Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.
Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
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).*fn1
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. Mitchett. 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 State 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 deductibility 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 ...