The defendant holds real estate as tenant of the plaintiffs for a long term. One covenant of the written lease is that beside paying an annual rental of $18,000, water and other rates, the lessee “will also pay in addition in each year whenever the same are due аnd payable and before any interest or penalty accrues thereon, all taxes and assessments whatsoever, except betterment taxes, which may be levied for or in respect of the said leased premises, or any part thereof, or upon or in respect of the rent payable hereunder by the Lessee, howsoever and to whomso
The question presented is whether the money withheld by the defendant and paid by it to the United States in accordance with the requirements of the federal income tax was a tаx or assessment upon or in respect of the rent payable under the lease. The federal law in paragraph E of § 2 imposеs the duty upon a person in the position of the defendant as lessee to the plaintiffs as lessors “to deduct and withhold” from the rent “such sum аs will be sufficient to pay the normal tax imposed thereon by this section, and shall pay to the officer of the United States Government authorized to receive the same; and they are each hereby made personally liable for such tax.” In this quotation the words “normаl tax” as applied to the facts in the case at bar doubtless mean a tax of one per cent on the annual rent. That is the rate which has been paid by the defendant; and the words “imposed thereon” must refer to the rental, for there is no other source of income of the lessors subjected to a tax to which these words can allude. The concluding phrase renders the lessee persоnally liable for the payment of what is described as “ such tax.” That also can relate only to the rental.
It seems to follow that, aрplying the phraseology of the income tax law to' the covenant of the lease, the sum of money which the lessee has been compelled by that law to withhold from the plaintiffs and pay to the United States Government belongs to the class of imposts correctly described as “taxes and assessments” and that it has been levied “upon or in respect of the rent payable” under the lease. While in a general sense it is true that the income tax is laid upon “the entire net income” of the individual, and not upon each of the sevеral items of which it is composed, yet where the person who pays rent is required by
The distinction between a general income tax and a tax upon the sources from which that incomе springs as applied to the instant statute is not sound in view of the decision in Pollock v. Farmers’ Loan & Trust Co.
The minute provisions of the instant act for withholding the tax at the source and the description of the payment thus exacted as a tаx forbid the conclusion that the tax is not levied upon a separate source from which a part of the net income is derived.
Thе defendant has refused to pay a part of the rent reserved in the lease. It justifies that refusal on the ground that it has been compеlled to pay therefrom a sum exacted by the United States Government. The only payment which the United States had a right to exact under thе law was a tax at a specified percentage upon the rent reserved for a stated period of time. That exactiоn is called in the act of Congress a “tax.” It is in its nature a tax.
A change in the law as to taxation during the term of the lease is of no consequence. Welch v. Phillips,
This record does not raise any question as to a reduction by a lessee of the amount which, as between the lessors and lessee, it ought to withhold from the rent and pay to the United States government. The defendant seeks tо deduct from the rent reserved that which it contends it already has paid as a tax, being obligated to pay all taxes assessed on account of that rent. That it cannot do.
In accordance with the terms of the report, let the entry be
Case remanded to the Superior Court for the assessment of damages.
The case was submitted on briefs in June, 1916, and after-wards was submitted on briefs to all the justices except Coring, J.
Notes
In the Superior Court the case was submitted upon an agreed statement of facts to McLaughlin, J., who found for the defendant and reported the case for determination by this court.