Now, if said note shall be paid in all respects according to its tenor, this deed shall be void. Signed, sealed and delivered in the presence of [Signed] B. F. WINSLOW H. J. TERRILL [Signed] JULIUS G. DAY (L. S.) At all times material to this proceeding the trustee held the note and the mortgage securing it. The trustee, serving without compensation, invested payments of interest received from petitioner, in securities. Julius G. Day, Jr., became of age in 1927, and the trustee then transferred to him the aforesaid securities, but retained the note, continuing to collect the interest thereon as paid by petitioner. The subsequent interest payments were turned over by the trustee to Julius G. Day, Jr., as received. No demand for payment of the note has been made by the trustee or by Julius G. Day, Jr., and the latter has never demanded the note from the trustee. During 1933 and 1934 petitioner, because of the depression, made no interest payments; but on April 22, 1935, he gave the trustee his check for $4,950, covering the interest in arrears and the interest then due. The trustee endorsed the check over to Julius G. Day, Jr., who received payment therefor. The principal of the note is still unpaid, but the interest is paid up to date. The mortgage is still in effect. The value of the mortgaged property in 1935 was approximately $30,000. Foreclosure has neither been instituted nor threatened. Petitioner has never directed or interfered in the administration of the trust. The trustee consulted with petitioner as to investment of the interest prior to 1927 "only casually and generally." OPINION. LEECH: Petitioner contends that inasmuch as the note given by him to the trustee is secured by an instrument under seal, it is a valid and enforceable obligation and the interest payments are consequently deductible. He states that under controlling Connecticut law (see Sterling Morton, 38 B. T. A. 1270), the consideration given for an instrument under seal may not be questioned, but must be conclusively presumed to exist. Hence, he says, the instant situation is controlled by William Park, 38 B. T. A. 1118, which held that, where by the law of a state the consideration for a note may not be questioned because the note is under seal, the note must be deemed evidence of an enforceable debt and the interest paid thereon must be allowed as a deduction. This note is not, however, under seal. But even if it were, absence of consideration could be shown under the laws of Connecticut. See St. Paul's Episcopal Church v. Fields, 81 Conn. 670; 72 Atl. 145. The fact that the mortgage and the trust deed were sealed instruments, and the further fact that, in Connecticut, a seal imports consideration in such instruments as a release (Dwy v. Connecticut Co., 89 Conn. 74; 92 Atl. 883), an option (Hartford-Connecticut Trust Co. v. Divine, 97 Conn. 193; 116 Atl. 239) or a quitclaim deed (Monski v. Lukomske, 118 Conn. 635; 173 Atl. 897), do not foreclose our inquiry into the existence of consideration for the note here. There is no promise to pay contained in either the mortgage or the trust instrument. The mortgage constitutes the security for the note, but it is the note itself which evidences the debt, if any. It is the general rule, moreover, that there can be no valid mortgage without a valid debt, and if the note is unenforceable, the mortgage falls with it. Hendrie v. Hendrie, 94 Fed. (2d) 534; Lee v. Macon County Bank, 233 Ala. 522; 172 So. 662; Rogers v. Snow Bros. Hardware Co., 186 Ark. 183; 52 S. W. (2d) 969; Western Loan & Building Co. v. Scheib, 218 Cal. 386; 23 Pac. (2d) 745; Guaranty Title & Trust Co. v. Thompson, 93 Fla. 983; 113 So. 117; Thorin v. Marchi, 287 Ill. App. 513; 5 N. E. (2d) 292; Hoover v. Pennington, 19 La. App. 779; 141 So. 517; Sanger v. Bancroft, 78 Mass. 365; Spielman v. Albinson, 183 Minn. 282; 236 N. W. 319; Donovan v. Boeck, 217 Mo. 70; 116 S. W. 543; Shriver v. Sims, 127 Neb. 374; 255 N. W. 60; Pierson Co. v. Freeman, 113 N. J. Eq. 268; 166 Atl. 121; Title Guarantee & Trust Co. v. Nessle, 296 N. Y. S. 270; Red River National Bank v. Latimer, 110 S. W. (2d) 232 (Tex. Civ. App.); Tesdahl v. Collins, 97 Pac. (2d) 649 (Wash.); Doyon & Rayne Lumber Co. v. Nichols, 196 Wis. 387; 220 N. W. 181. Consequently, we are here concerned only with the question of whether the note itself is enforceable. Petitioner first urges that love and affection constitute valid consideration. Such is not the law. Estate of Hugo Goldsmith, 36 B. T. A. 1201; Shriver v. Danby, 12 Del. Ch. 84; 106 Atl. 122; Bainbridge v. Hoes, 149 N. Y. S. 20; Shugart v. Shugart, 111 Tenn. 179; 76 S. W. 821; In re Smith's Estate, 226 Wis. 556; 277 N. W. 141. Petitioner's second argument is that the trustee's agreement to accept and perform the trust was consideration for the note. But there is no evidence that the note was given in exchange for such services. In fact, there was no agreement that the trustee would receive anything for his services and no compensation was paid him. The record is also clear that petitioner intended to give his son $30,000 and that the note, mortgage, and trust were the means adopted for that end. We think that this case is controlled by Johnson v. Commissioner, 86 Fed. (2d) 710. That case held that where a trust was set up composed solely of a note given without consideration, payments of interest on the note were wholly gratuitous and not allowable as deductions from gross income. See also Jamie A. Bennett, 40 B. T. A. 745; Sand Springs Railway Co., 21 B. T. A. 1291. The instant note was not backed by any valid consideration whatever. Our conclusion is that it constitutes an unenforceable obligation. Petitioner contends, however, that the note is enforceable in any event to the extent of the collateral securing it, citing William Park, supra (now on appeal, C. C. A. 3d Cir.). It is true that in the Park case the Board stated that "a collateral note is enforceable, at least to the extent of the collateral, regardless of whether or not it is under seal. Dando's Appeal, 94 Pa. 76." However, the Park case was rested specifically on Pennsylvania law, whereas we are now concerned with Connecticut law. In the latter state it has been held that no action lies on a note and mortgage given without consideration. Kane v. Kane, 120 Conn. 184. In any event, we have been cited to no authority for, and decline to adopt, the position that a gratuitous promise is rendered enforceable by the promisor's act in giving security therefor. See Restatement of Contracts, § 75.1 Respondent's determination that the interest is not deductible is sustained. In view of this conclusion, it will not be necessary to pass upon the other grounds advanced by him in support of his position. Decision will be entered for the respondent. C. B. CROSBY, PETITIONER, V. COMMISSIONER OF INTERNAL Docket No. 96401. Promulgated June 18, 1940. Under his father's will petitioner received certain shares of stock, the income from which was charged with making good the deficit, if any, in trust income required to pay certain annuities. Petitioner was one of the testamentary trustees who for convenience collected the dividends on his stock. After supplying a deficit in trust income for the trust's fiscal year, petitioner reported the remaining dividends as income. Held, petitioner is not entitled to a dividend credit in the amount of the remaining dividends under section 163 (b), Revenue Act of 1934. W. L. Schnatterly, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent. 1(1) Consideration for a promise is (a) an act other than a promise or (b) a forebearance, or the creation, modification or destruction of a legal relation, or a return promise, bargained for and given in exchange for the promise. (2) Consideration may be given to the promisor or to some other person. It may be given by the promisee or by some other person. [Implicit in this definition is the thought that the promisor can not give consideration for his own promise.] OPINION. ARNOLD: Petitioner appeals from a deficiency in income tax for 1936 of $68. The deficiency resulted from respondent's adjustment of a credit for dependents claimed by petitioner in the amount of $800 and allowed by respondent in the amount of seven-twelfths of $400, or $233.33. Petitioner alleges, however, that the taxes in controversy are $331.14, and charges that respondent has erroneously refused to allow him the benefit of the credits against net income provided for by section 163 of the Revenue Act of 1934. The parties stipulated the facts, and we recite herein only that portion thereof deemed necessary to determine the issue presented. The petitioner resides at Topeka, Kansas. His books and records are kept and his income tax returns are filed on the cash receipts and disbursements basis. Petitioner's father, Erastus H. Crosby, died testate March 8, 1935. It is stipulated that by the seventh paragraph of his will certain shares of stock of domestic corporations: were transferred and issued to the petitioner, subject to the conditions contained in paragraph seven and eight of the will, namely, that if the net income from the trust estate is insufficient to pay annual income payments totaling $11,800.00 to the testator's wife, sister and sister-in-law, then any such deficits shall be supplied from the income of the said stock issued to petitioner. That no judicial interpretation of the seventh paragraph of the will has been sought but pursuant to convenience, all dividends from the said shares of stock * were paid to the trust estate and held by it until the close of its fiscal year when the distributive shares of its income were determined. * The E. H. Crosby trust estate filed a fiduciary return for the fiscal year beginning March 8, 1935, and ending February 29, 1936, which showed payment of $11,800 to the three beneficiaries aforementioned. The income from the trust estate was insufficient to cover the income payments to the three beneficiaries in full and it was necessary to supply the deficit from dividends collected on the stocks transferred to petitioner under his father's will. After supplying the deficit there remained a balance in dividends from said stocks of $8,278.38, which was received by petitioner in the year 1936 and reported by him as taxable income in his income tax return for that year. If petitioner is entitled under section 163 of the Revenue Act of 1934 to a dividend credit of $8,278.38 in computing his normal tax liability for 1936, it is stipulated that the correct overpayment is $263.14. If he is not so entitled, it is stipulated that the correct deficiency is $68. The provisions of the testator's will bequeathing the corporate stocks in question to his son read in part as follows: SEVENTH: I give and bequeath to my son Charles Bernard Crosby, should he survive me, the following shares of stock in the following corporations or in any successor of said corporations: All of the stock of the Crosby Brothers Mercantile Company of which I may die seised except the shares of said stock bequeathed to Earle C. Williams and Cyrus L. E. Edwards by the Fifth and Sixth Paragraphs hereof; All of the stock of The Central National Bank of Topeka, Kansas, of which I may die seised; All of the stock of The Central Trust Company of Topeka, Kansas, of which I may die seised. I direct that none of the stock above mentioned, that is to say, the stock of The Crosby Brothers Mercantile Company, the stock of the Central National Bank, or the stock of the Central Trust Company herein bequeathed to said Charles Bernard Crosby shall be sold, pledged or in any way alienated by said Charles Bernard Crosby so long as my said wife Helen D. Crosby shall be living. I further direct that the income from said stock and all of it shall be applied to the payment to the said Helen D. Crosby [wife], to Mrs. Susan Sample [sister], and to Minnie D. Horner [sister-in-law], of the income bequeathed to them by Sections (c), (d), and (e) of the Eighth Paragraph of this my will, so far as shall be necessary to make up the full income by said sections of said Paragraph provided to be paid to such persons; that is to say, in case the net income from the property in the hands of the Trustees shall be insufficient to pay said income to said Helen D. Crosby, Susan Sample and Minnie D. Horner, such insufficiency shall be made up from the income from said shares of stock, but not from the principal thereof. I also give and bequeath to my said son Charles Bernard Crosby all of the shares of stock of The Crosby Brothers Realty Company of Shreveport, Louisiana, which I may own at the date of my death, except the stock bequeathed to Earle C. Williams by the Fifth Paragraph hereof. I also give and bequeath to my said son all of the stock which I may own at the date of my death in The Pegues-Wright Dry Goods Company or in any successor corporation, not heretofore and in the Fifth and Sixth Paragraphs hereof bequeathed to Earle C. Williams and Cyrus L. E. Edwards. Should my said son not survive me, then all of the property bequeathed to him in this paragraph of my will shall be and become a part of my residuary estate and shall be disposed of as provided in the Eighth Paragraph of this my will. The decedent's residuary estate was given by paragraph eighth of his will to his son, his nephew, Earle C. Williams, and Cyrus L. E. Edwards, in trust, for the benefit of his wife, sister, and sister-in-law, for life, to the extent of $11,800 of the income, payable monthly to these beneficiaries for life, and any remaining income was to be paid to his son, petitioner herein. In case of petitioner's death, his wife, or his children, depending upon survivorship, were to receive all trust income in excess of the annuities provided for, and upon termi 287011-41-13 |