U.S. 467">219 U.S. 467; Knox v. Lee,12 Wall. 457">12 Wall. 457, 550, 551. When the Constitution was amended and income taxes imposed upon the corporations, the right of the Government to collect such taxes from corporate property took precedence over the right of the stockholder to continue to receive that property.
The varying definitions of insolvency, the diversity in reasoning which shades of difference in cases have elicited, and the controversy which has raged in regard to the "trust fund doctrine," indicate the improbability of any satisfactory all-inclusive general rule covering equitable liability. Yet, despite conflicting reasoning in opinions and taxts, the decision of actual cases has not been so difficult. Therefore, in the final analysis, we must seek the decision of this case in its particular facts. *1129 These corporations have parted with their property and have gotten nothing in return which the Government can take for taxes. Instead, the consideration for the use of the properties under the agreement is to be paid directly to the stockholders, as if the corporations had been paid and had declared dividends. *277 If the corporations had sold their properties at a taxable profit, the proceeds of the sales, paid by agreement to the stockholders, could be followed for the purpose of collecting the tax on the sale. Cf. United States v. McHatton, supra.So here, since no remedy is available at law to the Government, we think equity under the local law would follow the income from the properties into the hands of the stockholders and make it liable for the tax, because the stockholders have this property which ought to be applied to the payment of taxes of their corporation. Cf. Bartlett v. Drew, supra.We, therefore, hold that there is a liability in equity on the part of this stockholder to pay these taxes of the corporations from its retained share of the payments which have become due since the obligation to pay the taxes accrued. *1130 Cf. United States v. Updike, supra;United States v. Armstrong, 26 Fed.(2d) 227.
Reviewed by the Board.
Judgment will be entered for the respondent.