16 T.C. 863">*864 The respondent has determined that the decedent's estate is liable as a transferee for the unpaid income taxes of the Pacific and Atlantic Telegraph Company of the United States and the Southern and Atlantic Telegraph Company for the year 1930 in the amounts of $ 2,534.76 and $ 2,187.50, respectively.

The principal issue herein is whether the Commissioner has satisfactorily established the insolvency of the Pacific and Atlantic Telegraph Company of the United States and the Southern and Atlantic Telegraph Company and has exhausted all reasonable means of collecting the tax from the taxpayers before proceeding against the decedent's estate as a transferee.

The second issue is whether the decedent's estate during 1930 held certain shares of stock of the Pacific and Atlantic Telegraph Company of the United States and the Southern and Atlantic Telegraph Company and 1951 U.S. Tax Ct. LEXIS 219">*221 received distributions of rental-dividends thereon merely as a nominee for other persons and, therefore, is not liable as a transferee within the meaning of section 311 of the Revenue Act of 1928.

FINDINGS OF FACT.

The petitioners herein, Guy Cary, A. Loeb Salkin, and Walter Maynard, are the executors of the last will and testament of Frank Work and the trustees of certain trusts created therein.

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 located at 60 Hudson Street, New York, N. Y. Southern and Atlantic Telegraph Company, hereinafter referred to as Southern and Atlantic, 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. Pacific and Atlantic, prior to January 1, 1874, and Southern and Atlantic, prior to July 10, 1876, were engaged in the business of transmitting messages by telegraph. The capital stock of Pacific and Atlantic consists of 80,000 shares of common stock of the par value of $ 25 per share and the1951 U.S. Tax Ct. LEXIS 219">*222 capital stock of Southern and Atlantic consists of 37,962 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 December 16, 1873, Pacific and Atlantic leased its telegraph system, including all of its lines and property of every description, to Western Union for a term of 999 years from January 1, 1874, for the following consideration:

16 T.C. 863">*865 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 percentum per annum on the present existing Capital Stock of two million of dollars, said payments to be made semi annually at the office of the Treasurer of the WESTERN UNION TELEGRAPH COMPANY in the City of New York on the first days of July and January during the full term of this lease.

FIFTH. And it is further agreed that the party of the second1951 U.S. Tax Ct. LEXIS 219">*223 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.

On July 10, 1876, Southern and Atlantic leased its telegraph system and all of its other property to Western Union for a term of 92 years, and thereafter for such further term as would make a full term of 999 years for the following consideration:

FOURTH. And in consideration of the premises 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 during each and every year of the term herein created a rental equal to five per centum on the par value of so much of the Capital1951 U.S. Tax Ct. LEXIS 219">*224 Stock of the party of the first part now outstanding and also of so much more thereof as the existing contracts and the actual and contingent liabilities of the party of the first part may require it to issue provided however that such sum so to be paid as the annual rental to the party of the first part shall not exceed five per centum on nine hundred and fifty thousand dollars capital stock; said payment to be made semi-annually at the office of the Treasurer of the WESTERN UNION TELEGRAPH COMPANY in the City of New York on the first days of April and October 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 in sections fourteen and fifteen 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 own1951 U.S. Tax Ct. LEXIS 219">*225 name for any 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 properties covered by the lease agreements and Pacific and Atlantic and Southern and Atlantic have at no time since then had possession of or operated their telegraph systems. 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 16 T.C. 863">*866 stockholders of Pacific and Atlantic in accordance with the above agreements and the annual rental of $ 47,500 to the stockholders of Southern and Atlantic.

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 $ 47,500 received by the stockholders of Southern and Atlantic in the year 1930 constituted taxable income to Southern and Atlantic and that company was liable for Federal income tax for 1930 in the1951 U.S. Tax Ct. LEXIS 219">*226 amount of $ 5,700.

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 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 Commissioner assessed a deficiency in income tax for 1930 against Southern and Atlantic in the amount of $ 5,700, consisting1951 U.S. Tax Ct. LEXIS 219">*227 of original tax of $ 3,347.55 and additional tax of $ 2,352.45. The collector of internal revenue for the second district of New York served notice and demand upon Southern and Atlantic for payment of the original tax of $ 3,347.55 on September 11, 1931, and for the payment of the additional tax of $ 2,352.45 on March 2, 1939, but Southern and Atlantic has paid no part of the tax. A warrant of distraint was issued by the collector with respect to the original tax of $ 3,347.55 on May 5, 1932, which was returned unsatisfied. No warrant of distraint was issued with respect to the additional tax of $ 2,352.45. Western Union, as a transferee, has paid $ 2,345.85, and other persons, as transferees, have paid $ 368.99 of the total tax of $ 5,700, presently leaving an unpaid tax liability of Southern and Atlantic for 1930 in the amount of $ 2,985.16.

Frank Work, the decedent, died on March 16, 1911, at which time he was the owner of 2,990 shares of the common stock of Pacific and 16 T.C. 863">*867 Atlantic, and 1,750 shares of the common stock of Southern and Atlantic. The executors and trustees of the decedent's estate were ordered by a decree entered April 2, 1917, directing the distribution1951 U.S. Tax Ct. LEXIS 219">*228 of the decedent's estate, to hold 996 shares of Pacific and Atlantic and 584 shares of Southern and Atlantic in trust for the benefit of the decedent's granddaughter, Cynthia Cary, and her issue in accordance with the terms of the decedent's will. The executors and trustees were also instructed to transfer and pay over to the Roche trust, a trust created by decedent's family after his death, 997 shares of Pacific and Atlantic and 583 shares of Southern and Atlantic, and to transfer and pay over to Lucy Work Hewitt 997 shares of Pacific and Atlantic and 583 shares of Southern and Atlantic.

Lucy Work Hewitt and the trustees of the Roche trust thereafter requested the executors and trustees of the decedent's estate to retain possession of the Pacific and Atlantic and Southern and Atlantic shares ordered by the decree to be transferred to them and to receive and pay over the income therefrom to them.

In 1930 the Estate of Frank Work was the registered holder of 2,990 shares of Pacific and Atlantic common stock and 1,750 shares of Southern and Atlantic common stock and by reason thereof received in that year rental-dividends from Western Union in the sum of $ 2,990 with respect to the1951 U.S. Tax Ct. LEXIS 219">*229 Pacific and Atlantic stock and rental-dividends in the sum of $ 2,187.50 with respect to the Southern and Atlantic stock. The executors of the estate distributed all of such rental-dividends received in 1930 to Lucy Work Hewitt, the Roche trust, and to the beneficiaries under the will in accordance with their interests in the stocks held by the estate.

Lucy Work Hewitt died in 1934 and the trustees of her estate prior to 1938 sold the 996 shares of Pacific and Atlantic stock and the 583 shares of Southern and Atlantic stock which were then in the possession of the executors and trustees of the decedent's estate. Between 1934 and 1937, the executors and trustees of the decedent's estate and the trustees of the Roche trust likewise sold their holdings of Pacific and Atlantic stock and Southern and Atlantic stock.

A notice of transferee liability in the amount of $ 2,534.76 for the unpaid income tax of Pacific and Atlantic for 1930 was issued by the Commissioner to the "Estate of Frank Work, Transferee" on February 19, 1940. A notice of transferee liability in the amount of $ 2,187.50 for the unpaid income tax of Southern and Atlantic for 1930 was issued by the Commissioner to the1951 U.S. Tax Ct. LEXIS 219">*230 "Estate of Frank Work, Transferee" on February 21, 1940.

On December 30, 1949, the United States, at the request of the Commissioner, commenced a civil action against Western Union and Pacific 16 T.C. 863">*868 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 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 1951 U.S. Tax Ct. LEXIS 219">*231 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 or about February 27, 1950, the United States, at the request of the Commissioner, commenced a similar civil action against Western Union and Southern and Atlantic in the United States District Court for the Southern District of New York for income tax and interest due from Southern and Atlantic.

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.

On or about March 10, 1950, preliminary injunctions to the same effect were issued by the District Court in the case involving Southern and Atlantic. The tax liability of Pacific and Atlantic and Southern and Atlantic involved in the above proceedings now before the District Court involve the calendar1951 U.S. Tax Ct. LEXIS 219">*232 years 1931 to 1939, inclusive.

The Estate of Frank Work and the petitioners herein as executors are liable as transferees for the unpaid income taxes of Pacific and Atlantic and Southern and Atlantic for 1930 in the amounts of $ 996 and $ 730, respectively.

OPINION.

The principal issue herein, relating to the Commissioner's burden of showing the insolvency of the transferors and exhausting all reasonable remedies for the collection of the tax from the transferors before proceeding against the petitioners as transferees, has been fully considered and decided adversely to the petitioners in Samuel Wilcox, 16 T.C. 572. Therefore, we shall pass immediately to a consideration of the second issue.

16 T.C. 863">*869 Petitioners point to the fact that the court decree of April 2, 1917, directed them to transfer and pay over 1,994 of the 2,990 shares of Pacific and Atlantic stock and 1,166 shares of the 1,750 shares of the Southern and Atlantic stock held by the decedent's estate, one-half to Lucy Hewitt and the other half to the Roche trust. However, the distributees under the decree requested the petitioners to retain possession of such stock, to receive the income, 1951 U.S. Tax Ct. LEXIS 219">*233 and to pay the same over to them. The petitioners complied with the requests and thereafter and during the year 1930 retained title to the stock in the name of the estate and received and immediately paid over to Lucy Hewitt and the Roche trust all rental-dividends received on such stock. Therefore, the petitioners argue that the estate owned and was entitled to the rental dividends from only 996 shares of Pacific and Atlantic stock and 584 shares of Southern and Atlantic stock in 1930; that the estate had no beneficial interest in the remaining stocks registered in its name; and that the estate merely held such stock and received the rental-dividends thereon as a "nominee" for Lucy Hewitt and the Roche trust.

We think that the petitioners' position is well taken. They were completely divested of all ownership and interest in the stock which was ordered by the decree of April 2, 1917, to be distributed to Lucy Hewitt and the Roche trust. Therefore, no part of the rental-dividends received by the petitioners in 1930 with respect to the 1,994 shares of Pacific and Atlantic stock and the 1,166 shares of Southern and Atlantic stock inured in any way to the benefit of the estate or1951 U.S. Tax Ct. LEXIS 219">*234 the trust which the petitioners represented in their fiduciary capacities. For that matter, it does not appear that such rental-dividends ever came into the hands of or were handled by the petitioners as the executors and trustees of the decedent's estate. The Commissioner has made no showing that the petitioners received, administered, or distributed the rental-dividends belonging to Lucy Hewitt and the Roche trust in their fiduciary capacities or held themselves out as the beneficial owners of such stock. The single fact that the petitioners allowed the stock to remain registered in the name of the estate and, therefore, received the rental-dividends in 1930 is not sufficient to establish their liability as transferees when the evidence shows that they and the estate held title to the stock merely as nominees for the convenience of other parties. John Robert Brewer, 17 B. T. A. 713; R. E. Burdick, 24 B. T. A. 1297; Kizzie Gordon, 27 B. T. A. 377; Paulyn E. Tomfohr, 44 B. T. A. 730.

Petitioners concede that the estate in 1930 was the owner of 996 shares 1951 U.S. Tax Ct. LEXIS 219">*235 of Pacific and Atlantic stock and 584 shares of Southern and Atlantic stock and that they held such stock and received the rental-dividends in controversy in their fiduciary capacities as executors and trustees under the decedent's will. Petitioners herein occupy the same 16 T.C. 863">*870 position with respect to such stock and the rental-dividends received thereon in 1930 as did the executors in the Estate of Irving Smith, 16 T.C. 807, wherein we held on substantially the same facts that the executors of an estate were liable as transferees.

Therefore, on the authority of Samuel Wilcox, supra, and the Estate of Irving Smith, supra, we hold that the Estate of Frank Work and the petitioners as executors thereof are liable as transferees under section 311 of the Revenue Act of 1928 for the unpaid income taxes of Pacific and Atlantic and Southern and Atlantic for 1930 in the amounts of $ 996 and $ 730, respectively.

Decisions will be entered under Rule 50.