*618 Decedent took out six policies of insurance upon his life, aggregating $200,000. In each policy he reserved the right to change the beneficiary. He contracted with a corporation, of which he was president, to pay the premiums and pledged to it the policies as collateral security. His wife, who was the sole beneficiary of each policy, was a party to the agreement. Among other things, the wife was to receive the proceeds of the policies as trustee for the corporation to the extent that the proceeds were required to repay the premiums advanced, with interest, and $25,000 if decedent failed to attain the age of 40. Decedent died prior to attaining the age of 40. Held, respondent properly included in gross estate the proceeds less the amounts received by the wife in trust and the statutory exemption of $40,000, because (a) the payment of premiums was decedent's obligation paid for him by the corporation; (b) the premiums were not paid by the beneficiary since under the contract she received that portion of the proceeds in trust and not in her own right; (c) the premiums were not paid by the corporation since it expressly contracted for the repayment of its advances with interest. *619
*1138 This proceeding involves a deficiency in estate tax of $1,369.85. The pleadings raise two issues for our determination, namely, (1) whether there should be included in the decedent's gross estate the proceeds from six life insurance policies, less the statutory exemption of $40,000, and less $43,846.68 paid to the Columbian Hog & Cattle Powder Co. on account of premiums paid under a certain contract; and (2) whether the inclusion of said proceeds in decedent's gross estate under section 302(g) of the Revenue Act of 1926 violates Article I, section 2, and the Fifth Amendment of the Constitution.
The parties submitted a stipulation of facts, with attached exhibits. The pertinent portions of the stipulation and the documentary evidence are hereinafter set forth in our findings.
*1139 The petition and amended petition herein were filed by Helen H. McDermand, administratrix of the estate of Frank R. McDermand, Jr., deceased. Subsequent to the hearings, Helen H. McDermand remarried, and upon motion the style*620 of this proceeding was changed to the caption hereinabove set forth.
FINDINGS OF FACT.
The petitioner is administratrix of the estate of Frank R. McDermand, Jr., and is a resident of Kansas City, Missouri. Frank R. McDermand, Jr., a resident of Kansas City, died intestate on July 3, 1931.
The decedent's father, Frank R. McDermand, Sr., died suddenly on or about April 10, 1929. At the date of his death, McDermand, Sr., was president of the Columbian Hog & Cattle Powder Co., a Missouri corporation, whose principal business was the manufacture of and marketing of hog and cattle feeds, powders, remedies, and similar products. The decedent succeeded his father as president of the Columbian Hog & Cattle Powder Co., hereinafter referred to as the company.
Thereafter, on August 8, 1929, the company, as party of the first part, and Frank R. McDermand, Jr., and Helen H. McDermand, his wife, as parties of the second part, duly made and entered into a certain agreement in writing. The provisions of this agreement, together with the provisions of a supplemental agreement entered into by the same parties on April 26, 1930, are as follows:
ARTICLES OF AGREEMENT
* * *
ARTICLES*621 OF AGREEMENT, made and entered into this 8th day of August, 1929, by and between COLUMBIAN HOG & CATTLE POWDER COMPANY, a corporation organized and existing under the laws of the State of Missouri, of the first part, and FRANK R. MCDERMAND, JR., AND HELEN MCDERMAND, his wife, of the second part, all of Kansas City, Missouri, WITNESSETH:
WHEREAS the recent death of Frank R. McDermand, Sr., has made necessary new management of first party, of which Frank R. McDermand, Jr., is president, as the successor of Frank R. McDermand, Sr.,; and
WHEREAS for the next several years the death of the said Frank R. McDermand, Jr., would be a serious loss to first party; and
WHEREAS Frank R. McDermand, Jr., one of the second parties, is desirous of having his life insured in favor of his wife, Helen McDermand, the other of said second parties, and desires the aid of first party in providing for and paying the premiums on such insurance,
Now, THEREFORE, for and in consideration of the sum of one dollar ($1.00) each to the other in hand paid, the receipt of which is hereby acknowledged, and of the mutual covenants and agreements herein made, IT IS AGREED by and between the parties hereto as follows, *622 to-wit:
*1140 1. The said Frank R. McDermand, Jr., one of second parties, agrees to procure and have his life insured in approved and recognized old line life insurance company or companies, in the sum of one hundred seventy-four thousand five hundred dollars ($174,500.00), payable to Helen McDermand, his wife, the other of second parties.
2. The premiums on said insurance from year to year until the death of the said Frank R. McDermand, Jr., or until such time as he attains the age of forty years, shall be paid by first party.
3. Should the said Frank R. McDermand, Jr., die at or prior to attaining the age of forty years, it is agreed that there shall be paid to first party, from and out of the insurance hereinabove mentioned, the following items:
(a) The sum of twenty-five thousand dollars ($25,000.00).
(b) A sum equivalent to all premiums on said insurance paid by first party.
(c) Interest upon all premiums aforesaid paid by first party from the date of the respective payments, at the rate of five per cent. (5%) per annum.
And it is agreed that the beneficiary under the terms of the policies aforesaid, shall come into possession of and hold the amount*623 necessary to meet the aforesaid items (a), (b) and (c), as trustee for first party; and promptly upon receipt thereof from the insurance company or companies, she agrees to pay the same to first party, and said policies of insurance shall be, and hereby are pledged, as collateral security to said payment so to be made to first party. The balance of said insurance shall be the absolute property of the beneficiary under the provisions of said policies of insurance.
4. Should the said Frank R. McDermand, Jr. live to attain the age of forty years, then, and at that time, the parties of the second part agree to and shall pay first party, its successors or assigns, a sum of money equivalent to all sums paid by first party to and upon the premiuns for insurance aforesaid, together with interest thereon at the rate of five per cent. (5%) per annum from the date of the respective premium payments; and upon the said Frank R. McDermand, Jr. attaining the age of forty years the said first party shall be under no obligation to make any futher or additional premium payments on said insurance, and thereafter, and upon receiving payment as aforesaid, it shall have no right, title nor claim*624 in and to said insurance or any of the proceeds arising therefrom, but the whole of said policy or policies shall be paid as per the terms of said policy or policies, and this contract shall thereafter be null and void.
IN WITNESS WHEREOF, the said Columbian Hog & Cattle Powder Company has caused these presents to be signed by its President and attested by its Secretary and the corporate seal to be hereto attached, and the said second parties have hereto set hands and seals on the day and year first above written.
COLUMBIAN HOG & CATTLE POWDER COMPANY.
By [Signature of parties.]
It being to the mutual interest of the undersigned, and in consideration of one dollar ($1.00) each to the other in hand paid, the receipt of which is hereby ackowledged, it is agreed that the insurance provided for in paragraph 1 of the within contract may be increased from one hundred seventy four thousand five hundred dollars ($174,500.00) to two hundred thousand dollars ($200,000.00); the said insurance being in all respects subject to the terms and provisions of the within contract bearing date August 8, 1929.
Done this 26 day of April, 1930.
COLUMBIAN HOG & CATTLE POWDER COMPANY
*625 By [Signature of parties.]
*1141 The decedent applied for and was issued six policies of insurance aggregating $200,000. The companies insuring decedent's life, the policy numbers, the date of issuance, and the face value of each policy plus post mortem dividends as to three policies are as follows:
| Insurer | Policy No. | Date issued | Amount |
| Royal Union Life Ins. Co | 149959 | Apr. 24, 1930 | $25,000 |
| Do | 146802 | Nov. 27, 1929 | 25,000 |
| Prudential Ins. Co. of America | 6503309 | Apr. 30, 1929 | 50,234 |
| Midland Life Ins. Co | 55691 | Mar. 18, 1930 | 50,000 |
| Sun Life Assurance Co. of Canada | 1149096 | May 7, 1929 | 25,236 |
| Do | 1149097 | May 7, 1929 | 25,236 |
| Total | 200,706 |
An analysis of the insurance policies issued upon decedent's life reveals that each is the standard form 20-payment life policy with the usual insurance policy provisions. The application for each policy was made by the decedent. Each policy named his wife as beneficiary. In each policy, except one, if she predeceased him, the proceeds were payable to his estate; the one exception made the proceeds payable to decedent's son, Frank R. McDermand, III. In each policy decedent reserved the*626 right to change the beneficiary. Each policy provided for a cash surrender value and a loan value after the policy had remained in force for three years. Any assignment of policy was ineffective until the insurer was notified and a duplicate or copy of the assignment filed with the insurance company.
After issuance of the policies delivery thereof without assignment was made to the company, which retained possession of the policies until the decedent's death. Pursuant to the terms of the agreements of August 8, 1929, and April 26, 1930, both of which related to all six policies regardless of the date of issue, the company duly paid all premiums on the policies. These premium payments, together with interest thereon at the rate of 5 percent per annum from the dates of payment, were charged to an account on the books of the company entitled "The Frank R. McDermand, Jr., Insurance Account." At the date of the decedent's death the total amount of premiums paid and interest charged was the sum of $18,846.68.
After the decedent's death the company delivered the policies to Henry S. Conrad for the purpose of collecting the insurance. Conrad was the attorney for the company, for*627 Helen H. McDermand, and for the decedent during his lifetime. The proceeds of the insurance policies were received by Helen H. McDermand in her individual right, and not as the administratrix of the decedent's estate. Helen H. McDermand "duly repaid" the company "from the proceeds of the aforesaid policies of insurance said premium payments and interest thereon" in the amount of $18,846.68, "together with an additional *1142 sum" of $25,000, or a total payment to the company of $43,846.68.
In the estate tax return petitioner reported a gross estate of $140,854.59, total deductions of $162,238.73, and no net estate. The respondent determined the gross estate to be $263,637.40, total deductions therefrom $156,648.93, a net estate of $106,988.47, and a deficiency of $1,369.85. The deficiency so determined arose from respondent's increase in the value of real estate from $9,000 to $11,675, an increase which petitioner now concedes to be correct, and from respondent's inclusion in the gross estate of $128,345.31, being part of the proceeds from the aforementioned insurance policies.
OPINION.
ARNOLD: The controlling provisions of the statute occur in the last portion*628 of section 302(g) of the Revenue Act of 1926, which is set out in full in the margin. 1 It is stipulated that respondent has given effect to the $40,000 exemption, and to the payments made pursuant to the agreements of August 8, 1929, and April 26, 1930, in determining the "amount receivable by all other beneficiaries." The question is not as to the proper amount to be included, but whether any amount should be included in determining the value of the gross estate.
It is petitioner's contention that there was no amount receivable by the administratrix as insurance under policies taken out by the decedent upon his own life; that there was no excess over $40,000 of*629 the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life; that the proceeds of the policies here in question were the absolute property of the beneficiary, Helen H. McDermand, subject only to the right of the company to be repaid therefrom the amount of its advances for premiums plus interest and the additional sum of $25,000; that to apply section 302(g) violates the Constitution and the Fifth Amendment thereof.
Petitioner cites numerous cases which, it is asserted, support her position, but it seems that none of these decided cases involved the exact situation now presented. There is no question here but that decedent personally applied for the policies in question. The *1143 applications show this conclusively, and the insurance contracts show that the payment of premiums was primarily decedent's obligation.
Turning from the applications for and policies of insurance to the agreements, hereinabove set forth, we find certain reasons recited therein for the taking out of these policies by the decedent. It is stated that the death of decedent in the next several years "would be a serious loss" to the company. *630 It is further stated that decedent was "desirous of having his life insured in favor of his wife, * * * and desires the aid of" the company "in providing for and paying the premiums on such insurance." (Italics supplied.) Following which the parties set forth their mutual covenants; decedent agreed to insure his life in favor of his wife for $174,500 (increased to $200,000 by the supplemental agreement), and the company agreed to any the premiums. If the parties had stopped there we would have a more difficult question; but there were additional covenants. The company was to pay the premiums until decedent's death, or until he attained 40 years of age. If decedent died before he attained the age of 40 the company was to collect $25,000 insurance and was to be repaid the advances for premiums paid plus interest at 5 percent on each premium payment. The company was protected as to the repayment of these advances by making the beneficiary a trustee of the proceeds to the extent of the company's interest therein, and by the policies being "pledged as collateral security to said payment."
Repayment of the company's advances, in the event the decedent survived the age of 40, *631 was also provided for under the agreement. If decedent survived the age of 40, he and his wife "agree and shall pay" the company, "its successors or assigns, a sum of money equivalent to all sums paid by" the company "to and upon the premiums for insurance aforesaid, together with interest thereon" at 5 percent per annum. Thereafter, no further obligation rested upon the company to pay the premiums, and upon receiving payment for its advances the company "shall have no right, title nor claim in or to said insurance or any of the proceeds arising therefrom."
The terms of this agreement were carried out. Decedent's death occurred less than two years after the agreement was consummated. The company had sought by the contract to protect itself against loss from the death of its president to the extent of $25,000. This protection was secured by the agreements hereinabove set forth, rather than by taking out a policy in its own right upon the life of its chief executive. The company profited from this arrangement because it secured the protection against loss without the cost of the insurance if decedent survived the age of 40. It should be noted that the company *1144 bound*632 itself to pay no part of the insurance premiums. Under the contract, it was to advance the money necessary to pay the premiums, but it was to be repaid a sum equivalent to all premiums paid by it. There was no provision binding the company to pay the premiums on the $25,000 insurance carried on decedent's life for its own benefit. Decedent agreed to repay all the advances for premiums made by the company, either out of the proceeds if he died before 40, or personally if he survived 40. His wife, the sole beneficiary, agreed to be bound by this arrangement, which clearly limits the amount of the proceeds that she would reveive under the policies. In other words, she agreed to take the net proceeds of the policies after these payments were made to the corporation.
In view of the foregoing analysis it is impossible to view the relationship between the decedent and the company as other than that of debtor and creditor. Every feature of the agreement points to that relationship. Every act of the parties following the execution of the agreement is based upon such relationship. The advances by the company were made to meet decedent's obligations under insurance contracts. These*633 advances were conditioned upon repayment with interest. The repayment was secured by a pledge of the policies as collateral, and the advances were repaid with interest as agreed in the contract. Any other determination of the relationship existing between decedent and the company would be a distortion of the facts.
Petitioner advances a second contention regarding the payment of the premiums to the effect that, if the company did not pay the premiums, the sole beneficiary did pay them out of the proceeds from the insurance policies, which proceeds the parties have stipulated she received in her individual right. This contention is grounded upon a misapprehension of the contractual rights of decedent's widow. The contract provided that, if the insured died prior to attaining the age of 40, the beneficiary should pay out of the insurance proceeds to the company, not individually or in her own right, but as a trustee for the company, the amount advanced for premiums plus interest thereon at 5 percent, and plus the $25,000. The balance only of the proceeds was to be her absolute property. By the contract decedent provided for the trust fund out of which the premiums were to be*634 repaid. The funds used for that purpose did not belong to the beneficiary. Decedent's widow agreed to this disposition of a portion of the insurance proceeds and waived all right thereto by executing the contract.
One of the cases upon which petitioner relies is Wilson v. Crooks, 52 Fed.(2d) 692. The facts in that decision are distinguishable. There the Kansas City Star Co. paid the premiums on insurance upon the life of one of its principal stockholders. The insurance proceeds were to be used to purchase the stockholder's interest in the Star Co. *1145 upon his death, so that the officers and employees of the Star might be able to purchase the shares formerly owned by said stockholder. This was handled through an insurance trust agreement, with a local bank and trust company as trustee. Upon the stockholder's death the proceeds from said policies were used to buy the stock from his estate. The court denied the contention that payment by the Star was payment by the stockholder of the premiums. The court pointed out that the premiums were paid by the Star for and on behalf of the real beneficiaries, who were the officers and employees of the Star. *635 It was held that, since the stockholder did not pay the premiums and could not divert the proceeds to his estate or to any other than those recipients named in the trust agreement, the proceeds were not includible in his gross estate under section 302(g).
In Walker v. United States, 83 Fed.(2d) 103, also cited and relied upon by petitioner, the decedent had six policies outstanding on his life, in each of which his wife was named beneficiary. In four policies decedent reserved the right to change the beneficiary. In the other two there was a survival clause requiring payment to decedent's executors, administrators, or assigns, if his wife predeceased him. On the four policies the beneficiary paid from her own funds slightly more than half of the premiums. The estate tax return included no proceeds from any of the policies. Later the Commissioner included the proceeds from the four policies and collected a tax of $4,872.27. Thereafter the widow filed suit for refund of $3,746.05 upon the ground that the prorated amount of the insurance covered by her contributions to the premiums on these four policies was exempt from tax. The Commissioner denied the*636 claim and pleaded as an offset that an additional tax was due because of his failure to include the proceeds from the other two policies. The court held that the proportion of the proceeds from the four policies purchased by the premiums paid by the beneficiary was not within the intendment of section 302(g). The court further held, after analyzing the provisions of the two insurance policies, that the proceeds therefrom should not be included in the gross estate and there was no offset as to the refund due decedent's widow.
The principles stated in the Walker decision, which arose in the circuit within which petitioner resides, are in no way at variance with our decision. Under the court's decision premiums paid by the beneficiary removed the proceeds pro rata from inclusion in the gross estate. Here, the decedent obligated himself to pay the premium advanced by his company, and the sole beneficiary assented thereto by joining in the contract. This is quite different from the beneficiary, or another party, paying the premiums from his own funds.
*1146 Petitioner contends further that there was a sufficient assignment here, the legal effect of which was to divest*637 decedent of all right, title, and interest in the policies and their proceeds and to deprive him of any of the incidents of ownership, citing Guettel v. United States,67 Ct.Cls. 613. This argument, and the cited case, go to the question of the assignment of the policies. No assignment is shown by the record, unless the petitioner refers to the pledging of the policies as collateral security for the advances made by the company. This did not divest insured of his rights and privileges under the policies not inconsistent with the pledge. Clark v. Equitable Life Assurance Society,133 Fed. 816. The policy provisions regarding the assignments are all to the same effect; they permit assignments, but require a copy of the assignment to be filed with the insurer, and in at least one policy, Midland Life Insurance Co., policy No. 55691, the assignment, to be binding on the insurer, had to be "by an instrument in writing endorsed upon the policy or attached thereto." There was no endorsement on such policy nor an attached writing indicating that any assignment thereof was ever made. Furthermore, if there had in fact been an assignment of these*638 policies, the company could have collected in its own right as assignee. Guettel v. United States, supra, p. 618. There would have been no occasion to return the policies to the beneficiary or to make her trustee for the company's portion thereof.
We can not agree that decedent was divested of all the incidents of ownership with respect to these policies. He pledged the policies to secure the payment of the advances; he did not pass title thereto, but gave a lien on the proceeds in an amount sufficient to repay the advances. In re Herkimer Mills Co., 39 Fed.(2d) 625, 627. Naturally in view of the short period between the time the policies were taken out and decedent's death, there was no cash surrender or loan value built up. But if the policies had been more than three years old there is nothing in the agreements of August 8, 1929, and April 26, 1930, which would have prevented decedent from taking the cash value of the policies or securing a loan. He would have been indebted to the company for the advances, plus interest, but he could have exercised his rights under the policies despite any provisions appearing in the agreements. As*639 we stated in Bessie M. Ballinger, Executrix,23 B.T.A. 1312">23 B.T.A. 1312, 1320, "A power in the decedent to surrender and cancel a policy is one of the 'legal incidents of ownership' referred to by the Supreme Court in the Chase case, supra [Chase National Bank v. United States,278 U.S. 327">278 U.S. 327], and upon the termination of the power by death the beneficiary is freed from the possibility of being cut off by decedent and a transfer within the reach of the taxing power of the Government is thereby effected."
*1147 It is our view, therefore, that the proceeds of the six policies, less the amounts deducted by respondent, were properly included in the decedent's gross estate. Cf. Bank of America National Trust & Savings Assn. v. Commissioner, 90 Fed.(2d) 981, affirming 34 B.T.A. 684">34 B.T.A. 684.
We are unimpressed by petitioner's argument respecting the unconstitutionality of section 302(g) when applied to situations like that which exists here. It is our opinion that decedent directly provided for payment of the premiums by contract. We are satisfied that he personally applied for the insurance policies in question, and, *640 with the sole beneficiary, arranged for advances to pay his premiums thereon. By contract he established a debtor-creditor relationship. The performance of this contract was equivalent, for the purposes of the statute in question, of actual payment by decedent from his own funds. No constitutional question is involved, and to suggest one merely beclouds an otherwise clear-cut issue.
Decision will be entered for the respondent.
Footnotes
1. SEC. 302. 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 -
* * *
(g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life. ↩