United States v. Mitchell, 5130.

• Decision Date: 08 December 1934
• Docket Number: No. 5130.,5130.
• Citation: 74 F.2d 571
• Parties: UNITED STATES v. MITCHELL et al.
• Court: U.S. Court of Appeals — Seventh Circuit

74 F.2d 571 (1934)

UNITED STATES v. MITCHELL et al.

No. 5130.

Circuit Court of Appeals, Seventh Circuit.

December 8, 1934.

Frank J. Wideman, Asst. Atty. Gen., Dwight H. Green, U. S. Atty., of Chicago, Ill., and Sewall Key and Carlton Fox, Sp. Assts. to Atty. Gen., for the United States.

Edward F. Colladay and Wilton H. Wallace, both of Washington, D. C., and David O. Dunbar, Stanley Rich, and Clinton Merrick, all of Chicago, Ill., for appellees.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

EVANS, Circuit Judge.

The issue to be determined upon this appeal is whether claims, totaling $170,013.78, based on decedent's oral promise to pay possible losses arising out of loans to others, are to be deducted in arriving at the net taxable estate for the purpose of determining estate taxes under section 303 (a)(1), Revenue Act 1926 (26 USCA § 1095 (a)(1).¹

John J. Mitchell died October 29, 1927, leaving an estate which was subject to the Federal estate tax. In October, 1928, a tax of $175,183.17 was paid. On March 14, 1930, the Government sent a notice of a deficiency tax of $118,840.64. This sum was paid June 23, 1930. A claim for refund was filed a few months later. As it was not allowed, appellees, as executors of the estate, brought this action to recover $47,140.97 and interest. Appellant conceded part of the claim, the balance of which was contested. A judgment was entered against appellant for $31,573.82 and interest, and this appeal resulted.

The controlling facts may be stated by quoting from the court's finding:

"Decedent was chairman of the board of directors of the Illinois Merchants Trust Company, now by succession Continental Illinois National Bank and Trust Company of Chicago. Certain members of his family were largely interested as stockholders and officers in two separate corporations known as Inland Glass Manufacturing Company and Cord Tire Corporation. Said two companies, finding themselves in need of financial assistance, approached Mr. Geddes, one of the loaning officers of Illinois Merchants Trust Company, with a view to obtaining banking credit. Mr. Geddes advised officials of both said companies that since said companies were new enterprises being conducted by unseasoned executives, they should not seek banking credit but that said companies should conduct their business on capital furnished by those interested therein. After this conversation the officers of said companies had some negotiations with the Union Trust Company of Chicago with reference to banking connections. When the attention of decedent was called to this fact by members of his family, Mr. Mitchell expressed personal chagrin that the companies in which his family were so largely interested and of which his sons were executive officers and directors could not do their banking business with the institution of which he was chairman of the board of directors, and he expressed a desire to have said companies do business with Illinois Merchants Trust Company. As an inducement to Illinois Merchants Trust Company to make loans to said two corporations, Mr. Mitchell stated to Mr. Geddes and to the executive officers of the Trust Company that he would not permit that institution to suffer any loss as a result of loans made either to Cord Tire Corporation or the Inland Glass Manufacturing Company. He agreed to indemnify the Trust Company against all loss in connection with loans so made. At the instance of decedent and relying upon his indemnity agreement, the Illinois Merchants Trust Company from time to time did make loans to said two companies. From time to time as these loans came up for renewal decedent reiterated his statement that he would not permit the Bank to suffer any loss by reason of said loans. As security for loans made to Inland Glass Manufacturing Company, decedent also hypothecated and pledged to the Bank by a written instrument 200 shares of the capital stock of Commonwealth Edison Company, which stock was included for tax purposes in decedent's gross estate at $33,400.

"At the time of decedent's death, the Cord Tire Corporation and Inland Glass Manufacturing Company were * * * insolvent and in such condition financially that suits against them by the Trust Company for the collection of said indebtedness to it would have been idle formality. Both companies were hopelessly insolvent."

The notes of the Inland Glass Co. were signed "Inland Glass Mfg. Co. John J. Mitchell, Jr., Vice Pres.," and the notes of the Cord Tire Corp. were signed in the corporate name by a corporate officer.

The District Court held that deceased's liability was collateral and not primary; that the debt was voidable and not void under the Statute of Frauds; and that the claims were deductible under section 303 (a) (1) of the Revenue Act of 1926.

The two determinative questions on this appeal are: (1) Was the bank's claim against Mitchell, assuming it to be a valid enforceable one, deductible under section 303 (a) (1) of the Revenue Act of 1926? (2) Did Mitchell's agreement with the bank fall within the Illinois Statute of Frauds?

We will dispose of several minor contentions advanced by appellees as additional grounds for sustaining the decree with but brief comment.

The fact that a claim was presented and allowed in the Probate Court and subsequently paid by the executors has no bearing on the deducibility of the claim in question under section 303 (a) (1). One may pay a claim which he is under no legal obligation to satisfy. He may make gifts. He may waive legal defenses and, prompted by most commendable motives, assume and pay obligations that have no legal basis for support. Donnelley v. Commissioner (C. C. A.) 68 F.(2d) 722.

Nor can an asserted obligation which was enforceable only at the option of the deceased obligor be deducted. The mere fact that a contract within the Statute of Frauds is voidable and not void does not permit the executors of the estate to waive the obligor's defense after the latter's death so as to avoid an estate tax.

In reaching this conclusion we are not relying upon the last sentence of Article 36 of Regulations 70, which reads as follows: "Only claims enforceable against the estate may be deducted." We do not believe it was within the power of the Commissioner to limit by regulation the scope of deductible claims which were defined by the statute. But irrespective of the regulation, only enforceable claims against the estate may be deducted.

If claims not legally enforceable against the estate but which are voidable in character, or which are predicated upon a moral obligation only may be deducted, the temptation to assume claims that might well be paid by heirs would be well nigh irresistible. In the present case, it may have been laudable for those in charge of the estate of the decedent to pay all claims for which there was a legal or moral obligation on the part of the decedent to pay had he lived. On the other hand, there was as urgent a moral obligation on the part of the legatees who contracted the indebtedness to pay these notes as there was on decedent, and had they paid them there would have been no claim against the estate. Moreover, the claimant in the Probate Court and the executor who filed no objections to the claim were one and the same party, a party situation which should not be permitted.

(1) Assuming the decedent's promise was outside the Statute of Frauds, was it a deductible one under section 303?

The allowance of the deduction of this claim must find authorization in the statute. The above-quoted section (section 303 (a) (1) permits of deductions of "claims against the estate * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money's worth." The claim, however, must be "for an adequate and full consideration in money or money's worth." The italicized words are unusual and significant. If appellees' deduction is to be denied, it must be traceable to these words.

A study of the history of the section throws some light on the Congressional intent. We quote from the Acts of 1921, 1924, and 1926 (Revenue Act 1921, § 403 (a) (1), 42 Stat. 279; Revenue Act 1924, § 303 (a) (1), 26 USCA § 1095 note; Revenue Act 1926, § 303 (a) (1), 26 USCA § 1095 (a) (1).²

It is apparent that the 1924 and 1926 Acts successively narrowed the scope of deductible claims.

It is appellant's contention that the "adequate and full consideration in money or money's worth" must have passed to the decedent before a claim may be deducted. Reliance is placed on the opinion in Latty v. Commissioner (C. C. A.) 62 F.(2d) 952, 954, where it is said:

"The soundness of the above-stated conclusion is emphasized, we think, when we consider the purpose and effect of the addition to the analogous section of the 1921 act (42 Stat. 278, § 402 (c) of the clause permitting the deduction of claims against the estate only to the extent that such claims were `incurred or contracted bona fide and for a fair consideration in money or money's worth.' Possibly the reason why this clause has not been specifically the subject of judicial construction is that its meaning seems fairly apparent to the ordinary intelligence. In the present case we are not so much concerned with whether there was a `fair' consideration, although it might be somewhat difficult to say just what legal right Mrs. Jackson relinquished by her contract, as we are with whether the consideration moving to the father may rightly be considered as a consideration `in money or money's worth.' There are instances in which it is practically impossible to say that a fair consideration is not to be regarded as a consideration in money or money's worth (cf. Ferguson v....