*252 Decisions will be entered for the respondent.
Where a corporation, engaged in the telegraph business, in 1883 entered into an agreement whereby it leased all of its lines and properties to another corporation for a term of 99 years, with a provision for renewals extending the term to 999 years, and with the proviso that the lessee should pay the annual rental directly to the lessor's stockholders, and the lessor corporation was left with insufficient property to discharge the income tax liability subsequently determined against it for such rentals, held, that the stockholders of the lessor corporation are liable as transferees under section 311 of the Revenue Act of 1928 for the lessor's unpaid income tax for 1930 to the extent of rentals received by each from the lessee during that year. Commissioner v. Western Union Telegraph Co., 141 Fed. (2d) 774, followed.
*572 These proceedings, consolidated for trial and opinion, arise from the respondent's determination that the petitioners, as transferees, are liable for deficiencies in income tax for the calendar year 1930 in the following amounts:
| Docket No. | Amount |
| 102192 | $ 150.00 |
| 102269 | 289.50 |
The sole issue herein is whether the petitioners are liable as transferees for the unpaid income taxes of the New York Mutual Telegraph Company for the year 1930 within the meaning of section 311 of the Revenue Act of 1928.
FINDINGS OF FACT.
Petitioner Samuel Wilcox is an individual residing at 413 Fairway Road, Ridgewood, New Jersey. Petitioner Florence W. Bosworth is an individual residing in Maplewood, New Jersey.
*573 The New York Mutual Telegraph Company, hereinafter referred to as New York Mutual, is a New York corporation whose principal office is, and was at all times material to the issue herein, located at 60 Hudson Street, New York, N. Y. The capital stock of New York Mutual consists *254 of 100,000 shares of common stock of the par value of $ 25 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 issue herein, located at 60 Hudson Street, New York, N. Y.
On or about February 10, 1883, the Mutual Union Telegraph Company, a New York corporation, engaged in the business of transmitting messages by telegraph, leased all of its lines and property of every description to Western Union for a term of 99 years from February 15, 1883, with a provision for further renewals extending the term to a full 999 years. In consideration therefor Western Union agreed to pay rentals in the following manner:
FIRST. The sum of three hundred thousand dollars per annum, payable semi-annually, on the first days of May and November, being interest at six per centum per annum, from the fifteenth day of February, one thousand eight hundred and eighty-three, upon the mortgage bonds of the lessor, to the amount of five millions of dollars, which said interest shall be paid directly to the holders of said bonds at the time and place or places convenanted therein, and in*255 all respects as required by the tenor of said bonds, until the same shall be fully paid and discharged.
* * * *
THIRD. The further sum of one hundred and fifty thousand dollars per annum payable semi-annually, on the first days of January and July in each year during the continuance of this lease; the said sum of one hundred and fifty thousand dollars to be paid to the lessor or its successor company until the first day of January, one thousand eight hundred and eighty-five, and thereafter to the stockholders of the lessor or its successor company, semi-annually, on such days, pro rata according to their respective holdings of such stock * * *
Thereafter, Western Union took complete possession of the property covered by the lease agreement. The leased properties have been so intermingled with the properties of Western Union that they are not now subject to identification or segregation.
On March 17, 1883, Mutual Union Telegraph Company sold and transferred to New York Mutual its entire property, rights, interests, and obligations under the lease agreement with Western Union. Western Union has in all years since, including 1930, paid and distributed the annual rental of $ 150,000*256 to the stockholders of New York Mutual in accordance with the lease agreement.
The $ 150,000 received by the stockholders of New York Mutual in the year 1930 constituted taxable income to New York Mutual and that company was liable for Federal income tax for the year 1930 in the amount of $ 17,706.96.
*574 The Commissioner assessed income tax for the year 1930 in the amount of $ 17,706.96 against New York Mutual on February 27, 1939. The collector of internal revenue for the second district of New York served notice and demand upon New York Mutual for the payment of the tax on March 2, 1939, but New York Mutual paid no part of the tax. Upon instructions from the Commissioner no warrant of distraint was issued by the Collector for the reason that in the same month assessment of the tax was made against Western Union, as transferee, and that company thereafter made a payment of $ 17,053.92 in respect to the tax, leaving an outstanding balance of only $ 653.04.
Samuel Wilcox was the owner of 100 shares of New York Mutual common stock during the year 1930 and by reason thereof received in that year dividends in the amount of $ 150 from Western Union.
Florence W. Bosworth was the*257 owner of 193 shares of New York Mutual common stock during the year 1930 and by reason thereof received in that year dividends in the amount of $ 289.50 from Western Union.
The notices of transferee liability for the deficiency involved herein were issued by the Commissioner on January 31, 1940.
On December 30, 1949, the United States, at the request of the Commissioner, commenced a civil action against Western Union and New York Mutual in the United States District Court for the Southern District of New York praying that the court enter a decree:
(1) That the plaintiff have judgment against the defendant, New York Mutual Telegraph Company, for the amounts of the assessments set forth in paragraph IV hereof, together with interest thereon as provided by law;
(2) That the defendant, The Western Union Telegraph Company, be restrained and enjoined from paying rental dividends to the stockholders of the defendant, New York Mutual Telegraph Company, until the plaintiff's Collector of Internal Revenue for the Second District of New York can levy thereon, to the end that the income taxes due to the plaintiff, as above set forth, may be satisfied in full with interest;
(3) That the defendant, *258 The Western Union Telegraph Company, pay to the plaintiff, upon notice and demand of levy from the Collector of Internal Revenue, the sums which otherwise would be payable semi-annually as dividends to the stockholders of the lessor, New York Mutual Telegraph Company, until the taxes due and owing to the said plaintiff, hereinabove set forth, are satisfied in full, with interest as provided by law;
* * * *
On January 3, 1950, a preliminary injunction was issued on the motion of the United States enjoining Western Union from paying over further rentals to the stockholders of New York Mutual until the further order of the court or until the taxes due the United States from New York Mutual have been paid. The above proceedings now before the District Court involve the income tax liability of New York Mutual for the calendar years 1931 to 1939, inclusive.
*575 The petitioners Samuel Wilcox and Florence W. Bosworth are liable in the amounts of $ 150 and $ 289.50, respectively, as transferees of New York Mutual for the latter's unpaid income tax of $ 653.04 for the year 1930.
OPINION.
It is now well established that rentals such as were paid in 1930 by the lessee, Western Union, constitute*259 income and are taxable to the lessor, New York Mutual, even though paid directly to the lessor's stockholders under the terms of the lease agreement. See United States v. Joliet & C. R. Co., 315 U.S. 44">315 U.S. 44. The petitioners herein do not dispute the respondent's finding that as a result of this rule income tax in the amount of $ 653.04 for the calendar year 1930 is still owing and unpaid by New York Mutual, nor do they deny that during 1930 they received rentals from Western Union under the lease agreement in the amounts respondent now seeks to recover in satisfaction of New York Mutual's tax liability for that year.
The sole issue is whether the respondent is correct in his determination that the petitioners are each liable to the extent of the rentals received in 1930 for the deficiency in tax as transferees of New York Mutual within the meaning of section 311 of the Revenue Act of 1928.
Petitioners point out that the statute imposes the burden of proof in respect to transferee liability upon the respondent. See section 1119, I. R. C. Petitioners contend that to sustain this burden the respondent must first establish that a transfer of assets was*260 made to the petitioners at a time when New York Mutual was insolvent or that New York Mutual was rendered insolvent by reason of such transfer and, second, must show that he has exhausted all reasonable means of collecting the tax from New York Mutual, the primary obligor, or that further proceedings would be ineffectual. Terrace Corporation, 37 B. T. A. 263; Oswego Falls Corporation, 26 B. T. A. 60, affd., 71 Fed. (2d) 673; Wire Wheel Corporation of America, 16 B. T. A. 737, affd., 46 Fed. (2d) 1013; Phil Gleichman, 17 B. T. A. 147.
Respondent has shown the assessment of the tax for 1930 against New York Mutual and the service of notice and demand for payment. Assessment was also made against Western Union as transferee and tax in the amount of $ 17,053.92 was thereafter collected from Western Union. Petitioners nevertheless argue that the respondent still possesses effective means of collecting the full amount of unpaid tax from New York Mutual and is required to pursue such remedies before he may resort*261 to transferee liability against its stockholders. Petitioners cite the opinions of the Court of Appeals for the Second Circuit in United States v. Warren R. Co., 127 Fed. (2d) 134, and United States v. Morris & Essex R. Co., 135 Fed. (2d) 711, as authority that respondent *576 may collect the tax from New York Mutual by applying for an order enjoining the payment of further rentals by Western Union to the stockholders until such rentals have been applied in full satisfaction of New York Mutual's delinquent taxes. See also 174 A. L. R. 1366, 1383. Petitioners point out that respondent has adopted this course of action in respect to New York Mutual's tax liability for the years 1931 to 1939, inclusive, and has succeeded in obtaining a temporary restraining order in an action instituted before the United States District Court for the Southern District of New York.
As further evidence that New York Mutual possesses an enforceable property right in and to the rentals upon which the Commissioner can levy, petitioners point out that a New York court has recently held, in Northwestern Telegraph Co. v. Western Union Telegraph Co., 99 N. Y. S. (2d) 331,*262 where a similar lease agreement was in effect that the lessor may bring an action in its own right to enjoin the further payment of rentals to its stockholders until such rentals have been applied in satisfaction of its income tax liability to the Government.
Respondent assessed the tax for 1930 and issued notice and demand for payment but found no property in the hands of New York Mutual upon which to levy or distrain. Although it appears that under New York law a lien attached in favor of the Government upon the reversionary interest of New York Mutual in the leased properties, see Johnson v. Western Union Telegraph Co., 293 N. Y. 379, 57 N. E. (2d) 721, it is nevertheless clear that the value of such a reversionary interest was inconsequential as far as the Commissioner's problem of collecting the unpaid tax was concerned.
The creditor of an impoverished debtor has long possessed the right to invoke the aid of equity in following and setting aside any subsequent transfer which is made by a debtor for insufficient consideration and leaves the debtor without sufficient property to discharge his existing obligations. Such transfers*263 are characterized as being in fraud of existing creditors regardless of the debtor's actual intent, and the creditor, upon showing that he has exhausted his remedies at law against the debtor, may resort to equity and there attempt to have any such fraudulent transfers set aside. See American Jurisprudence, vol. 24, pars. 187-190, pp. 314-316, par. 213, pp. 330-331. The rights of the Commissioner as a creditor in the collection of Federal taxes are essentially the same and the principal purpose of section 311 was to provide the Commissioner with the same summary procedures for collection of the tax from transferees as he previously possessed in respect to the taxpayer. See Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589. Surely the Commissioner in the instant case, having assessed the tax and found New York Mutual possessed of no tangible property, no existing contractual right to any part of the rentals, *577 and no contractual obligation on the part of Western Union or the stockholders to pay the tax for New York Mutual, has exhausted his remedies at law.
We have uncovered no decisions under the law of fraudulent conveyances or under section 311*264 requiring a creditor, once he has exhausted his legal remedies against the debtor, to resort to any particular equitable remedy which may be preferred by the debtor's transferees. Yet this is the substance of the petitioners' argument for if we accept their contention that New York Mutual possesses a right similar to that recognized in Northwestern Telegraph Co. v. Western Union Telegraph Co., 99 N. Y. S. 2d 331, the fact remains that the right is enforceable only in an equitable proceeding and New York Mutual has not as yet made any effort to perfect such a right and thereby recover enough of the rents from Western Union to meet its tax obligations. It may well be that if such a right had been established by New York Mutual and a fund had been accumulated or had been provided for upon which the Commissioner could levy in satisfaction of the tax, he would then have been required to look to that fund before pursuing the transferees herein who are secondarily liable. However, where there is no tangible or intangible property in the hands of the taxpayer upon which the Commissioner can levy in satisfaction of the tax and there exists at best only*265 a choice between two equitable remedies, we do not think that the Commissioner must first pursue an untried claim which the transferor may have against a third person, and thereby involve the Government in protracted litigation, as a condition precedent to his alternative recourse against the transferees. Cf. W. W. Cleveland, 28 B. T. A. 578, affd., 77 Fed. (2d) 184.
Such is the import of the decision of the Court of Appeals for the Second Circuit in Commissioner v. Western Union Telegraph Co., *141 Fed. (2d) 774, certiorari denied, 322 U.S. 751">322 U.S. 751, where it was held that Western Union as a stockholder of New York Mutual was liable as a transferee for a part of New York Mutual's unpaid taxes for the years 1931, 1932 and 1933. In reaching this conclusion, the court expressly recognized the Government's right to proceed against Western Union, as lessee, and to enjoin the further distribution of rents by Western Union to the stockholders of New York Mutual until the tax indebtedness of New York Mutual had been paid, stating:
We have heretofore held that taxes found*266 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., 2 Cir., 127 F. 2d 134; United States v. Morris & Essex R. R. Co., 2 Cir., 135 F.2d 711">135 F. 2d 711. In the present proceedings *578 the government seeks to employ an additional remedy for the collection of the lessor's income tax by following distributions of income paid by the lessee to the lessor's stockholders as transferees.
The court concluded that:
In view of the relations of the lessors to their stockholders as defined in the Joliet case, we hold that in the cases before us there were transfers of income by the former to their stockholders which were in derogation of the rights of the creditors of the lessors under the state law.
*267 Although the result reached in Commissioner v. Western Union Telegraph Co., supra, would seem to be dispositive of the present proceedings, petitioners argue that the cases here involved may be distinguished on the ground that the parties in Commissioner v. Western Union Telegraph Co., supra, stipulated that New York Mutual was insolvent whereas here the petitioners are contending to the contrary. In our opinion, the petitioners' attempt to distinguish the cases on this basis is without merit. The temporary injunction obtained by the Government on January 3, 1950, does not involve the taxable year 1930 so that there will be no fund established by the order of the court in those proceedings upon which the Commissioner can levy in satisfaction of New York Mutual's unpaid tax for the year 1930. Moreover, apart from the fact that the parties voluntarily stipulated the insolvency of New York Mutual in Commissioner v. Western Union Telegraph Co., supra, we can find no valid factual or legal distinction between the position of Western Union as a transferee in that proceeding and the*268 status of the petitioners as transferees in the present case. See also New Jersey Title Guarantee & Trust Co., 13 T. C. 674, affd., 183 Fed. (2d) 169.
Therefore, we have concluded, upon the authority of Commissioner v. Western Union Telegraph Co., supra, that the petitioners are liable for the delinquent taxes of New York Mutual for the taxable year 1930 to the extent of the rents received by them from Western Union in that year.
Decisions will be entered for the respondent.
Footnotes
*. See Western Union Telegraph Co↩., T. C. Memorandum, entered July 24, 1942.