68 T.C. 792 (1977)





Over a period of 20 years petitioner made successive promises to his sister Rose to make sizable gifts to her. His promises for the years in issue were memorialized in bonds, executed under seal, secured by mortgages on his home. The issue before us is whether petitioner is entitled to deduct the interest which he paid to his sister on these bonds.


A deduction is generally allowed on "all interest paid or accrued within the taxable year on indebtedness." Sec.163(a). Courts have defined indebtedness to mean an unconditional and legally enforceable obligation for the payment of money. The determination of whether an obligation is legally enforceable requires an analysis of the law of the State in which the transaction occurred, in this case---New Jersey.


Since in most jurisdictions a promissory obligation executed as a gift is not legally enforceable, any interest paid on such an obligation is not deductible.


In New Jersey, as under the common law generally, a gratuitous promise to make a gift cannot normally be enforced. At common law, however, such a promise, if under seal, is enforceable. Since the gratuitous promises involved in this case were under seal, the sole issue is whether or not New Jersey retains this common law rule.


The following statutory rule applies in New Jersey:


In any claim upon a sealed instrument, a party may plead and set up, in defense thereto, fraud in the consideration of the contract upon which recovery is sought, or want or failure of consideration, as if the instrument were not sealed.


In such cases the seal shall be only presumptive evidence of sufficient consideration, which presumption may be rebutted as if the instrument were not sealed. [N.J. Stat. Ann. sec. 2A:82-3 (1976). Emphasis added.]


On its face, this statute, enacted in substantially its present form in 1900 (1900 N.J. Laws, ch. 150, sec. 15), appears to modify the common law rule and to make lack of consideration a defense to a scaled instrument. This would scarcely be surprising, for the magic of the seal has long since been legislatively exorcised in most American jurisdictions . . .


. . . Research has disclosed no recent instance in which any court in the United States has enforced a gratuitous promise under seal. Since petitioner's bonds were not in our view legally enforceable in New Jersey, interest paid thereon is nondeductible.