Before KALODNER, STALEY and HASTIE, Circuit Judges.
This petition for review of a decision of the Tax Court involves alleged deficiencies in the estate tax paid by the executors of the estate of Charles B. Wolf.
At his death on January 8, 1951, Charles B. Wolf was a resident of York County, Pennsylvania. He was survived by his wife, Frances G. Wolf, by whom he had four children, all living upon his demise: Frances Jane Wolf, now McCabe; Charles S. Wolf; Jessie C. Wolf, now Sherrill; and Mary Julia Wolf.
Subsequent to decedent's death, twenty-five demand notes were found in various envelopes in his safety deposit box. These notes had been executed by decedent and made payable to either his wife or one of their four children.*fn1 They were issued to decedent's wife and children in exchange for dividend checks received by them and turned over to decedent for his own use. The face amount of each note corresponded to the amount of the dividend check turned over to decedent by the named payee.
Although Frances G. Wolf and her children were aware of the existence of the notes and were shown them on occasion, the notes were retained by decedent in his safe-deposit box. The notes relating to each individual were segregated in an envelope appropriately marked with the payee's name. Both decedent and his family looked upon these transactions as loans, although the payees did not receive any security or interest payments. The Tax Court found that the payees never made a demand on decedent for payment nor did they ever contemplate suit for payment.
Both Frances J. and Charles attained their majority more than six years prior to decedent's death and served in the armed services during World War II. Frances J. was a member of the Women's Army Corps from February 1943 to November 1944, and Charles was a member of the United States Army from June or July 1943 until March 1946. Of the remaining two children, Mary was a minor at the time of her father's death, and Jessie had attained her majority less than six years prior thereto.
The executors paid the face amounts of the twenty-five notes on October 11, 1954, to the respective payees. They claimed a deduction from the gross estate equal to the face amounts of the notes and interest thereon accrued to the date of decedent's death.
The Tax Court concluded that the notes reflected bona fide debts of decedent. However, it held that the debts were barred by the Pennsylvania Statute of Limitations as to all the parties except Jessie and Mary, the two younger children, and therefore not "allowed" within the meaning of Section 812(b)(3) of the Internal Revenue Code of 1939.*fn2 It is from this decision that the appeal was taken.
Section 812(b)(3) of the Internal Revenue Code of 1939 provides that the net estate "shall be determined * * * by deducting from the value of the gross estate * * * such amounts * * * for claims against the estate * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered," and further that "The deduction * * * allowed in the case of claims against the estate * * * shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth * * *." (Emphasis supplied.) Inasmuch as the deductibility of claims against the estate depends on their allowance by the jurisdiction in which the estate is being administered, we must examine Pennsylvania law.
In Pennsylvania, a suit on a demand note is barred six years after execution. 12 Purdon's Pa. Stat. Ann. §§ 31, 36. However, it is well established that "A debt barred by the statute of limitations is still a debt, though the remedy upon it be suspended or gone. Its force as an existing obligation, even though only moral, is such that a promise to pay is binding without other consideration." Woods v. Irwin, 1891, 141 Pa. 278, 21 A. 603. That case additionally held that it was well settled that the executrix, if satisfied the claim is honest, is not bound to plead the statute of limitations. Also see Fritz v. Thomas, 1836, 1 Whart. Pa. 66; Ritter's Appeal, 1854, 23 Pa. 95. But the parties beneficially interested in the estate also have rights which have been fully recognized. In Kittera's Estate, 1851, 17 Pa. 416, it was held that where the fund was insufficient to pay all the debts of a decedent, each creditor has a right to oppose any other claimant by showing that his debt is barred by the statute of limitations, regardless of the lack of action by the personal representative of the decedent. In a case decided shortly thereafter, it was admitted that a legatee, or other person interested in an estate, has a right to interpose the bar of the statute of limitations against a debt claimed from the estate, although the executor should refuse to plead the statute. Hoch's Appeal, 1853, 21 Pa. 280. And see In re Yocum's Estate, 1913, 242 Pa. 82, 88 A. 919; In re Claghorn's Estate, 1897, 181 Pa. 608, 37 A. 921.*fn3 The rationale for the above cases was well stated in Ritter's Appeal, 23 Pa. at page 97:
"In Kittera's Estate, the right of the creditor to interpose was properly made to depend upon the question whether his interest was affected. That it would be affected where the fund on which he had a lien was not sufficient to pay all the persons claiming to be creditors, is clear. In such a case it is equally clear that he had a right to be heard in his endeavors to protect his interest. So, legatees or distributees may be interested to protect the estate from being exhausted by illegal claims, and consequently their right to plead the statute was fully recognized in Hoch's Appeal."
No appellate cases have been cited to us, nor have we found any that consider the right of the Commonwealth or the United States to raise the bar of the statute of limitations in order to preserve the size of the estate for inheritance or estate tax purposes. One Orphans' Court opinion*fn4 has considered the question, and it concluded that the Commonwealth did not have standing to raise the bar of the statute of limitations.*fn5 The Commonwealth's contention as to standing was based on its right to taxes under the provisions of the Act of May 6, 1887, P.L. 79, which was repealed by the present Transfer Inheritance Tax, 72 Purdon's Pa. Stat. Ann. § 2301 et seq. The decision is based upon the thesis that the statute only grants the state a right to taxes "upon the residue left for distribution after all just, as well as legally enforceable, debts of the decedent are paid * * *." 10 Pa. Dist. R. 538. Whether this opinion is in complete accord with the interpretation placed upon the same statute by the Supreme Court of Pennsylvania in In re Handley's Estate, 1897, 181 Pa. 339, 37 A. 587, is questionable. In the latter case it was stated, at page 588 of 37 A., that
"* * * If distribution is unduly delayed, the commonwealth, under section 15 of the act of 1887, may have a citation to the executors to file an account, or to show cause why the tax should not be paid. By this section, the commonwealth, as to the tax, is put upon the same footing as a legatee or creditor, with a right to enforce distribution at the proper time." (Emphasis supplied.) Furthermore, the more recent cases interpreting the present Transfer Inheritance Tax lead us to the conclusion that the opinion rendered in McKee's Estate is not presently an accurate statement of the law of the Commonwealth. ...