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June 16, 1950

MARCELLE, Collector of Internal Revenue

The opinion of the court was delivered by: BYERS

There are cross motions for summary judgment in a cause containing no contested issues of fact.

The action is to recover an alleged overpayment of personal income taxes for the years 1942 and 1943 of $ 11695.33 with interest, and is based upon the disallowance as a deduction for a bad debt of $ 21142.93 principal and $ 7157.07 interest, which together amount to $ 28300.00.

That sum was paid by the taxpayer to the Trustees under the Will of Frederick S. Wheeler, deceased, during the calendar year 1942, and represented approximately one-half of the balance of principal and unpaid interest due on a note for $ 50,000.00 bearing 4% interest, dated December 14, 1934, made by Henry W. Phelps, to the order of the decedent. That note was owned by the latter at the time of his death during April of 1936, and thus came into the possession of his executors.

 It is assumed for present purposes that the note could have been collected by the executors; they did in fact receive payments on account of principal amounting to $ 8500.00 between June 19, 1936, and August 12, 1937, but nothing more. In the Federal Estate Tax proceedings the note was listed at face value, and so assessed in the computation of the tax.

 For personal reasons the widow and son of the decedent (who with Bankers Trust Company were executors of and trustees under the Wheeler Will) were reluctant to enforce the collection of the Phelps note by legal means; thus their official duties, and two-thirds of their person inclinations were reconciled by the arrangement which forms the basis of this claim.

 By written agreement, dated January 7, 1938, between the executors and trustees of the one part, and Mrs. Wheeler and her son Arthur of the other, it was recited that they had requested the former 'not to demand or enforce payment against the maker (Phelps) of either principal or interest of said note at the present time and are willing to make this Agreement to hold the said parties of the first part harmless by reason of the failure to collect against the maker the balance of principal or interest now due or to become due'.

 To carry out this declared purpose, the executors agreed to distribute the said note in kind to themselves as Trustees of the testamentary trust for Mrs. Wheeler, and that they would not enforce payment of the note as such Trustees except upon the written consent of Mrs. Wheeler and her son. Wherefore the latter agreed. (a) to waive interest occasioned by the failure to collect interest or principal of the Phelps note; (b) that Arthur would accept the note at face value pursuant to the terms of the trust for his mother if he should survive her; (c) that if she should survive him the note should be purchased jointly (by her and his representatives) from the executors and trustees. and (d) that the individuals, jointly and severally, from themselves, etc., 'in the event that at any time any court of competent jurisdiction enters any final order surcharging the account of the parties of the first part as Executors and/or Trustees * * * with any amount by reason of the failure to collect the principal or any interest thereon upon the of said H. W. Phelps * * * then and in such event they will promptly pay over forthwith to the said parties of the first part * * * the full amount of any such surcharge together with any interest or costs thereon so as to hold at all times the said parties of the first part or their survivors or successors harmless and free from any and all liability or loss or damage by reason of any such surcharge'.

 It is in respect of the taxpayer's performance of the contractual duty so arising, that this suit arises.

 It will be observed that the last payment on account of the note (August 12, 1937) rendered the statute of limitations applicable six years later.

 Suit was instituted by the Trustees under the Wheeler Will, against Phelps, in the Supreme Court of New York, in July of 1942, upon the unpaid balance of $ 41500.00 and accrued interest, but seemingly it did not go to judgment. An examination of the defendant elicited the information that he was without assets from which a judgment could have been satisfied, and in the opinion of counsel the note at that time was worthless, and 'to take judgment thereon would be at best a futile gesture and would cost the Trustees substantial expense, all to no avail'.

 Believing that execution on such a judgment would be returned unsatisfied, the parties plaintiff abandoned the case.

 Thereupon (December 24, 1942) the Bankers Trust Company wrote to Mrs. Wheeler and her son, in part: 'We are convinced that upon any accounting the trustees will be surcharged with the amount of this note, and, therefore, that the agreement between the trustees and yourselves dated January 7, 1938 should be enforced against you as guarantors.'

 Demand for reimbursement of the trust estate was made to the extent of $ 55,545.00 of which $ 41,500.00 was the principal unpaid 'and $ 14,045 interest computed to December 28, 1941'.

 With obvious alacrity Mrs. Wheeler made the payment of $ 28,300.00 on that day, being the amount referred to in ...

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