*1287 Petitioner transferred to his wife, without consideration, shares of stock which had been pledged as collateral security for his debt. The stock had a value slightly in excess of the indebtedness. The pledgee, at the request of petitioner and his wife, had new certificates of stock issued in the name of the wife. She, in conformity with the understanding of the parties, endorsed them in blank and left them with the pledgee as security for her husband's debt. Held, that the value of the gift is an amount equal to the excess of the value of the stock over the indebtedness.
*704 The Commissioner determined a deficiency in gift tax for the calendar year 1936 in the amount of $3,174.30. Petitioner contends that there is no deficiency.
FINDINGS OF FACT.
Petitioner is an individual, residing in Wichita, Kansas. He filed a gift tax return for the year 1936 with the collector of internal *705 revenue for the district of Kansas. Therein he reported a gift to his wife in the sum of $5,374. The following statement shows how petitioner computed*1288 the aggregate sum of the net gifts made by him in that year and how the respondent determined the computation should be made:
| Returned | Determined | |
| 899 shares of the Kansas Milling Co | $77,994 | $80,910 |
| 293 shares of the Leger Mill Co | 35,280 | 35,160 |
| 110 shares of the Wichita Terminal Elevator Co | 12,100 | 13,200 |
| 125,374 | 129,270 | |
| Less amount due on note signed by donor payable to the Kansas Milling Co | 120,000 | |
| 5,374 | ||
| Less reasonable amount on account of stocks being pledged as collateral to donor's note to the Kansas Milling Co | 24,000 | |
| 105,270 |
It is stipulated that "The stocks transferred by gift on January 25, 1936, and the fair market value thereof on that date, without any reduction on account of the indebtedness of $120,000, for which the stocks were pledged, was * * *" as set out in the above schedule under the heading "Determined."
Some time prior to December 1934 petitioner invested a substantial sum in the Blankenship Petroleum Co. This company was adjudged a bankrupt in October 1935.
Most of the money invested by petitioner in the Blankenship Petroleum Co. had been borrowed by him from the Kansas Milling Co. On December 21, 1934, he*1289 was indebted to that company in the amount of $149,036.93, represented by a promissory note payable on demand with interest at the rate of 3 percent per annum. On May 31, 1935, petitioner paid on this note $29,036.93, leaving a balance due of $120,000.
Petitioner was the treasurer of the Kansas Milling Co. and had occupied such position for approximately 21 years. For several years preceding 1934 petitioner received a salary of $600 per month. In 1934 and subsequent years he received a salary of $12,000 a year plus profit sharing. He also received a salary from the Leger Mill Co. His total earnings as salary plus profit sharing in the year 1935 amounted to approximately $40,000. For the year 1936 the aggregate amount was approximately $24,000 and for 1937 approximately $37,000. Petitioner carried life insurance in an amount slightly in excess of $100,000.
The securities shown in the above schedule were held by Willis M. Stillwell, secretary of the Kansas Milling Co., as security for petitioner's note. The stock of the Kansas Milling Co. and of the Leger Mill Co. stood in the name of W. M. Stillwell as trustee.
*706 On January 25, 1936, petitioner made a gift*1290 to his wife of his interest in the securities referred to above. He told Stillwell to have new certificates of stock issued in her name, to have her endorse them back to him, and to continue to hold them as security for his loan. The old certificates in the Kansas Milling Co. were canceled, new ones were issued in the name of petitioner's wife, she endorsed them in blank, and they were left with Stillwell. Petitioner also asked Stillwell to send the Elevator Co. stock and the Leger Mill Co. stock to the companies and to have new certificates issued in the name of his wife. This was done and when the new certificates were received the wife endorsd them in blank and they were left with Stillwell. Other than as above stated, the Kansas Milling Co. never relinquished any of its rights as pledgee of the stocks and has at all times retained possession of the certificates.
After the transfer of the securities the dividends thereon were paid to petitioner's wife. Petitioner continued to liquidate the debt, making an additional payment of $15,000 on his indebtedness to the Kansas Milling Co. in 1937. He filed a gift tax return for 1937, considering the additional payment as a gift*1291 in that amount to his wife and including it in computing his net gifts for that year.
Immediately prior to the date of the gift petitioner's net worth was approximately $20,000, including the value of his equity or interest in the securities transferred and the cash surrender value of his life insurance. Immediately prior to the date of the gift the net worth of petitioner's wife was approximately $10,000. The value of the interest or equity of the petitioner in the securities which he transferred to his wife on January 25, 1936, was $9,270.
OPINION.
MELLOTT: In the statement attached to the deficiency notice it is stated:
The value of the securities, which are the subject of these gifts, is their fair market value at date of gift, subject however to such discount as is reasonable on account of the hypothecated use of which they were subjected at date of gift. This discount is determined to be, not the full $120,000 indebtedness of the donor * * * for which * * * [the securities] were pledged as security, but in a reasonable discount amount of $24,000 based on donor's ability to pay, considering all the circumstances.
Finding has been made that the net gift was $9,270*1292 rather than the amount determined by respondent. In making such finding we have not ignored the argument and authorities relied upon by respondent. Briefly summarized, his argument is: (1) When the pledgee released the stock for the purpose of securing new certificates in the name of petitioner's wife its right in the pledged property ceased *707 to exist; (2) if the wife had not carried out her promise to pledge the stock for her husband's debt, the creditor's only recourse would have been on the promise and it would not have had the right of sale belonging to a pledgee; (3) since the tax is an excise upon the act of the donor in making the transfer, measured by the value of the property passing from him, and since the entire title to the securities passed from him relieved of the pledge, he then made a gift of the securities themselves, which had a stipulated value of $129,270; and, (4) inasmuch as the only thing of value retained by petitioner was the right to have the stock applied to his debt in case he was unable to pay and defaulted on his indebtedness, such value is to be measured by his probable ability to pay off the indebtedness in the future.
*1293 Respondent relies upon the general rule that a pledgee, in order to preserve his pledge, must retain possession. 49 C.J. 896. This rule seems to be applicable in Kansas, where the transaction in question occurred. ; . Nevertheless, it does not seem to be determinative of the present issue. As to the stock of the creditor corporation, which it had in its possession as security for its debt and which constituted the major portion of the pledged property, it is clear that possession was retained at all times. True, new certificates were issued in the name of petitioner's wife; but she endorsed them in blank and they remained continuously in the possession of the pledgee and never left its possession for one instant. The certificates for the other shares were transmitted by the pledgee to the issuing companies with instructions to mail the new certificates to it and this was done. Neither the old nor the new certificates were ever turned over to petitioner or his wife, the wife merely endorsing the new certificates in blank after they were returned to the pledgee. Under these circumstances*1294 it can not be held that the pledgee's right in the pledged property ever ceased to exist or that it ever placed itself in the situation where its only recourse would have been on the wife's promise to hypothecate the stock after she acquired it.
We are of the opinion that petitioner endeavored to give, and actually did give, his wife only such interest as he had in the pledged property. "The general rule applicable to property other than negotiable securities is that the vendor or pledgor can convey no greater right or title than he has." . A pledgee has a right in the pledged property superior to any that can thereafter be given by the pledgor, ; ; and, if the pledgor takes possession of the property with the intent to deprive the pledgee of his rights, *708 such act may constitute larceny. ; *1295 . It is obvious that petitioner intended to make a gift to his wife of only his interest or equity in the stock and that she accepted the gift knowing that she could not be given the stock itself until and unless her husband's indebtedness to the pledgee was paid. Respondent admits as much. In paragraph 5(a) of his answer it is stated: "Admits that on January 25, 1936 petitioner made a gift to his wife, Nora E. Jackman, of his interest or equity in certain securities owned by him which were pledged to The Kansas Milling Company as collateral security." We have accordingly found that he made a gift of only such interest or equity and that it had a value of $9,270.
The applicable statute (sec. 501(a), Revenue Act of 1932) imposes a tax upon "the transfer * * * of property by gift." We do not understand that respondent is contending there should be added, to the value of the property transferred, a separate value computed upon the probable ability of the donor to pay off his indebtedness. At any rate he points to no statute or regulation justifying or authorizing that any such addition to the property transferred should be made and we know of none. He*1296 assumes that the stock, having a value of $129,270, had been given to the wife, but that, because it of necessity must be left as collateral security for her husband's debt, the value of the gift should be ascertained by "discounting" the value of the stock "in a reasonable amount based on the donor's ability to pay." Since respondent has admitted and we have found that petitioner gave his wife only his interest or equity in the stock, it is perhaps unnecessary to discuss respondent's "discount" theory at any length. It may be pointed out, however, that it would be impossible to value with any degree of accuracy such a nebulous interest or right. Through the use of mortality tables, a fairly reliable prognostication of the donor's length of life may be made; yet even that is dependent upon his present state of health, family history, and many other factors not in evidence in the instant proceeding. But how may it be foretold that the donor's employer would remain in existence, that his services would be continued, and that his present income would continue at approximately its present rate? Even if all available evidence touching these factors were before us, still our attempt*1297 to find the right answer would be, at best, mere speculation. Taxation is a practical matter and should not rest upon guesswork. In addition, it may be pointed out that it seems to be incredible that a person having a net worth of $20,000 could possibly make a gift of $105,000.
Reviewed by the Board.
Decision will be entered for the petitioner.