Hamlen v. Welch

• Decision Date: 30 December 1940
• Docket Number: No. 3611.,3611.
• Citation: 116 F.2d 413
• Parties: HAMLEN et al. v. WELCH, Former Collector.
• Court: U.S. Court of Appeals — First Circuit

116 F.2d 413 (1940)

HAMLEN et al. v. WELCH, Former Collector.

No. 3611.

Circuit Court of Appeals, First Circuit.

December 30, 1940.

COPYRIGHT MATERIAL OMITTED

Richard W. Hale, of Boston, Mass. (George C. Abernathy, Jr., and Hale & Dorr, all of Boston, Mass., on the brief), for appellants.

Loring W. Post, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., J. Louis Monarch and Julian G. Gibbs, Sp. Assts. to Atty. Gen., and Edmund J. Brandon and C. Keefe Hurley, both of Boston, Mass., on the brief), for appellee.

Before MAGRUDER and MAHONEY, Circuit Judges, and PETERS, District Judge.

MAHONEY, Circuit Judge.

This action was brought in the United States District Court for the District of Massachusetts to recover back income taxes for the year 1935, and is here on appeal from judgment for the defendant upon a directed verdict. The taxpayer died after suit had been commenced and his administrators with the will annexed have been substituted for him as parties plaintiff.

In his 1935 return, the taxpayer claimed as a deduction the sum of $38,875.70, which he had paid in that year to the Boston Safe Deposit & Trust Company and the Warren Institution for Savings, holders of mortgages on properties of the Nathaniel Hamlen Trust, of which the taxpayer was a trustee and one-fourth beneficiary. The money so paid was applied by the banks to the payment of taxes on these properties. The Commissioner of Internal Revenue disallowed the deduction and determined a deficiency, with interest, of $9,793.60. The claim for refund as to this part of his taxes was disallowed and suit brought.

The question to be determined is whether this was a bad debt "ascertained to be worthless and charged off within the taxable year" within the meaning of Section 23(k) of the Revenue Act of 1934¹, 48 Stat. 680, 689, 26 U.S.C.A.Int.Rev.Acts, page 673.

The case was heard on a stipulation of facts and oral testimony. The evidence shows that the Nathaniel Hamlen Trust was created under the will of the taxpayer's grandfather, and included many pieces of real estate in Boston. Several mortgages on real estate of the trust were held by the Boston Safe Deposit & Trust Company and the Warren Institution for Savings. The taxpayer and the other three parties in interest became owners of the assets of the William Powell Perkins Trust in 1929, and placed them in the Hamlen Trust in the same proportion as they were interested in them. Included in these assets was certain real estate in Boston which had been mortgaged in 1913 by William J. Stober to the Boston Safe Deposit & Trust Company to secure the payment of a promissory note for $225,000. In this mortgage, the mortgagor covenanted to pay promptly when due all taxes and assessments, as well as interest and principal.

On August 5, 1930, the taxpayer, as trustee under the will of Nathaniel Hamlen, and the Boston Safe Deposit & Trust Company signed an indenture whereby the Trust Company agreed not to demand payment of the principal sum secured by the mortgage until January 31, 1931, upon payment by Paul M. Hamlen, Trustee (the taxpayer), of interest from March 31, 1930, to January 31, 1931, and the taxpayer covenanted to pay the mortgage debt. By a written instrument of August 11, 1930, the taxpayer, in consideration of the extension, personally guaranteed to the Trust Company the payment of the principal and interest of said mortgage note for $225,000, in accordance with the terms of the extension.

Under date of October 17, 1930, the taxpayer signed a mortgage and note as Trustee under the will of Nathaniel Hamlen, which was secured by certain other trust property. The note was for the period of three years and payable to the Warren Institution for Savings, or its order.

The taxpayer seeks to deduct as a bad debt the amount paid by him in 1935 to the banks and applied by them to the payment of taxes on the properties covered by these mortgages. Between the giving of his guarantee and the payment to the banks, the financial situation with reference to the trust estate had become very bad. At the end of 1935 the Nathaniel Hamlen Trust had no net value.

On August 8, 1935, the taxpayer paid from his own funds, and not as trustee, to the Boston Safe Deposit & Trust Company the sum of $18,562.50 and on December 31, 1935, the sum of $10,000. On December 31, 1935, he paid from his own funds, and not as trustee, to the Warren Institution for Savings, the sum of $10,313.20. These sums total $38,875.70 and are shown to have been applied by the banks to the payment of taxes on the properties mortgaged to them. It appears that these payments by Mr. Hamlen were in part performance of his contractual obligations to the respective banks, as previously set forth.

Entries of these cash payments were made currently in the taxpayer's personal cash book. They were not considered as charging off these amounts as bad debts but as evidence of cash payments to the banks. Later these entries were posted in the ledger to the account of "Paul M. Hamlen, Guarantor", and were also posted to the profit and loss account through the journal in the closing entries. These entries in the journal and ledger were made as of December 31, 1935, though their physical entry on the books was made some time in February or the latter part of January, 1936.

There are in evidence two affidavits by the taxpayer containing valuations of the assets of the Nathaniel Hamlen Trust, which show that the taxpayer appraised the trust properties on November 29, 1935, at less than $1,000,000. This evidence, corroborated by expert real estate appraisers, and taken in conjunction with the balance sheet of the trust for 1935, showing liabilities in excess of $1,600,000, was introduced for the purpose of proving that the taxpayer in 1935 had ascertained the claim in question to be worthless.

In an antenuptial agreement which the taxpayer entered into in May 1, 1936, there was set up the Mainstone Farm Trust. The schedule of property affected by this trust included among his assets his claim of $38,875.70 against the Nathaniel Hamlen Trust. Schedule A of this agreement is entitled "Property Owned by Paul M. Hamlen to be Affected by the Foregoing Indenture and Antenuptial Agreement" and Item 14 there reads as follows: "Claim of Paul M. Hamlen against Paul M. Hamlen and Nathaniel Hamlen, as Trustees under the will of Nathaniel Hamlen, for money advanced to the said Trustees under the will of Nathaniel Hamlen in the principal amount of $42,875.70". The latter sum includes the claim in suit of $38,875.70.

At the conclusion of the testimony for the taxpayer, the trial judge ruled that the evidence was insufficient to warrant a verdict for the plaintiff and granted the defendant's motion for a directed verdict.

We are of the opinion that there was a debt within the meaning of the statute. There are many meanings to such words as "debt" or "indebtedness", and their precise meaning in any given statute must depend upon the purpose of the statutory provision. Commissioner v. Tennessee Co., 3 Cir., 1940, 111 F.2d 678; cf. John H. Farish & Co. v. Commissioner, 8 Cir., 1929, 31 F.2d 79, 81, (bad debt deduction allowed for uncollectible amount embezzled from taxpayer). A debtor-creditor relation is possible even though the debt is between the trustee and his trust estate. The trustee has an enforceable right to reimbursement which is sometimes spoken of as an indebtedness. See, e. g., Austin v. Parker, 1925, 317 Ill. 348, 353, 148 N.E. 19, 22. ("An exception to this rule exists where the estate is either indebted to the trustee, or would be if he should pay the demand.") Though a partnership has no legal personality, it may be the debtor of one of its partners. Nye v. United States, 1 Cir., 1936, 84 F.2d 457, 462; Bowers v. New York Trust Co., 2 Cir., 1925, 9 F.2d 548, 550. Furthermore, Congress, in the income tax statute, has recognized the individuality of a trust or partnership by requiring separate returns to be filed by the trust and the trustee individually or the partnership and its partners. 26 U.S. C.A. Internal Revenue Code §§ 161-189.

However, to be deductible as a bad debt, the debt must have existed in fact, for that which never existed had no value to lose. Appeal of Luke & Fleming, Inc., 1924, 1 B.T.A. 12. It has been held that when a taxpayer attempts to deduct as bad debts amounts which he has paid as endorser or guarantor and for which he has not been reimbursed, it must be shown that he was legally bound to pay as the voluntary assumption of obligations does not justify deductions. Jamie A. Bennett, 1939, 40 B.T.A. 744; cf. Robinson v. Commissioner, 8 Cir., 1931, 53 F.2d 810, 79 A. L.R. 975. But in the case of a trustee, it appears to be the law that he is entitled to reimbursement from the trust estate whenever he has benefited the latter by paying trust obligations out of his own pocket though he erroneously supposed himself to be liable. Restatement of Restitution, §§ 43, 54, 79; Scott, Trusts, (1940) § 245.1. Whether such a quasi-contractual claim for reimbursement, arising from a payment made under mistake of law, would, if uncollectible, give rise to a bad debt deduction, we need not now determine as we believe the trustee was under an enforceable obligation to make the payments to the Boston Safe Deposit & Trust Co. and the Warren Institution for Savings.

The personal liability of the taxpayer for the payments made depends upon the law of Massachusetts. The mortgage note of October 17, 1930, given to the Warren Institution for Savings read in part as follows: "For Value Received, I, Paul M. Hamlen, as I am trustee under the will of Nathaniel Hamlen, * * * promise to pay * * * (signed) Paul M. Hamlen, Trustee as aforesaid". And the indenture of August 5, 1930, providing for an extension of the Stober mortgage and its assumption by the trustee was signed "Paul M. Hamlen, Trustee u/will Nathaniel Hamlen." After a searching...