Shiman v. Commissioner of Internal Revenue, 168.

• Decision Date: 05 July 1932
• Docket Number: No. 168.,168.
• Parties: SHIMAN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

60 F.2d 65 (1932)

SHIMAN v. COMMISSIONER OF INTERNAL REVENUE.

No. 168.

Circuit Court of Appeals, Second Circuit.

July 5, 1932.

David S. Pollock, of New York City, for appellant.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and John MacC. Hudson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and G. D. Brabson, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

In July, 1920, Shiman, the taxpayer, guaranteed four brokers' accounts for his brother-in-law, Oppenheim, who was speculating in stocks. One of these was Oppenheim's own, one was Shiman's, one belonged to Oppenheim's wife, in the fourth Shiman and others were interested. At the time of the guaranty Shiman thought Oppenheim solvent, as he was, and the transaction was of the ordinary kind, though influenced no doubt by the relationship of the two. Thereafter, Oppenheim fell into financial straits and became insolvent, though he still retained a small salary susceptible in part to garnishment. The parties do not however rely upon this as a resource; the case has been disposed of on the assumption that nothing could be recovered from him. In October, 1924, the brokers made a demand upon Shiman under his guaranty for ten thousand dollars to be applied upon the account in which Oppenheim was alone interested, and Shiman was forced to respond. At that time the brokers had collateral against this account, some of which at any rate was Shiman's. The record is not clear whether any of it that had value was Oppenheim's, but we must assume that some was his, the amount being in doubt. This payment kept the account open for the rest of the year, but in 1925 it was closed out, and Shiman was forced to make good the deficit, this time amounting to twenty-six thousand dollars more. He claimed the payment of October, 1924, as a loss, or a worthless debt, in his income tax return for 1924, and the Commissioner disallowed it. Upon appeal to the Board he was again unsuccessful and this appeal followed.

The objections are, first, that the payment created no debt from Oppenheim to Shiman at all, because at the time he was known to be insolvent, and a payment to an insolvent's use cannot be made with intent to create a debt; it is to be treated as a gift. At least, the taxpayer, who has the burden, must show that it is not a gift, and this Shiman failed to do. No doubt a man may pay money for another's use, from which a promise to repay is normally inferred, without in fact meaning to create a debt. The relations of the parties may show that it was a gift, just as they may show that any expressions which ordinarily import a contract, are understood by both sides not to create one. New York Trust Co. v. Island Oil & Transport Corp'n, 34 F. (2d) 655 (C. C. A. 2); Williston § 21. Indeed, if the putative lender knows that the borrower is without resources and likely never to have any, it may be reasonable with nothing further, to assume that he merely means to give the money. The conduct of neither party would in that case have its usual implication, and no contract would result. In the case at bar there was no reason to suppose, when Shiman guaranteed the accounts, that Oppenheim would be unable to make him whole. Oppenheim was then solvent, and his promise, implied from the facts, was as authentic as any other. Nobody disputes that this is the common understanding, or that a contract results from it. Oppenheim's obligation was indeed conditional upon Shiman's to the brokers. Only in case Shiman was called upon to perform, was Oppenheim to repay him; no debt arose between the two till Shiman paid, though as soon as he did, Oppenheim owed him the amount at once. But it made no difference that when Shiman did in fact pay, the situation had become such that, had he then voluntarily done so, the advance would have been a gift. He was forced to pay by his earlier undertaking, which from 1920 forward bound his freedom of choice. It has indeed been at times debated whether a conditional obligation is an obligation at all until the condition is fulfilled, but the dispute is scholastic. Except so far as the doctrine of anticipatory breach may require, a promise to perform in the future, whether absolute or conditional, does not circumscribe the conduct of the promisor meanwhile; it limits his freedom only when the time arrives, or if the event occurs. Nevertheless, that limitation has all along been fixed by the promise, and requires no further consent by the promisor to hold him. He has subjected himself to events beyond his control. So it is absurd to treat the performance as it would have been had it been freely made at the time. That cannot be a gift which the putative giver was powerless to withhold.

Next the Commissioner says that in any event there can be no deduction because Shiman suffered no loss; the debt was worthless at the moment it arose, for Oppenheim was then insolvent and known to be. If the deduction had been for the loss of purchased property, this would be clearly untrue. The statute, section 204 (a) and (b) of the Act of 1924, 26 USCA § 935 (a, b) and...