*76 Decision will be entered under Rule 50.
At the date of his death, January 15, 1951, D. Byrd Gwinn owned 360 shares of the common stock of Gwinn Bros. & Co. He also owned life insurance policy No. 235883 issued by the New England Life Insurance Co. in the face amount of $ 10,000. His wife, Caroline A. Gwinn, was designated primary beneficiary of the policy. On January 15, 1951, this policy, along with other life insurance policies of decedent, was pledged with a bank as collateral security for an indebtedness of decedent to the bank in the amount of $ 20,000. After decedent's death his administrator paid the indebtedness out of the property of the estate and the widow received the proceeds of policy No. 235883. Held, the fair market value of Gwinn's stock owned by decedent at his death was $ 21,600 or $ 60 per share. Held, further, the proceeds of policy No. 235883 qualify for the marital deduction afforded by section 812 (e), Internal Revenue Code of 1939.
*31 This proceeding involves a deficiency which the Commissioner has determined in estate tax in the amount of $ 21,657.42 of which approximately $ 13,143.17 is in dispute.
The issues for decision are:
1. What was the value at the time of the death of the decedent of 360 shares of stock in Gwinn Bros. & Co.?
2. Do the proceeds of a life insurance policy which was pledged with a creditor as collateral security for an indebtedness of decedent qualify for the marital deduction afforded by section 812 (e), Internal Revenue Code of 1939?
FINDINGS OF FACT.
Some of the facts were stipulated and are incorporated herein by reference.
James A. Gwinn is the duly appointed, qualified, and acting administrator of the estate of D. Byrd Gwinn who died intestate a resident of Huntington, West Virginia, *78 on January 15, 1951.
*32 At the time of his death the decedent owned, among other properties, 360 shares of the common stock of Gwinn Bros. & Co. (hereinafter sometimes referred to as Gwinn). In filing the estate tax return with the collector of internal revenue for the district of West Virginia petitioner valued this stock at $ 14,400 or $ 40 per share. In determining the deficiency in estate tax respondent valued the stock at $ 70,200 or $ 195 per share.
Gwinn Bros. & Co., a West Virginia corporation, was organized in 1901 as an outgrowth of a partnership formed by decedent's brothers in 1887. Since its organization it has engaged in the business of milling, selling, and distributing flour, grain, meal, and feed. Its only mill and office are located in Huntington, West Virginia.
The products of Gwinn are sold principally to wholesale grocers in the so-called Tri-State area surrounding the cities of Ashland, Kentucky, and Huntington, West Virginia. Most of Gwinn's flour is sold outside Huntington. Its market for bakery flour is very limited. Its principal competitors are Pillsbury Mills, American Milling Company, and Kasco Mills. Gwinn is the only flour mill in West *79 Virginia, the others in Bluefield, Clarksburg, and Charleston having been forced out of business.
The capital stock of Gwinn has at all times consisted of 2,000 shares of common stock of the par value of $ 100. At decedent's death all 2,000 shares were outstanding and were held as follows:
| Relationship | Number of | |
| Shareholder | to decedent | shares |
| D. B. Gwinn, Decedent | 360 | |
| James A. Gwinn | Son | 786 |
| Mrs. James A. Gwinn | Daughter-in-law | 175 |
| Caroline A. Gwinn | Widow | 55 |
| Elizabeth G. Stillman | Daughter | 100 |
| Hugh D. Stillman | Son-in-law | 1 |
| Mrs. Minnie Holloway | Sister | 178 |
| Martina E. Wickline | Sister | 120 |
| R. G. Whitten | Nephew | 25 |
| Sara Marr | None | 130 |
| R. D. Wylie | None | 45 |
| Philip W. Chambers | None | 10 |
| Mrs. Julia Stone | None | 5 |
| Mrs. Lucile Von Pechy | None | 5 |
| Wm. S. Smith | None | 5 |
At the time of his death decedent was president and treasurer of Gwinn and James A. Gwinn was vice president, secretary, and general manager. Since decedent's death James A. Gwinn has become president of the company.
The following is a list of all the sales of stock of Gwinn for the period June 1948 through August 1951: *33
| Seller's | ||
| Date | Seller | relation to decedent |
| and/or Gwinn | ||
| Bros. & Co. | ||
| 6-24-48 | Sue Gwinn Jones | Niece |
| 9-28-48 | Chauncey R. Crutcher | None |
| 12-6-48 | Robert H. Wylie | do |
| 1-7-49 | Chloe Edith Wylie | do |
| 3-18-49 | Ruth W. Wylie | do |
| 5-12-49 | Belle Groverman | do |
| 3/50 | R. D. Wylie | Director |
| 8/51 | R. D. Wylie | do |
| Number | ||||
| Date | Seller | of shares | Price | Buyer |
| 6-24-48 | Sue Gwinn Jones | 13 | $ 60 | D. Byrd Gwinn. |
| 9-28-48 | Chauncey R. Crutcher | 5 | 40 | |
| 12-6-48 | Robert H. Wylie | 14 | 50 | |
| 1-7-49 | Chloe Edith Wylie | 24 | 50 | |
| 3-18-49 | Ruth W. Wylie | 24 | 50 | |
| 5-12-49 | Belle Groverman | 10 | 40 | |
| 3/50 | R. D. Wylie | 5 | 50 | Wm. S. Smith. 1 |
| 8/51 | R. D. Wylie | 5 | 50 | W. E. Gayle. 2 |
Though offered to him, Gayle refused to buy the entire number of shares then owned by R. D. Wylie because he considered $ 50 too high a price. None of the buyers or sellers of the stock above mentioned were under any compulsion to buy or sell such stock. The 90 shares above mentioned purchased by the decedent were part of the 360 shares owned by decedent at his death.
At the time of the sales vendors Sue Gwinn Jones, Chauncey R. Crutcher, Robert H. Wylie, and Chloe Edith Wylie resided in California, Mexico City, California, and Florida, respectively. Vendor R. D. Wylie was over 80 years of age, dying April 29, 1952.
*81 The real estate owned by Gwinn on January 15, 1951, consisted of the following parcels all located in Huntington, Cabell County, West Virginia, and the assessed values placed thereon by the Assessor of Cabell County, West Virginia, as of January 1, 1951, are as follows:
| Assessed value | |||
| Land | Buildings | ||
| 1. | A lot 42 x 300 ft. Second Ave., between Ninth and | ||
| Tenth Streets on which the flour mill building | |||
| and two elevators are located. The mill was built | |||
| in 1915. One grain elevator was constructed | |||
| in 1889 and the other in 1921. All of these are | |||
| single-purpose buildings. The elevators because of | |||
| their limited capacity are useful only in connection | |||
| with an operating flour mill and cannot be utilized | |||
| economically for general grain storage purposes | $ 10,240 | $ 41,840 | |
| 2. | A lot 52 x 150 ft., Tenth Street and Second Ave., | ||
| on which there is located a very old three-story | |||
| office building and warehouse | 5,440 | 6,700 | |
| 3. | Lot 11, Block 118, on which the garage building | ||
| for the Company's trucks is located | 3,960 | 1,300 | |
| 4. | Lot 10, Block 118, on which a dilapidated building was | ||
| located. Subsequent to decedent's death this building | |||
| was condemned by the city and demolished | 3,820 | 650 | |
| 5. | 40/100ths acre, Tenth St. and Second Ave. on which the | ||
| feed mill is located | 2,000 | 1,500 | |
| 6. | A vacant lot 42 x 200 ft., Second Ave. and Twelfth St., | ||
| which was the site of the former feed mill which was | |||
| destroyed by fire in 1946 | 3,240 | ||
| 7. | 111.93 acres Mud River (Barboursville District) used | ||
| as a research farm. There was a house and dairy | |||
| barn on the farm | 6,000 | 7,000 | |
| Total | $ 34,700 | $ 58,990 |
*82 *34 Gwinn maintains its books and records on the accrual method of accounting with the fiscal year ending June 30.
The balance sheets of Gwinn as of June 30, 1947, 1948, 1949, 1950, and 1951 are as follows:
| June 30 | ||||
| 1947 | 1948 | 1949 | ||
| Assets | ||||
| Current assets: | ||||
| Cash on hand and in banks | $ 67,646.74 | $ 23,026.26 | $ 13,965.30 | |
| Accounts receivable (net) | 106,573.20 | 87,818.00 | 68,367.41 | |
| Inventories | 262,161.49 | 232,522.15 | 113,949.81 | |
| Other current assets | 26,562.59 | 28,030.64 | 17,433.86 | |
| Total current assets | $ 462,944.02 | $ 371,397.05 | $ 213,716.38 | |
| Investments | 34,507.77 | 36,886.30 | 38,673.47 | |
| Fixed assets (net) | 200,514.68 | 223,848.48 | 245,087.70 | |
| Other assets | 77,854.90 | 61,863.24 | 61,191.07 | |
| Total assets | $ 775,821.37 | $ 693,995.07 | $ 558,668.62 | |
| Liabilities | ||||
| Current liabilities: | ||||
| Notes payable, banks | $ 180,000.00 | $ 212,000.00 | $ 57,000.00 | |
| Accounts payable | 191,613.28 | 65,671.24 | 39,664.71 | |
| Accrued liabilities | 11,730.49 | 15,727.08 | 22,779.39 | |
| Total current liabilities | $ 383,343.77 | $ 293,398.32 | $ 119,444.10 | |
| Deferred liabilities: | ||||
| Notes payable, D. B. Gwinn | 98,000.00 | |||
| Total liabilities | $ 383,343.77 | $ 293,398.32 | $ 217,444.10 | |
| Capital stock | 200,000.00 | 200,000.00 | 200,000.00 | |
| Earned surplus | 192,477.60 | 200,596.75 | 141,224.52 | |
| $ 392,477.60 | $ 400,596.75 | $ 341,224.52 | ||
| Total liabilities and capital | $ 775,821.37 | $ 693,995.07 | $ 558,668.62 |
| June 30 | |||
| 1950 | 1951 | ||
| Assets | |||
| Current assets: | |||
| Cash on hand and in banks | $ 17,224.50 | $ 7,333.88 | |
| Accounts receivable (net) | 115,868.73 | 126,152.88 | |
| Inventories | 125,923.17 | 161,747.12 | |
| Other current assets | 12,403.55 | 8,649.92 | |
| Total current assets | $ 271,419.95 | $ 303,883.80 | |
| Investments | 44,732.85 | 21,998.23 | |
| Fixed assets (net) | 240,079.48 | 243,388.58 | |
| Other assets | 32,410.60 | 14,159.29 | |
| Total assets | $ 588,642.88 | $ 583,429.90 | |
| Liabilities | |||
| Current liabilities: | |||
| Notes payable, banks | $ 57,000.00 | $ 13,500.00 | |
| Accounts payable | 49,353.10 | 80,510.74 | |
| Accrued liabilities | 11,086.29 | 35,057.24 | |
| Total current liabilities | $ 117,439.39 | $ 129,067.98 | |
| Deferred liabilities: | |||
| Notes payable, D. B. Gwinn | 98,000.00 | 48,000.00 | |
| Total liabilities | $ 215,439.39 | $ 177,067.98 | |
| Capital stock | 200,000.00 | 200,000.00 | |
| Earned surplus | 173,203.49 | 206,361.92 | |
| $ 373,203.49 | $ 406,361.92 | ||
| Total liabilities and capital | $ 588,642.88 | $ 583,429.90 |
The book value of Gwinn's fixed assets as of June 30, 1950, and June 30, 1951, is:
| Reserve for | |||
| June 30 | Cost | depreciation | Net value |
| 1950 | |||
| Land | $ 67,072.15 | $ 67,072.15 | |
| Buildings | 125,128.89 | $ 72,165.97 | 52,962.92 |
| Machinery and equipment | 224,027.53 | 122,149.66 | 101,877.87 |
| Construction in progress | 4,070.40 | 4,070.40 | |
| Laboratory | 5,500.64 | 1,323.17 | 4,177.47 |
| Autos and trucks | 26,200.35 | 20,229.79 | 5,970.56 |
| Furniture and fixtures | 12,675.04 | 8,726.93 | 3,948.11 |
| Totals | $ 464,675.00 | $ 224,595.52 | $ 240,079.48 |
| 1951 | |||
| Land | $ 55,072.15 | $ 55,072.15 | |
| Buildings | 125,128.89 | $ 74,345.72 | 50,783.17 |
| Machinery and equipment | 236,561.51 | 133,202.32 | 103,359.19 |
| Laboratory | 5,500.64 | 1,689.87 | 3,810.77 |
| Autos and trucks | 45,347.72 | 18,838.14 | 26,509.58 |
| Furniture and fixtures | 13,429.73 | 9,576.01 | 3,853.72 |
| Totals | $ 481,040.64 | $ 237,652.06 | $ 243,388.58 |
*84 *35 The book value per share of the stock of Gwinn as of the close of the fiscal years ended June 30, 1947, through June 30, 1951, is:
| 1947 | $ 196.24 |
| 1948 | 200.30 |
| 1949 | 170.61 |
| 1950 | 186.60 |
| 1951 | 203.18 |
The income statements (cents omitted) of Gwinn as of the fiscal years ended June 30, 1947, through June 30, 1951, are as follows:
| June 30 | ||||
| 1947 | 1948 | 1949 | ||
| Income | ||||
| Net sales | $ 3,955,791 | $ 3,432,197 | $ 2,289,200 | |
| Cost of sales: | ||||
| Grains and other materials | $ 3,496,905 | $ 2,903,720 | $ 1,742,968 | |
| Bags, tags, etc | 170,345 | 190,740 | 154,868 | |
| Labor | 101,559 | 99,855 | 101,712 | |
| Manufacturing expenses | 52,791 | 46,896 | 42,080 | |
| Depreciation, plant | 12,561 | 10,793 | 11,942 | |
| Inventory adjustment | -127,134 | +25,012 | +105,350 | |
| Total cost of sales | $ 3,707,027 | $ 3,277,016 | $ 2,158,920 | |
| Gross profit | $ 248,764 | $ 155,181 | $ 130,280 | |
| Expenses | ||||
| Delivery expenses | $ 70,429 | $ 64,496 | $ 39,503 | |
| Selling expenses | 79,733 | 67,696 | 69,689 | |
| Administration expenses | 97,747 | 98,118 | 76,475 | |
| Total expenses | $ 247,909 | $ 230,310 | $ 185,667 | |
| Operating profit (loss) | $ 855 | ($ 75,129) | ($ 55,387) | |
| Other income: | ||||
| Discount earned | $ 1,190 | $ 1,536 | $ 1,617 | |
| Interest earned | 151 | 198 | ||
| Rents | 371 | 420 | 555 | |
| Profits on assets sold | 3,787 | 1,953 | 1,416 | |
| Insurance recoveries | 26,032 | 94,083 | ||
| Gain on life insurance | ||||
| Miscellaneous | 1,477 | 2,433 | 552 | |
| Storage | ||||
| Net profit, farm operations | ||||
| Total | $ 32,857 | $ 100,576 | $ 4,338 | |
| $ 33,712 | $ 25,447 | ($ 51,049) | ||
| Other deductions: | ||||
| Pension trust contribution | $ 8,222 | $ 15,075 | $ 11,325 | |
| Net loss, farm operations | 5,657 | 581 | 4,373 | |
| Miscellaneous | 1,949 | 420 | 429 | |
| W. Va. tax deficiencies 1944-49 | ||||
| Total | $ 15,828 | $ 16,076 | $ 16,127 | |
| Net income before income taxes | $ 17,884 | $ 9,371 | ($ 67,176) | |
| Income and excess profits taxes | ||||
| Net income | $ 17,884 | $ 9,371 | ($ 67,176) |
| June 30 | |||
| 1950 | 1951 | ||
| Income | |||
| Net sales | $ 2,135,707 | $ 2,678,438 | |
| Cost of sales: | |||
| Grains and other materials | $ 1,645,885 | $ 2,171,561 | |
| Bags, tags, etc | 159,762 | 191,422 | |
| Labor | 97,217 | 106,322 | |
| Manufacturing expenses | 44,228 | 45,630 | |
| Depreciation, plant | 12,978 | 13,098 | |
| Inventory adjustment | -20,875 | -48,867 | |
| Total cost of sales | $ 1,939,195 | $ 2,479,166 | |
| Gross profit | $ 196,512 | $ 199,272 | |
| Expenses | |||
| Delivery expenses | $ 43,031 | $ 47,683 | |
| Selling expenses | 59,738 | 69,257 | |
| Administration expenses | 68,166 | 75,928 | |
| Total expenses | $ 170,935 | $ 192,868 | |
| Operating profit (loss) | $ 25,577 | $ 6,404 | |
| Other income: | |||
| Discount earned | $ 1,455 | $ 1,830 | |
| Interest earned | 329 | 304 | |
| Rents | 1,250 | 1,095 | |
| Profits on assets sold | (124) | 13,824 | |
| Insurance recoveries | 10,000 | ||
| Gain on life insurance | 24,461 | ||
| Miscellaneous | 2,890 | 1,787 | |
| Storage | 2,724 | 1,846 | |
| Net profit, farm operations | 3,730 | 1,946 | |
| Total | $ 12,254 | $ 57,093 | |
| $ 37,831 | $ 63,497 | ||
| Other deductions: | |||
| Pension trust contribution | $ 3,987 | $ 8,195 | |
| Net loss, farm operations | |||
| Miscellaneous | 1,865 | 599 | |
| W. Va. tax deficiencies 1944-49 | 16,194 | ||
| Total | $ 5,852 | $ 24,988 | |
| Net income before income taxes | $ 31,979 | $ 38,509 | |
| Income and excess profits taxes | 700 | 4,789 | |
| Net income | $ 31,279 | $ 33,720 |
*86 Gwinn's feed mill burned in September 1946 and the company recovered as insurance approximately $ 40,000, realizing a gain of $ 26,032, which amount has been reflected in its income for the fiscal year *36 1947. As a result of the fire Gwinn was unable to manufacture its usual line of animal feeds for approximately 1 year. During that time Gwinn went out into the market and purchased feed to sell to its customers. The consequent effect of such purchases and resales was a reduced profit margin. As a further result of the mill fire Gwinn recovered in 1948 on its business interruption insurance $ 94,083, which sum is included in income for that year and represents an indemnity for fixed charges incurred plus an estimated amount for lost profits at the rate of $ 20,000 to $ 25,000 per year. As of January 15, 1951, Gwinn carried fire and extended coverage insurance on its buildings, machinery, and equipment (not including motor vehicles) based on their replacement cost in the amount of $ 619,000.
In 1951 Gwinn recovered $ 10,000 from a bonding company as the result of the settlement of an embezzlement loss. 1 This amount is included in Gwinn's income for 1951. In the same *87 year Gwinn received the proceeds from certain life insurance policies owned by it on the life of decedent, and the difference (amounting to $ 24,461) between the cash surrender value of such policies and the proceeds recovered by Gwinn was reflected in Gwinn's income for that fiscal year.
Since World War II Gwinn's business has declined in both volume and profit. Its export market no longer exists.
During the fiscal years 1947 through 1951 Gwinn paid no dividends. In each of those years Gwinn had insufficient cash reserves to finance its purchases of grain and raw materials which averaged $ 2,315,966 per year. As a result Gwinn had average borrowings for those years of:
| 1947 | $ 227,000 |
| 1948 | 293,690 |
| 1949 | 216,860 |
| 1950 | 235,506 |
| 1951 | 205,232 |
In 1947 Gwinn was working under an arrangement with the First National Bank of Cincinnati, whereby certain sums *88 were loaned to Gwinn to make its inventory purchases, with the understanding that at the close of each fiscal year the current loan would be repaid. However, in that year Gwinn was unable to repay when due the seasonal inventory loan made to it for the fiscal year ended June 30, 1947. As a consequence this bank refused to extend it further credit. Faced with the problem of inventory financing, Gwinn's management considered a plan to increase its working capital by the issuance of additional stock or debenture bonds. This idea was abandoned because of the *37 absence of a market for such stocks and bonds. Gwinn's management then attempted to raise sufficient working capital by obtaining a mortgage loan in the amount of $ 150,000, which amount was later reduced to $ 100,000. Applications for the loan were made to 13 different lending institutions, including banks and insurance companies. Each of these corporations was furnished balance sheets and profit and loss statements for a 10-year period and a complete description of the company's properties, including documents and photographs. Each institution sent representatives to inspect Gwinn's property and each declined to *89 make a loan. Finally, in December 1948 the First Huntington National Bank of Huntington, West Virginia, loaned decedent $ 98,000 which decedent in turn loaned to Gwinn. In making this loan to decedent the bank refused to accept stock of Gwinn as collateral security and decedent was required to secure the loan by putting up his life insurance and certain personal and real property owned by him as collateral.
In an effort to reduce its expenses Gwinn reduced the salaries of decedent and James A. Gwinn as officers for the fiscal years 1949 through 1951 each from $ 18,000 to $ 9,000 a year. The company also discharged its grain buyer in 1950 because of poor business conditions. In a further effort to conserve its working capital Gwinn reduced the contribution to its pension plan by 50 per cent in 1951.
Much of Gwinn's plant and equipment is antiquated and many of its operations have to be done by manual labor. In 1948 Gwinn's production was 4.4 cwt. of flour per man per hour as compared to a national average of 6.2 cwt.
During the years 1944 through 1946 Rust Engineering Co. of Pittsburgh was employed by Gwinn to draft a program for modernization of its plant and equipment. Rust's*90 recommendations called for an expenditure of approximately $ 500,000. Because of lack of capital Gwinn was unable to adopt the plan and was limited to a program of piecemeal mechanization. By 1951 some of the mechanization had been accomplished and, since decedent's death, an automatic sealing device has been purchased on a time-payment plan.
The grains processed and handled by Gwinn are subject to fluctuation in market price. The decedent and James A. Gwinn were experienced in hedging operations designed to prevent loss due to wide swings in the price of grains by means of transactions on the futures market. However, because Huntington, West Virginia, is geographically out of position with respect to the Kansas City and Chicago grain markets and because of the cost of transportation to and from these cities, the value of grain inventories could not be effectively *38 hedged by Gwinn's purchases or sales in the futures market. The fluctuations in the grain market do not merely affect Gwinn's grain inventories but the actual profit and loss on its finished products.
The management of Gwinn has never considered any plan of liquidation for the company and has never attempted*91 to sell the assets or business of Gwinn, nor has it ever received any offer from any person, firm, or corporation to purchase Gwinn's assets or business.
The following extract appears in the minutes of the meeting of the stockholders of Gwinn Bros. & Co. on August 21, 1951:
President Gwinn advised the stockholders that while the statement showed a nice profit for the year, it was no [sic] made from operation, and he felt that dividends should not be considered at this time. He further said he hoped that by the end of the next six months it would be possible to get back to where dividends could be regulated.
The fair market value of Gwinn's stock owned by decedent at his death was $ 21,600 or $ 60 per share.
At the time of his death decedent owned a life insurance policy issued by the New England Life Insurance Company, No. 235883, in the face amount of $ 10,000. Caroline A. Gwinn, wife of the decedent, was designated as the primary beneficiary of the policy. Attached to the policy is a request for change of beneficiary, dated September 22, 1948, and executed by the decedent wherein decedent's wife, Caroline A. Gwinn, was again designated as the primary beneficiary and in which*92 there was the following printed provision:
Prior to maturity of a policy by death or as an endowment, the right to change the beneficiaries and any endowment payees, receive dividends, assign the policy as collateral security, or exercise any right, option or benefit contained in the policy or permitted by the Company, including the right to change all provisions governing control of the policy, shall be reserved to the Owner of the policy, without the consent of any beneficiary; and the rights of any beneficiary shall be subject to any interest so created. The insured shall have no such rights unless the insured shall be the owner.
At the time of decedent's death this policy, along with other policies of decedent, was pledged with the Guaranty Bank & Trust Company of Huntington, West Virginia, as collateral security for an indebtedness of decedent to the bank in the amount of $ 20,000. After decedent's death, James A. Gwinn, administrator of the estate of decedent, paid the indebtedness to the bank out of property of the estate, secured the release of the policy and delivered it to Caroline A. Gwinn, the primary beneficiary, who elected to place the proceeds thereof on deposit*93 at interest with the insurance company with the right to make withdrawals from time to time.
*39 OPINION.
Issue 1.
The first question presented is the value of the 360 shares of the common stock of Gwinn Bros. & Co. owned by D. Byrd Gwinn at the date of his death, January 15, 1951. In the estate tax return filed for the estate this stock was valued at $ 40 per share. The Commissioner increased the value to $ 195 per share. We have carefully considered all of the relevant facts and circumstances presented by the evidence herein and have found as a fact that the fair market value of the stock in question as of the basic date was $ 60 per share. This finding is dispositive of this issue.
Issue 2.
At the time of his death decedent owned life insurance policy No. 235883 issued by the New England Life Insurance Co. in the face amount of $ 10,000. His wife, Caroline A. Gwinn, was designated primary beneficiary of the policy. Under the terms of the policy decedent retained, among other things, the right to change the beneficiary and the power to assign the policy as collateral security.
On January 15, 1951, this policy, along with other life insurance policies of decedent*94 (the face value of which was not shown), was pledged with a bank as collateral security for an indebtedness of the decedent to the bank in the amount of $ 20,000. After decedent's death the administrator paid the indebtedness out of the property of the estate and Caroline A. Gwinn received the proceeds of the policy No. 235883.
The issue for decision is whether the proceeds of this life insurance policy qualify for the marital deduction afforded by section 812 (e), Internal Revenue Code of 1939. 2 The widow is not the only heir of this intestate, and the marital deduction will be larger if the proceeds of the insurance policy go in their entirety to her rather than augment the net estate, of which she would receive only a part, by being used in whole or in part to discharge the bank loan for which the policy was pledged as collateral.
*95 *40 Respondent contends that the assignment and pledge of this policy constitutes an "incumbrance" within the meaning of section 812 (e) (1) (E) (ii), Internal Revenue Code of 1939, 3 and that this "incumbrance" must be taken into account in determining the value of the interest in the property passing to the surviving spouse.
*96 Respondent argues that the language "in any manner" contained in this section precludes all property which is incumbered without exception and therefore, as the amount of the incumbrance ($ 20,000) was greater than the value of the policy ($ 10,000), 4 for the purpose of the marital deduction the policy had a value of zero. We do not agree with respondent's determination under the facts and circumstances here presented.
Section 812(e)(1)(A) allows a marital deduction equal to the value of any interest in property which passes or has passed from decedent to his surviving spouse, to the extent that such interest is included in determining the value of the gross estate. Section 812(e)(1)(E)(ii) provides that in arriving at the value of such a property interest, where the property or interest "is incumbered in any manner * * * such incumbrance * * * shall *97 be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined." Both parties agree that the proceeds of the policy here involved are includible in the gross estate of the decedent, and, section 812(e)(3)(G) provides that, for the purposes of this subsection, an interest in property shall be considered as passing from the decedent to any person if "such interest consists of proceeds of insurance upon the life of the decedent receivable by such person." 5
*98 *41 We agree with respondent that the assignment of the policy here involved as security for the decedent's indebtedness to the bank constitutes an incumbrance within the meaning of the statute. Having reached that conclusion our next step is to determine the value of the property interest to be allowed as a marital deduction. In so doing the statute requires that for the purpose of arriving at the value of the property interest which passed to the surviving spouse such incumbrance shall be taken into account "in the same manner as if the amount of a gift to such spouse of such interest were being determined."
There is apparently a paucity of authorities determining how a gift to a spouse would be determined under the circumstances here presented. In D. S. Jackman, 44 B. T. A. 704, the 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. It was there held that the value of the gift was an amount equal to the excess of the value of the stock over the indebtedness. In Commissioner v. Proctor, 142 F. 2d 824,*99 certiorari denied 323 U.S. 756">323 U.S. 756, the Fourth Circuit Court of Appeals affirmed on this point (reversed and remanded on another point) a Memorandum Opinion of this Court (Frederic W. Proctor, Docket No. 111015, entered July 6, 1943), wherein a similar conclusion was reached on authority of the Jackman case. In its discussion of this point, the Fourth Circuit said:
The question which confronts us at the outset is how property which has been pledged or assigned as security for a debt and is afterwards made the subject of gift should be valued for the purposes of the gift tax (i. e. whether the debt should be deducted from the value of the property or not); but the Tax Court has decided that the value for purposes of gift taxation is the excess of the value of the property pledged or assigned over the debt. Jackman v. Commissioner, 44 B. T. A. 704. The rule is not one of law, but one for arriving at a conclusion of fact, the value of the property given, and, in view of the fact that there is nothing here to show that the debt could have been paid otherwise than out of the trust property, we cannot say that the Tax Court was*100 guilty of error of law in following it in this case. * * *
While the Fourth Circuit did not specifically rule that where the debt for which the property was pledged could have been paid otherwise than out of the pledged property the value for gift tax purposes would be the value of such property unreduced by the debt, we think this is fairly to be inferred. In the Jackman case, the donor's net worth at the time of the gift was such that the debt could not then have been paid otherwise than out of the pledged property, and, in the Proctor case there was no showing that the debt could have been paid otherwise than out of the pledged property. Those cases therefore held that the value of the gift was the amount *42 by which the value of the pledged property exceeded the debt. Here the indebtedness of the decedent, for which the insurance policy was pledged as collateral, not only could have been but was paid out of property of the estate, and the beneficiary received the full proceeds of the insurance policy. These facts make the Jackman and Proctor cases distinguishable. Cf. Estelle May Affelder, 7 T.C. 1190">7 T. C. 1190.
Considering all *101 the facts and circumstances here presented, it is our opinion that, if the amount of a gift to the surviving spouse were being determined, the amount of the gift would be the entire proceeds of the policy. The administrator was legally obligated to pay off all of the decedent's debts (Cf. McClanahan v. Davis, 49 U.S. 169">49 U.S. 169, 178), including the debt in question, and, as hereinafter shown, the widow, as beneficiary of the insurance policy, could have required that the indebtedness be paid out of other assets of the estate, or that she be subrogated to the claim of the bank against the estate, in which event, the estate being solvent, she would have received the payment.
Under the provisions of West Virginia Code, 1949, section 3359, 6*103 and similar statutes in other jurisdictions, as between the estate and the named beneficiary, the insurance proceeds are the property of the latter. Bennett v. Bennett, 135 W. Va. 3">135 W. Va. 3, 62 S. E. 2d 273. 7 The estate owed the debt to the bank. Cf. In re Stafford's Estate, 101 N. Y. S. 2d 904, affirming 98 N. Y. S. 2d 714.*102 The beneficiary did not. She owned the right to the proceeds of the policy subject to any liens thereon. This right is not to be minimized by calling the interest contingent throughout the life of decedent. The statute provides the contrary. Bennett v. Bennett, supra.
Upon the death of decedent a right of present enjoyment of the proceeds accrued to the beneficiary. That right extended to the whole of the policy. It had never been diminished in amount. The only incumbrance upon it was a pledge as collateral security. "Collateral means secondary or subsidiary. Such security is to be resorted to only in the event that the pledgor fails to perform the principal*104 *43 contract. A pledge as collateral security ex vi termini excludes the idea that the thing pledged is designed as the primary source from which payment is to be made." Barbin v. Moore, supra, p. 374; Wickert v. Folk, 250 Wis. 194">250 Wis. 194, 26 N. W. 2d 540; Crump v. McMurtry, 8 Mo. 408">8 Mo. 408; Third National Bank v. Hall, 30 Tenn. App. 586">30 Tenn. App. 586, 209 S. W. 2d 46; Ex parte Boddie, 200 S. C. 379, 21 S. E. 2d 4; In re Alexander's Estate, 273 N. Y. S. 984; Butler v. Gage, 14 Colo. 125">14 Col. 125, 23 P. 462">23 Pac. 462.
Under the circumstances here present it is generally held that if the proceeds of the policy in question had been employed to discharge the indebtedness the beneficiary would have become subrogated to the lender's right to enforce a claim against the estate in an amount equal to the loan. Caroline D. Thompson, 22 T. C. 507. 8 So being, the value of the interest of Caroline A. Gwinn under the circumstances*105 here presented, was equal to the value of the policy at decedent's death.
*106 Accordingly, under the facts and circumstances here presented we have concluded, and so hold, that the entire amount of the proceeds of policy No. 235883 qualifies for the marital deduction allowed by section 812 (e) of the Internal Revenue Code of 1939.
Decision will be entered under Rule 50.
Footnotes
1. Employee of company since 1936 (formerly office manager); officer and director since August 1951.↩
2. Employee of company since 1936 (formerly plant manager); officer and director since August 1951.↩
1. There is nothing in the record to indicate that the loss occurred in 1951 and on brief petitioner states that it occurred over an extended period of time.↩
2. SEC. 812. NET ESTATE.
For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --
* * * *
(e) Bequests, etc., to Surviving Spouse. --
(1) Allowance of marital deduction. --
(A) In General. -- An amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.↩
3. SEC. 812. NET ESTATE.
For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --
* * * *
(e) Bequests, Etc., to Surviving Spouse. --
(1) Allowance of marital deduction. --
* * * *
(E) Valuation of interest passing to surviving spouse. -- In determining for the purposes of subparagraph (A) the value of any interest in property passing to the surviving spouse for which a deduction is allowed by this subsection --
* * * *
(ii) where such interest or property is incumbered in any manner, or where the surviving spouse incurs any obligation imposed by the decedent with respect to the passing of such interest, such incumbrance or obligation shall be taken into account in the same manner as if the amount of a gift to such spouse of such interest were being determined.↩
4. Paragraph 5 (c) of the petition (denied in part by respondent's answer) and the briefs for both parties state that the proceeds of this policy were $ 10,029.40.↩
5. The illustration contained in Senate Report No. 1013 (Part 2), 80th Cong., 2d Sess. (1941-1 C. B. 331, 335), which respondent argues on brief infers an affirmative direction by decedent if the payment of the incumbrance by the estate is to be included as an interest passing to the surviving spouse, points more to the definition of an interest passing from decedent contained in subparagraph (A) of section 812 (e) (3)↩. In any event we consider it immaterial whether the proceeds of the policy received by the surviving spouse herein are to be considered as a primary interest or as an additional interest. She was entitled to, and did receive such proceeds as the result of having been designated beneficiary by decedent.
6. Sec. 3359↩. Rights of Creditors as to Policies in Favor of Another Person and Policies Assigned. -- If a policy of insurance, whether heretofore or hereafter issued, is effected by any person on his own life or on another life, in favor of a person other than himself, or, except in cases of transfer with intent to defraud creditors, if a policy of life insurance is assigned or in any way made payable to any such person, the lawful beneficiary or assignee thereof, other than the insured or the person so affecting such insurance, or his executors or administrators, shall be entitled to its proceeds and avails against the creditors and representatives of the insured and of the person effecting the same, whether or not the right to change the beneficiary is reserved or permitted, and whether or not the policy is made payable to the person whose life is insured if the beneficiary or assignee shall predecease such person: * * *
7. See Dellefield v. Block, 40 F. Supp. 616">40 F. Supp. 616; Massachusetts Linotyping Corporation v. Fielding, 312 Mass. 147">312 Mass. 147, 43 N. E. 2d 521; Chatham Phenix National Bank & Trust Co. v. Crosney, 251 N. Y. 189, 167 N. E. 217; United States v. Sullivan, 19 F. Supp. 695">19 F. Supp. 695, affd. 95 F.2d 1021">95 F. 2d 1021; In re Messinger, 29 F. 2d 158; In re Weick, 2 F. 2d 647; In re Rose, 24 F. 2d 253; In re Firestone, 2 F. Supp. 96↩.
8. See also Smith v. Coleman, supra; Barbin v. Moore, supra; Ex parte Boddie, supra;In re Stafford's Estate, supra;Chamberlin v. First Trust & Deposit Co., 15 N. Y. S. 2d 168; Reinhold's Estate, 68 N. Y. S. 2d 347; In re Jones' Estate, 81 N. Y. S. 2d 386; In re Cumming's Estate, 105 N. Y. S. 2d 104; In re Scheer's Will, 114 N. Y. S. 2d 288, affd. 118 N. Y. S. 2d 752; In re Gallagher's Will, 57 N. Mex. 112, 255 P. 2d 317; Russell v. Owen, 203 N. C. 262, 165 S. E. 687; Farracy v. Perry, Tex. Civ. App. 1928, 12 S. W. 2d 651; Blair v. Baker, 196 Md. 242">196 Md. 242, 76 A.2d 129">76 A. 2d 129; Schum v. Lawrenceburg National Bank, 314 Ky. 297">314 Ky. 297, 234 S. W. 2d 962; Mutual Life Insurance Co. of New York v. Illinois National Bank of Springfield, Ill., 34 F. Supp. 206">34 F. Supp. 206, affd. sub nom. Mackie v. Mackie, 126 F. 2d 469; Fidelity Union Trust Co. v. Phillips, 5 N. J. Super. 529, 68 A. 2d 574, affd. 4 N. J. 28, 71 A.2d 352">71 A. 2d 352. Cf. Fitzsimmons v. American Union Life Insurance Co., 234 Mo. App. 878">234 Mo. App. 878, 133 S. W. 2d 680↩.