*242 Decisions will be entered for the respondent.
1. Petitioners, who as stockholders of a corporation received rental-dividends in 1930, held liable as transferees for the unpaid income taxes of the transferor corporation for the year 1930. Samuel Wilcox, 16 T. C. 572, followed.
2. Petitioner, as sole residuary legatee of an estate, received in 1931 all the property of said estate including distributions of rental-dividends paid to the estate in 1930. Held, petitioner is liable as transferee to the extent of such distributions for the unpaid tax liability of the corporation for 1930.
3. Petitioner, the trustee of a testamentary trust, received distributions of rental-dividends from a corporation in 1930 which it in turn distributed in that year to the life beneficiary; in 1937 the petitioner sold the stock it held in the corporation; in 1940 the petitioner was notified of the Commissioner's determination of its transferee liability; and in 1948 petitioner distributed the trust corpus to the remaindermen on the death of the life beneficiary. Held, the petitioner is liable as a transferee to the extent of the distributions received in 1930*243 for the unpaid tax liability of the corporation for 1930.
*671 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: *672
| Docket No. | Amount |
| 101977 | $ 460.00 |
| 102460 | 400.00 |
| 102523 * | 205.00 |
| 102670 | 200.00 |
*244 The sole issue herein is whether the petitioners are liable as transferees for the unpaid income taxes of Pacific and Atlantic Telegraph Company of the United States for the year 1930 within the meaning of section 311 of the Revenue Act of 1928.
FINDINGS OF FACT.
United States Trust Company of New York, a New York corporation with its office at 45 Wall Street, New York, N. Y., is now, and was during the entire calendar year 1930, acting as trustee of the trust established under the will of Philander K. Cady.
The Hartford Steam Boiler Inspection and Insurance Company, hereinafter referred to as the Hartford Company, is a Connecticut corporation with its principal office located at 56 Prospect Street, Hartford, Connecticut.
Mary Frances McChesney is an individual with an address in care of Becket & Wagner, attorneys-at-law, Lakeville, Connecticut.
Ethel W. Thomas is an individual with an address in care of the First National Bank, 50 State Street, Hartford, Connecticut.
The Pacific and Atlantic Telegraph Company of the United States, hereinafter referred to as Pacific and Atlantic, is a Pennsylvania corporation whose principal office is, and was at all times material to the issues herein, *245 located at 60 Hudson Street, New York, N. Y. The capital stock of Pacific and Atlantic consists of 80,000 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 issues herein, located at 60 Hudson Street, New York, N. Y.
Pacific and Atlantic was engaged in the business of transmitting messages by telegraph prior to December 16, 1873, on which date it leased to Western Union for a term of 999 years from January 1, 1874, all of its lines and property of every description for the following consideration:
FOURTH. * * * 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 at the rate of eighty thousand dollars per year for each and every year of the term herein created being four per centum per annum on the present existing Capital Stock of two million of dollars, said payments to be made semi annually *673 at the office of the Treasurer of the WESTERN UNION TELEGRAPH COMPANY in the City of New York on the first days of *246 July and January 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 pay the rental herein reserved to the several stockholders of the party of the first part rateably 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 an absolute default by the said party of the second part in making any payment at the time specified in this Agreement.
Thereafter, Western Union took possession of the property covered by the lease agreement and Pacific and Atlantic has at no time since then had possession of or operated its telegraph system. The leased properties have been so intermingled with the properties of Western Union that they are not now subject to identification or segregation. Western Union has in all years, including 1930, paid and distributed the annual rental of $ 80,000 to the stockholders*247 of Pacific and Atlantic in accordance with the above agreement.
The $ 80,000 received by the stockholders of Pacific and Atlantic in the year 1930 constituted taxable income to Pacific and Atlantic and that company was liable for Federal income tax for the year 1930 in the amount of $ 9,600.
The Commissioner assessed a deficiency in income tax for 1930 against Pacific and Atlantic in the amount of $ 9,600, consisting of original tax of $ 2,157.72 and additional tax of $ 7,442.28. The Collector of Internal Revenue for the Second District of New York served notice and demand upon Pacific and Atlantic for payment of the original tax of $ 2,157.72 on September 11, 1931, and for the payment of the additional tax of $ 7,442.28 on March 2, 1939, but Pacific and Atlantic paid no part of the tax. A warrant of distraint was issued by the collector with respect to the original tax of $ 2,157.72 on May 5, 1932, which was returned unsatisfied. No warrant of distraint was issued with respect to the additional tax of $ 7,442.28.
On February 27, 1939, an assessment in the amount of $ 7,065.24 was made against Western Union, as transferee, which Western Union thereafter paid. Since that time other*248 payments have been made in the aggregate amount of $ 1,013.40, leaving an unpaid balance of tax owing for 1930 in the amount of $ 1,521.36.
The petitioner, United States Trust Company of New York, was the trustee of the trust created by the will of Philander K. Cady who died on August 30, 1917. Included in the assets of the trust were 460 shares of Pacific and Atlantic stock.
Under the terms of the will, the sum of $ 600 a year was to be paid from trust income to Sara Clark Germond and the balance of trust *674 income was to be paid over every three months to Helen Sophia Cady during her lifetime. Sara Clark Germond died on January 18, 1926, and thereafter all of the entire income of the trust, including dividends received by the trust upon the Pacific and Atlantic stock was distributed to Helen Sophia Cady, the life beneficiary.
In 1930, United States Trust Company of New York, as trustee, was the holder of 460 shares of Pacific and Atlantic common stock and by reason thereof received dividends in the amount of $ 460 from Western Union. Similar dividends were received by the trust until January 7, 1937, when all of the Pacific and Atlantic shares held by the trust were sold.
*249 A notice of transferee liability was issued by the Commissioner on February 19, 1940, in the amount of $ 460 for the unpaid income tax of Pacific and Atlantic for 1930 in the following name and form:
Trust u/w of Philander K. Cady, Transferee,
United States Trust Company of New York, Trustee
The present proceedings were instituted by the petitioner United States Trust Company of New York in a petition from this notice filed with the Board of Tax Appeals on April 4, 1940. The respondent's answer in this cause was filed on May 31, 1940.Helen Sophia Cady died on October 8, 1948, and thereafter the trust corpus was distributed by the petitioner United States Trust Company of New York to the named remaindermen.
The Hartford Company was the owner of 400 shares of Pacific and Atlantic common stock during the taxable year 1930, and in that year received by reason thereof dividends in the amount of $ 400 from Western Union.
Mary Frances McChesney was the owner of 200 shares of Pacific and Atlantic common stock during the taxable year 1930 and in that year received by reason thereof dividends in the amount of $ 200 from Western Union.
Ethel W. Thomas was not the owner of any stock*250 of Pacific and Atlantic during the year 1930. On April 6, 1931, she received 200 shares of Pacific and Atlantic common stock as the sole residual legatee of the estate of her mother, Frances Wood, and by reason of the ownership of such stock, received dividends of $ 100 in 1931 and $ 200 in 1932, 1933, and 1934 from Western Union. During 1930 such stock was held and dividends in the amount of $ 200 for 1930 were received by the estate of Frances Wood.
The notices of transferee liability for the deficiency involved herein were issued by the Commissioner to the petitioners on February 19, 1940.
On December 30, 1949, the United States, at the request of the Commissioner, commenced a civil action against Western Union and *675 Pacific and Atlantic 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, The Pacific & Atlantic Telegraph Company of the United States, 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*251 from paying rental dividends to the stockholders of the defendant, The Pacific & Atlantic Telegraph Company of the United States, 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, 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, The Pacific & Atlantic Telegraph Company of the United States, 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 Pacific and Atlantic until the further order of the Court or until the taxes and interest due the United States from Pacific and Atlantic have been paid in full. The tax liability of Pacific and Atlantic involved in the above*252 proceedings now before the District Court involve the calendar years 1931 to 1939, inclusive.
The petitioners, United States Trust Company of New York, Hartford Company, Mary Frances McChesney, and Ethel W. Thomas, are liable to the extent of $ 460, $ 400, $ 200, and $ 200, respectively, as transferees for the unpaid income tax of Pacific and Atlantic for 1930.
OPINION.
The contention of the petitioners herein that the respondent has not exhausted his remedies for the collection of the tax from Pacific and Atlantic and, therefore, is barred from proceeding against the petitioners as transferees under section 311 of the Revenue Act of 1928 has been disposed of by our opinion in , promulgated March 7, 1951. The facts and the legal defenses to transferee liability raised by the parties and passed upon in Wilcox are for all practical purposes identical with those advanced by the petitioners, The Hartford Steam Boiler Inspection and Insurance Company, and Mary Frances McChesney, and therefore our decision in Wilcox is dispositive of the present proceedings in so far as they involve those petitioners.
However, the petitioners*253 Ethel W. Thomas and United States Trust Company of New York have offered secondary defenses to transferee *676 liability which we must discuss and decide. Petitioner Thomas suggests that she should not be compelled to pay the portion of Pacific and Atlantic's 1930 tax assessed against her as a transferee when the record shows that she owned no stock of Pacific and Atlantic in 1930, "and, of course, received no dividend distributions thereon for that year."
It appears that the estate of the petitioner's mother, Frances Wood, received rental-dividends of $ 200 in 1930, and on April 6, 1931, the entire estate, including the shares of stock, passed to the petitioner who was the sole residuary legatee under her mother's will. While the Commissioner might have chosen to assess the transferee liability herein against the estate of the petitioner's mother as the first recipient of the distribution in controversy, see , it is clear that he had the alternative right to follow the funds into the hands of the petitioner who ultimately received the stock and the 1930 distribution from the estate without consideration*254 as the sole legatee. ; .
It follows that the petitioner Ethel W. Thomas is liable as a transferee within the meaning of section 311 of the Revenue Act of 1928 for the unpaid tax of Pacific and Atlantic for the calendar year 1930 to the extent of $ 200.
In the case of the petitioner United States Trust Company of New York, the narrow question remains as to whether the Commissioner may hold a trustee liable as a transferee where the dividends in question were received by the trustee in that capacity and were distributed in the same year to the life beneficiary of the trust.
Petitioner states that as a general rule transferee liability can only be maintained against a person who receives the beneficial use of the transferred assets. ; Mertens, Law of Federal Income Taxation, Vol. 9, section 53.16, pp. 503, 504. However, an examination of the authorities cited by petitioner shows that this rule is limited to the proposition that a trustee's receipt of funds subject to the unpaid tax liability of*255 the transferor of itself does not establish individual liability on the part of the trustee as a transferee. The rule clearly has no applicability herein for the notice of transferee liability discloses that it was issued to the "Trust u/w of Philander K. Cady, Transferee" and that no transferee liability was determined against the petitioner individually. It appears from the notice that the only capacity in which the petitioner is involved herein is in its capacity as trustee and legal representative of the trust. See .
Petitioner alleges that the dividends it received as trustee were distributed in every year, including 1930, to Helen Sophia Cady, the life *677 beneficiary of the trust, and that the 460 shares of Pacific and Atlantic stock held by the trust were sold on January 7, 1937. Petitioner also points out that the first notification it received from the Commissioner as to transferee liability on the part of the trust for the unpaid taxes of Pacific and Atlantic occurred on February 19, 1940. Petitioner argues that the receipt of the notice after the sale of the stock prevented its withholding*256 dividends therefrom sufficient to satisfy the transferee liability.
Petitioner clearly cannot now absolve the trust of transferee liability by showing that the distributions of cash which were received from the transferor in 1930 were expended, distributed, or otherwise disposed of, or that the stock itself was sold by the trust prior to the receipt of the notice of transferee liability. In 1930, the trust was a stockholder of Pacific and Atlantic and was entitled to the rental-dividends it received from Western Union in that year. However, such distributions were received by the trust subject to the unpaid tax owing thereon by Pacific and Atlantic for that year and it matters not that the trustee was unaware of Pacific and Atlantic's tax liability at that time, or that they were passed on to the beneficiary.
Moreover, the petitioner was notified of the Government's claim against the trust as a transferee on February 19, 1940. The petition herein was filed on April 4, 1940, and the respondent's answer was filed on May 31, 1940. Thereafter, until 1948, when the corpus of the trust was distributed, petitioner had ample time and opportunity to withhold enough of the trust income *257 from the same life beneficiary who had received the distribution in 1930 to satisfy or protect itself against the Government's claim. Nor does the fact that the corpus has been distributed by the petitioner in the face of the Government's claim relieve the trust from transferee liability.
Petitioner complains that it now possesses no funds from which it can satisfy the liability determined by the Commissioner. Whether the distribution of all of the assets of the trust may render the Commissioner's task in collecting the tax more difficult or whether he may ultimately be forced to proceed against the petitioner individually under section 3467 of the Revised Statutes or against the estate of the life beneficiary is of no concern to us in this proceeding. The sole question raised by the pleadings is the liability of the trust as a transferee and it suffices to say that, in our judgment, the trust and therefore the petitioner in its capacity as trustee is liable as a transferee under the provisions of section 311 of the Revenue Act of 1928 for the unpaid tax of Pacific and Atlantic for 1930 to the extent of $ 200, representing the rental-dividends it received in that year from Western*258 Union.
Decisions will be entered for the respondent.
Footnotes
*. This proceeding was submitted under Rule 30 (a) and upon a joint motion of the parties has been consolidated with and submitted for decision upon the record made in the other cases herein.↩