*1023 In 1918 the decedent took out a life insurance policy, naming a corporation, E. W. Edwards & Son, of which he was president, the beneficiary. The insured had the right to change the beneficiary and in 1920 designated his wife, Caroline W. Edwards, as beneficiary and retained no right further to change the beneficiary. The policy carried a cash surrender value and the insured was entitled to all of the benefits of the policy "without the consent of the beneficiary." Held, that the proceeds of the policy paid to the beneficiary are includable in the gross estate of the decedent.
*879 This proceeding is for the redetermination of a deficiency in estate tax in the amount of $811,208.43. Several of the issues raised by the petition have been settled by stipulation of the parties. The questions still in issue are (1) the fair market value of 14,700 common shares of the capital stock of E. W. Edwards & Son, and (2) whether the amount of the proceeds of a policy of life insurance taken out by the decedent upon his life with the*1024 Fidelity Mutual Life Insurance Co. and made payable to Caroline W. Edwards, the decedent's wife, if living, at the date of the death of the insured, or otherwise to his estate, is includable in the gross estate.
FINDINGS OF FACT.
Daniel M. Edwards died a resident of Syracuse, New York, on May 26, 1929. He left a large estate. At the date of his death the decedent was the owner of all of the capital stock of E. W. Edwards & Son, a corporation, and all of the shares of stock of the Murray Realty Co.
E. W. Edwards & Son is a New York corporation, organized in 1918, which since 1922 has conducted department stores in Syracuse, Rochester, and Buffalo.
The capital structure of E. W. Edwards & Son at the date of the death of the decedent consisted of 6,500 shares of preferred stock issued and outstanding, having a par value of $100 per share, and 14,700 shares of common stock issued and outstanding, having a par value of $100 per share. Dividends of 6 percent per annum were regularly paid upon the preferred stock, but the only dividends ever paid upon the common stock were a 10 percent dividend paid on *880 January 31, 1926, and a 3 percent dividend paid on December 27, 1929.
*1025 Shortly after the death of the decedent, the Surrogate's Court appointed Elmer T. Eshelman, and one William J. Burke to appraise the assets of the estate. They appraised the common stock of E. W. Edwards & Son at $310 per share. In the return for Federal estate tax filed by the petitioners the common stock of E. W. Edwards & Son was included in the gross estate at a value of $310 per share, which value was not changed by the respondent in determining the deficiency. The balance sheet of E. W. Edwards & Son at December 31, 1928, shows as follows:
| Assets | ||
| CURRENT | ||
| Cash on Hand and on Deposit | $201,750.97 | |
| Accounts Receivable | 1,869,244.39 | |
| Merchandise Inventory | 2,275,265.98 | |
| OTHER ASSETS | ||
| Stocks and Bonds | 227,718.34 | |
| Personal & Miscellaneous Accounts | 208,787.20 | |
| MURRAY REALTY CO. | ||
| Notes Receivable | 1,849,409.76 | |
| Mortgage Receivable & Open Account | ------------- | |
| FIXTURES, EQUIPMENT, ETC. | ||
| Fixtures, Equipment and Automobiles | ||
| (Depreciated Book Value) | 573,874.75 | |
| DEFERRED CHARGES | ||
| Supplies, prepaid Expenses, etc | 60,833.51 | |
| ------------- | ||
| 7,266,884.90 | ||
| Liabilities | ||
| CURRENT | ||
| Notes Payable | $466,694.77 | |
| Accounts Payable | 48,570.47 | |
| Accrued Payrolls, Taxes, etc. | 57,606.20 | |
| RESERVE | ||
| For Doubtful Accounts | 25,000.00 | |
| For Dividend Preferred Stock | 39,000.00 | |
| NOMINAL | ||
| Preferred Stock Cumulative - Outstanding | 650,000.00 | |
| Common Stock - Outstanding | 1,470,000.00 | |
| Suplus | 4,510,013.46 | |
| ------------- | ||
| 7,266,884.90 |
*1026 The book value of the common stock on December 31, 1928, was $403.80 per share.
The appraisers were of the opinion that the merchandise inventory had a value of only 60 percent of the book value; that the customers' accounts receivable had a value of only 85 percent of the *881 book value; and that the conditional sale contracts receivable had a value of only 90 percent of the book value. They also concluded that certain of the other assets had a value less than the book value, and upon the basis of their computations determined the value of each share at $310.
The business of E. W. Edwards & Son for a period of 10 years had been profitable. The business was prosperous in 1929; sales were increasing and there was nothing on the horizon to indicate to the appraisers that the business would not continue to be profitable. The average net profits of the business, after the deduction of all expenses, including income and profits taxes for a period of 10 years ended May 26, 1929, and after the deduction of dividends on the preferred stock, amounted to $427,730.21 per annum or at the rate of $29.09 per share on the common stock (in making such computation the net profits*1027 for the fiscal year ended January 31, 1920, and for the calendar year 1929 have been prorated). The average annual net profits for the five years ended May 26, 1929, computed in the same manner, were $381,916.45 or at the rate of $25.98 per share on the common stock.
In some years subsequent to 1929 the company operated at large net losses.
The fair market value of the shares on May 26, 1929, was $310 per share.
On September 23, 1918, the decedent took out a life insurance policy, No. 284,984, with the Fidelity Mutual Life Insurance Co. of Philadelphia in the principal amount of $40,000. The beneficiary named in the policy is "the firm of E. W. Edwards & Son, Syracuse, New York (with * * * the right on the part of the insured to change the beneficiary as provided in section 4)." On September 20, 1920, the insured exercised his right to change the beneficiary and designated his wife, Caroline W. Edwards "as my beneficiary, if living; if not, to Insured's Estate." In making such designation the insured did not reserve any right further to change the beneficiary. Section 4 of the policy provided in material part as follows:
Change of beneficiary. - When the right of*1028 revocation has been reserved, or in case of the death of any beneficiary under either a revocable or irrevocable designation, the insured, while this policy is in force and if there be no existing assignment, may designate a new beneficiary, with or without reserving right of revocation, by filing written notice thereof with the Company accompanied by this policy for suitable endorsement. Such change shall take effect when endorsed on the policy by the Company, and not before. If any beneficiary shall die before the insured, the interest of such beneficiary shall vest in the insured, unless otherwise expressly specified in this policy.
* * *
*882 The insured may, without the consent of the beneficiary, receive every benefit, exercise every right and enjoy every privilege conferred upon the insured by this policy.
Section 3 of the policy provided in part:
After three full annual premiums shall have been paid, the insured or assigns, at any time within three months after any default in payment of premium, but not later, may surrender this policy;
(a) For its CHSH SURRENDER VALUE less any indebtedness to the Company hereon * * *.
Then follows a table of guaranty*1029 loan and surrender values per $1,000 insurance. According to this table the loan or cash value per $1,000 of insurance, after the policy had been in force 10 years, was $278. The proceeds of this policy in the amount of $40,410.59 were paid to the beneficiary, but not included in the gross estate of the decedent. The respondent has included this amount in the gross estate in the determination of the deficiency.
OPINION.
SMITH: The first question presented by this proceeding is the fair value of 14,700 shares of common stock (the total issue outstanding) of E. W. Edwards & Son at the date of the death of the decedent on May 26, 1929. These shares were returned by the petitioners as having a fair market value at the date of death of $310 per share. This is the amount at which they were appraised by the two appraisers appointed by the Surrogate's Court. The petitioners now contend that the fair market value of the shares on May 26, 1929, the date of the death of the decedent was not in excess of $200 per share.
One of the witnesses for the petitioners in this proceeding was Elmer T. Eshelman, one of the appraisers appointed by the Surrogate's Court. He testified that in*1030 appraising the stock of E. W. Edwards & Son for probate purposes the $310 per share value was not based on the "fair market value", but upon "the value"; that "fair value" is what a thing is worth; that "market value" is what you can sell a thing for; that a thing is worth a little more than market value, that is "unless it is some particular thing somebody wants."
We are of opinion that the distinction sought to be made by the witness between "fair value" and "fair market value" is not valid. Section 302 of the Revenue Act of 1926 provides: "The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated." In article 13 of Regulations 70 (1929 edition) the respondent has provided: "The fair *883 market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell." But we do not understand from the witness' testimony that his appraisal was on an essentially different basis from that provided for by the law and regulations. There is nothing in the witness' *1031 testimony that would warrant a finding that the appraised value was different from the price at which 14,700 shares of common stock "would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell."
From a consideration of all of the evidence introduced in this proceeding it is apparent that the present claim of petitioners that the fair market value of the shares of stock of E. W. Edwards & Son on May 26, 1929, the date of the death of the decedent, was less than $310 per share is predicated in large part upon hindsight. There were no facts before the appraisers or before the petitioners at the time they filed the estate tax return showing that the fair market value of the shares was less than $310 per share. The operating losses of subsequent years could not be foreseen as at the date of the death of the decedent. The taxing statute requires the inclusion in gross income of the value of property possessed by the decedent "at the time of his death." The petitioners introduced no evidence which proves that the fair market value of the shares was less than $310 per share. The determination of the respondent that that value*1032 $310was per share will not therefore be disturbed.
The second question is whether there should be included in the gross estate the proceeds of a life insurance policy taken out by the decedent in 1918 on his own life. The beneficiary named in the policy is E. W. Edwards & Son. The insured had the right, however, to change the beneficiary and he exercised such right on September 20, 1920, and designated and appointed his wife, Caroline W. Edwards, as his beneficiary "if living; if not, to Insured's Estate." In making such designation the insured did not reserve any right further to change the beneficiary. It follows therefrom that the insured did not at the time of his death have any right further to change the beneficiary. . Cf. .
The respondent contends, however, that whether or not the insured had the right to change the beneficiary the proceeds of the policy are includable in the gross estate, since the decedent up to the date of death had the right to surrender the policy and receive cash therefor, or to pledge it for loans equal to the surrender*1033 value, and since the $40,000 exempt insurance permitted the estate under section 302(g) of the Revenue Act of 1926 was exhausted on other *884 policies on the life of the insured payable to other beneficiaries than the executors.
The question presented here is substantially the same as that which was considered by the court in , and in . In both of these cases proceeds of insurance policies were held to be includable in the gross estate. In the last named case we exhaustively considered the decisions of the Board and of the courts bearing upon this point and set forth the reasons for our conclusions. In accordance therewith the action of the respondent in including the proceeds of the insurance policy in question in the gross estate of the decedent is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MURDOCK and MCMAHON concur in the result.
VAN FOSSAN concurs only in the result.