*900 The decedent guaranteed the creditor of his wife's account against loss, and at the time of his death the account showed a deficit and the wife was not insolvent but had a substantial income from a trust. The estate paid the deficit. Held, the amount of the deficit is not deductible as a claim against the estate.
*225 In determining a deficiency of $6,089.84 in estate tax the Commissioner disallowed a deduction of an amount paid by the estate in settlement of a deficit in decedent's wife's brokerage account which decedent had guaranteed.
FINDINGS OF FACT.
T. Handasyd Cabot died February 2, 1938. The estate tax return was filed in the second district of New York.
*226 The decedent and his wife were married in 1898, had a son and two daughters, all born before 1905, and lived amicably together until decedent's death. For many years they maintained a home at Dublin, New Hampshire, where they usually resided four months of the year, and a home in Italy, where they resided eight months. They lived on an expensive scale and in later*901 years their household often comprised the children and eight grandchildren.
Prior to 1923 the decedent's wife had no separate property, and decedent paid all household bills. Upon the death of her father in the autumn of 1923 she became entitled to the income of a trust, which thereafter averaged about $15,000 a year. Decedent suggested and she agreed that an account be opened in her name with the brokerage firm of Moors & Cabot; that her share of the trust income be deposited in it; and that she pay from it a substantial part of the family living expenses. Decedent had maintained an active brokerage account with Moors & Cabot for many years, and after the conversation with his wife he directed William Ferguson, a partner of the firm, who is also a trustee of the trust and an executor of petitioner's estate, to open an account in his wife's name, in which trust income should be deposited and against which she could draw. He expressed the hope that debit balances might check her expenditures. He orally guaranteed the firm against loss on the wife's account, and gave to John F. Moors, another partner, a general power of attorney to act for him in the receipt and disposition of*902 money and property, thereby making available his account with the firm to cover the guaranty. This power remained in effect until decedent's death.
In 1932 decedent put his guaranty in writing:
In consideration of your carrying, at my request, the account of Elise P. Cabot, I hereby guarantee you against loss thereon and to pay you promptly on demand any debit balance now or hereafter due thereon; hereby expressly waiving demand and notice of default, notices of changes in said account and notice of acceptance of this guaranty; and hereby expressly consenting that said account may be conducted and controlled by you and/or by said Elise P. Cabot in the usual manner without notice to me and without affecting this guaranty which I agree shall survive and apply to all transactions in said account whether of purchase, sale, substitution, delivery of securities or of cash, interest, and brokerage charges, closing out or otherwise and whether initiated by you or by said Elise P. Cabot.
I agree that you may hold as additional security for said account all securities, credit balances and equities in any account of mine with you existing while this guaranty is in force.
In the event*903 of my death while this guaranty is in force, I agree that my estate shall be liable hereunder until liquidation of said account as the same shall be at the date of receipt by you of notice of my death.
* * *
An *227 account in the wife's name was opened by a debit of $2,500, which she withdrew for household expenses. Her share of the trust income has been regularly deposited in the account, and at decedent's death these deposits aggregated $215,569.11. She withdrew funds from it, usually depositing them in a checking account with a bank, and drawing checks against this for household and living expenses, servants, taxes, insurance, etc. Sometimes she sent bills to Ferguson, who paid them directly and without question from her Moors & Cabot account. She also made withdrawals from that account for letters of credit, using the proceeds for living expenses and travel abroad and for gifts to the children, which decedent approved. She never used it for the purchase and sale of securities. The account constantly had a debit balance after May 15, 1930, and usually had one before that date. Decedent's hopes that this condition would check his wife's spending were not realized, *904 and besides paying some of the household expenses himself, he made contributions to the wife's account. Moors & Cabot required him to do so whenever the credit balance in his account fell below the debit balance in hers. These contributions were made by transfers from his account to his wife's, securities in his account being sometimes sold for this purpose. Deposits of decedent's funds in the wife's account and the contemporary debit balance in her account were as follows:
| Date | Deposit | Debit balance |
| Nov. 2, 1925 | $1,000.00 | $9,197.91 |
| Nov. 11, 1926 | 8,778.78 | 8,778.78 |
| Do | 282.32 | |
| Oct. 18, 1924 | 15,059.40 | 16,059.40 |
| Sept. 28, 1932 | 1,000.00 | 17,293.72 |
| Oct. 9, 1936 | 15,000.00 | 33,186.69 |
| Total | 1 41,121.50 |
At decedent's death the wife's account showed a debit balance of $25,269.06, the last items paid from it being the following:
| Paid to decedent | $223.00 |
| Paid to decedent's children | 5,420.50 |
| Drafts - letters of credit | 7,201.36 |
| Paid to First National Bank, a/c Mrs. Cabot | 5,145.69 |
| Paid to Keene National Bank, a/c Mrs. Cabot | 310.20 |
| Federal income taxes of Mrs. Cabot | 1,025.25 |
| Interest charges on account | 1,230.12 |
| Service charge on account | 200.00 |
| Miscellaneous items | 4,512.94 |
| Total | 25,269.06 |
*905 *228 The miscellaneous items were household and living expenses. The interest charges of $1,230.12 on the account were deducted on the wife's income tax return. The payment of $223 to decedent was made at his request without the wife's express authorization. On May 2, 1938, at the direction of Ferguson as executor of decedent's estate, the debit balance in the wife's account was paid to Moors & Cabot by a transfer of $25,269.06 from decedent's account to his wife's. No claim for this amount was formally filed against the estate, and no approval of the payment has been sought or obtained from the Probate Court. The wife has continued her account with Moors & Cabot, and has opened a new account for trading. The wife is the sole beneficiary of decedent's estate.
OPINION.
STERNHAGEN: The Commissioner disallowed the deduction of $25,269.06 because it was not "a claim against the estate incurred or contracted bona fide for an adequate and full consideration in money or money's worth, within the meaning of section 303(a)(1) of the Revenue Act of 1926 as amended." The disallowance is sustained. This amount was not the subject of a claim against the estate, notwithstanding*906 the payment by the estate. The excess debit was in the wife's account, and was the result of her overdraft. She had independent means and was primarily liable on the account. She was not insolvent. The claim was primarily against her, and the decedent was only a "guarantor" in accordance with the terms of the 1932 letter. By that letter, he "guaranteed" the firm against loss and waived demand upon him and notice of default, giving the firm the right to take from his account to save it from loss in hers. There is no foundation for regarding this as a direct or simple obligation of his irrespective of whether the deficit represented a loss. The arrangement was that she should bear some of the expenses, and he "guaranteed" the firm against loss; not that he was to be the obligor in the first instance of any current deficit. So far as this record shows, he, during life, and his estate, after death, could rightfully resist the firm's demand for payment of a shortage in the amount until by insolvency of the wife or otherwise the firm had a loss. Nonresistance and voluntary payment are not the recognition of a legal claim, and do not per se prove the existence of a claim. *907 ; ; ; .
Since there was no claim against the estate, it is unnecessary to determine whether the consideration was adequate and full in money or money's worth. It is also unnecessary to determine whether the *229 estate was subrogated to the firm's right against the wife. Cf. ; ; ; . Even though there were no such right of subrogation after the payment in question, this would not support the deduction.
Other items are abandoned or settled.
Decision will be entered under Rule 50.
Footnotes
1. So stipulated. ↩