*287 Decision will be entered for the respondent.
Petitioner exercised an option offered him by Northwestern Mutual Life Insurance Company and exchanged all of his life insurance policies, endowment in form, for ordinary and limited payment life policies. In effecting this exchange the company applied the total cash surrender value of the surrendered policies. There was a sufficient amount of the funds thus released to enable the issuance of an additional single premium policy in the full amount of $ 8,500. The policy cost $ 6,541.40 of such funds and had a cash surrender value of $ 5,531.02 on the date of issuance.
Held: For the purpose of determining the taxable gain derived by petitioner the fair market value of the single premium life insurance policy on the date the transaction took place was its cost, $ 6,541.40.
*256 The Commissioner determined a deficiency in petitioner's income tax for the taxable year 1943 in the amount of $ 570.36.
The question before the Court is: Did the Commissioner employ the correct method in computing the taxable gain derived by petitioner from an exchange of life insurance policies?
FINDINGS OF FACT.
The facts stipulated are so found and incorporated herein by reference.
Petitioner, Charles Cutler Parsons, is an individual with residence at 1220 Yale Avenue, Salt Lake City, Utah. Petitioner's returns for *257 the calendar years 1942 and 1943, were filed with the collector of internal revenue for the District of Utah.
The respondent's notice of deficiency was mailed to petitioner on November 13, 1947.
The taxes in controversy are income and victory taxes for the taxable year ending December 31, 1943, in the amount of $ 570.36. Petitioner's return for the calendar year 1942 and the tax levied thereon are involved by reason of the provisions of the Current Tax Payment Act of 1943, 26 U. S. C. A. at page 406, section 6.
During*289 the taxable years ending December 31, 1942, and December 31, 1943, respectively, petitioner was married and living with his wife, Margaret H. Parsons, who filed a separate return for each of the taxable years and did not, for either year, claim any personal exemption.
On March 11, 1942, petitioner was the owner of endowment life insurance policies issued by The Northwestern Mutual Life Insurance Company, as follows:
| Policy | Date purchased | Face | Premiums |
| number | amount | paid | |
| 814133 | 12/15/09 | $ 1,000 | $ 923.34 |
| 814134 | 12/15/09 | 2,000 | 1,846.68 |
| 814135 | 12/15/09 | 2,000 | 1,846.68 |
| 1246959 | 12/4/17 | 2,000 | 1,695.54 |
| 1246960 | 12/4/17 | 3,000 | 2,543.31 |
| 1380076 | 12/20/19 | 17,000 | 14,650.77 |
| Total | $ 27,000 | $ 23,506.32 |
| Cash surrender | |||
| Policy | Dividends | Net cost | value |
| number | received | as of 3/17/42 | |
| 814133 | $ 309.39 | $ 613.95 | $ 876.76 |
| 814134 | 618.78 | 1,227.90 | 1,753.55 |
| 814135 | 618.78 | 1,227.90 | 1,753.55 |
| 1246959 | 436.14 | 1,232.40 | 1,452.60 |
| 1246960 | 694.71 | 1,848.60 | 2,178.92 |
| 1380076 | 3,860.36 | 10,790.41 | 12,275.50 |
| Total | $ 6,565.16 | $ 16,941.16 | $ 20,290.88 |
In the early spring of the year 1942 Charles C. Guilford, as general *290 agent for The Northwestern Mutual Life Insurance Company, with his offices in Salt Lake City, Utah, suggested to petitioner the advisability of reviewing petitioner's program of life insurance with his company. He suggested that this be done with a view to exchanging petitioner's policies of endowment life insurance with Northwestern Mutual for ordinary and limited payment life of the same date and age plus certain new policies at attained age, which might be available with the same outlay of premiums as before the exchange. Guilford explained to petitioner that Northwestern Mutual had consistently extended to its policyholders from a time antedating December 15, 1909, upon evidence of insurability, the option of permitting changes in policies from endowment to ordinary life or limited payment life to meet the changed conditions of its policyholders. The company used for that purpose the ages, respectively, at which the policyholder had purchased his endowment policies and the premium rate applicable to that age, for a like full value of new ordinary or limited payment life policies for which in part the exchange might be made. Petitioner informed Guilford that he was no longer*291 greatly *258 interested in the endowment features of his life insurance and that the exchange of his endowment policies for those of the form suggested by Guilford would interest him if, without additional investment, he could thus procure greater coverage for his beneficiaries in the event of his death. On March 11, 1942, petitioner authorized and directed The Northwestern Mutual Life Insurance Company to revamp his insurance program with that company. In so doing it was to exchange all the endowment policies issued to him by that company, being those listed above, for ordinary life and limited payment life insurance, using in the process all reserves so released. Accordingly, on March 17, 1942, petitioner exchanged his endowment policies for the following ordinary life or limited payment life policies:
| Policy | Face | Cash surrender | ||
| number | Date | Type of policy | amount | value |
| 814133 | 12/15/09 | Ordinary Life. | $ 5,000 | $ 2,361.46 |
| 1246960 | 12/4/17 | Ordinary Life. | 5,000 | 2,079.77 |
| 1380076 | 12/20/19 | 28-Payment Life. | 17,000 | 9,307.98 |
| 3170301 | 3/20/42 | Ordinary Life. | 2,500 | |
| 3170302 | 3/20/42 | Single Premium Life. | 8,500 | 5,531.02 |
| Total | $ 19,280.23 |
All of*292 these policies were and are freely assignable. Their only realizable value at any time prior to petitioner's death was and will be their cash surrender value.
Petitioner acquired Policy No. 3170301 dated March 20, 1942, in the amount of $ 2,500, ordinary life, by the payment of $ 158.46 and crediting $ 27.27 of the sum released for the purpose of the exchange. Policy No. 3170302, dated March 20, 1942, in the amount of $ 8,500, single premium life, with a cash surrender value of $ 5,531.02 was acquired for $ 6,514.40 of the sum released from the exchange of the endowment policies. The premiums upon these two policies were those generally specified by the insurance company for like policies issued to persons of the same age in good physical condition.
Finding petitioner in good health, the company provided petitioner an additional amount of death benefit as a result of the exchange. This additional amount of benefit was accomplished by the use of the reserves released by the exchange of the old endowment policies into the new policies. The additional coverage petitioner acquired could not have been obtained without additional investment, except by petitioner's exercise of the option*293 extended to him by Northwestern. Had this option or practice not been available to petitioner and had petitioner in the year 1942 at the age of 60 undertaken to purchase a five-payment life policy in the amount of $ 17,000, premiums would have been imposed upon petitioner for such insurance at the rate of $ 3,027.19 for each of the five annual payments. The premiums actually *259 paid by petitioner during the 5 years 1942 to 1946, inclusive, amounted to $ 551.82 per year, less dividends. By the exchange, petitioner acquired a coverage of $ 38,000 as against that of $ 27,000 under the old policies, for the following premiums (dividends not deducted):
| Policy | Annual | Face | |
| number | Type of policy | premium | amount |
| 814133 | Ordinary Life | $ 107.85 | $ 5,000 |
| 1246960 | Ordinary Life | 134.40 | 5,000 |
| 1380076 | 5-Payment Life, 1942-46, inc | 551.82 | 17,000 |
| 3170301 | Ordinary Life | 185.73 | 2,500 |
| 3170302 | Single Premium | 6,514.40 | 8,500 |
| Total | $ 38,000 |
Solicitor's Opinion 55, 3 C. B. 54, provides in part:
* * * the taxable gain, if any, arising from the exchange [of insurance policies] is the amount whereby (1) the gross premiums charged at any time, *294 either before or on or after March 1, 1913, less sums returned, deducted, or abated therefrom, are exceeded by (2) the cash, if any, received upon surrender of the first policy plus the cash value of the second policy.
Assuming that the transaction here involved constituted an exchange of policies within the above quoted Solicitor's Opinion, petitioner, in accord with his interpretation thereof, returned the transaction as follows:
| Cash received | $ 27.27 | |
| Cash value of second or new policies | 19,280.23 | |
| $ 19,307.50 | ||
| Gross premiums charged | $ 23,506.32 | |
| Less: Dividends received | 6,565.16 | |
| 16,941.16 | ||
| Taxable gain | $ 2,366.34 |
Respondent computed the taxable gain as follows:
| Cash value of first or old policies | $ 20,290.88 | |
| Gross premiums charged | $ 23,506.32 | |
| Less: Dividends received | 6,565.16 | |
| 16,941.16 | ||
| Taxable gain | $ 3,349.72 |
Accordingly, respondent made the resulting "Adjustments to Net Income" for the taxable year ended December 31, 1942. He thereupon determined a deficiency in petitioner's income and victory tax liability for the taxable year ending December 31, 1943, in the sum of $ 570.36.
Petitioner is and at all times has been the owner*295 of such policies of life insurance and all of them. The circumstance of neither gift nor assignment is involved.
*260 OPINION.
The sole issue before us involves the determination of the use of the "cash value" or "fair market value" of life insurance policies for the purpose of computing the taxable gain derived from an exchange of such policies.
Upon the suggestion of the general agent for The Northwestern Mutual Life Insurance Company, petitioner directed that company to revamp his insurance program with it. This was accomplished by exchanging all of the endowment life insurance policies which petitioner had with Northwestern for ordinary and limited payment life policies of the same date and age. In addition, petitioner received in exchange a new single premium life policy in the full amount of $ 8,500 and a small cash refund. As a result of the transaction, petitioner obtained a coverage of $ 38,000 as against that of $ 27,000 under the old endowment policies. In effecting this exchange, Northwestern applied the total cash surrender value of the surrendered policies as of March 17, 1942, leaving a balance due it of $ 158.46. This amount petitioner paid by his check.
*296 Petitioner returned the transaction in accordance with his interpretation of Sol. Op. 55, the pertinent portion of which is quoted above, and reported a taxable gain of $ 2,366.34. Respondent proceeded as set out in our Findings of Fact and determined a taxable gain of $ 3,349.72 or $ 983.88 more than that reported by petitioner. The difference is attributable for the most part to the difference between the cost and the cash surrender value of Policy No. 3170302, the new single premium policy, in the amount of $ 8,500. The policy cost $ 6,541.40 and on the date it was acquired had a cash surrender value of $ 5,531.02.
A life insurance policy is property within the purview of the tax statutes. See Lucas v. Alexander (CCA-6, 1928), 27 Fed. (2d) 237, 239. And here, the surrender of the old policies and the acquisition of the new constituted an exchange of property within the meaning of section 111 (b), Internal Revenue Code. 1
*297 Petitioner argues in his brief that Sol. Op. 55, supra, was an executive interpretation of section 202 (b) of the Revenue Act of 1918 and its use of the term "fair market value"; that the provision so interpreted appears in each revenue act enacted subsequent to 1918 and appears today as section 111 (b), supra, and that, therefore, Sol. Op. 55, supra, has been given the force and effect of law by reenactment of the statute it construed. Respondent does not dispute petitioner's argument *261 but takes the position that petitioner misinterpreted the scope and import of Sol. Op. 55, supra, and contends that the term "cash value" of the new policy appearing therein does not mean its cash surrender value, but rather means the amount which the insurance company would charge for such a policy in an outright sale.
This brings us to the specific question of whether the fair market value (or cash value) of the new policy, received in the transaction here involved, is its cash surrender value or its cost.
Fair market value is what a willing buyer would pay to a willing seller for an article where neither is acting under compulsion. This is a familiar rule and the courts*298 have generally held that when property has been traded for property, the fair market value of the property received in the transaction is its exchangeable value realizable in money's worth. E. g., Walls v. Commissioner (CCA-10, 1932), 60 Fed. (2d) 347; Logan v. Commissioner (CCA-2, 1930), 42 Fed. (2d) 193.
Since the only value realizable at any time prior to petitioner's death was and will be the cash surrender value, the petitioner urges that this would represent the fair market value of the new policy. We do not agree.
The cash surrender value of a life insurance policy is the amount that will be paid to the insured upon surrender of the policy for cancelation. It is merely the money which the company will pay to be released from its contract. However, insurance companies desire to discourage the surrender of policies as much as they can equitably do so. For this reason, the cash surrender value is arbitrarily set at an amount considerably less than would be established by its reserve value. Vance, Insurance, pp. 55, 56. Furthermore, with policies on an annual premium basis no cash surrender value is generally*299 allowed for the first two years. Huebner, Life Insurance, 4th Edition, page 279. It cannot, however, be seriously contended that a life insurance policy is entirely worthless until the third year following its issuance. Likewise, it can hardly be maintained that a transaction, such as here involved, would not be subject to tax because the new policy which was received in the exchange had no value. In determining what the term "fair market value" means, as applied to a single premium life insurance policy, we must not overlook the nature of the property with which we are dealing. Such a policy is unlike other property in that it appreciates rather than depreciates with the passage of time. Consequently, this type of property is subject to somewhat different rules from those that would apply to other forms of property. A consideration of all the elements involved must be the basis upon which to determine the fair value of such a policy.
The fair market value of a single premium life insurance policy on the date of issuance is the price which the insured, as a willing buyer, *262 paid the insurer, as a willing seller. If that is its fair market value in the hands of the *300 insurer at the moment of issuance, what intervening factor is there to cause its value to decrease an instant later in the hands of the insured? In many types of insurance the uncertainty of the insured's ability to continue payment of premiums may adversely affect the value of the policy. This, however, is not the case with a single premium life insurance policy where there are no more premiums to pay and the policy's value can only increase with the passage of time.
The cash surrender value is the market value only of a surrendered policy and to maintain that it represents the true value of the policy is to confuse its forced liquidation value at an arbitrary figure with the amount realizable in an assumed market where such policies are frequently bought and sold. Moreover, such an argument overlooks the value to be placed upon the investment in the insured's life expectancy and the protection afforded his dependents.
The rule is, then, that the fair market value of a single premium life insurance policy for the purpose of determining taxable gain derived from exchange of insurance policies is the same price that any person of the same age, sex, and condition of health as the *301 insured, would have to pay for a life policy with the same insurance company on the date the exchange took place. "This is a reasonable standard and one agreed upon by a willing buyer and a willing seller both of whom are acting without compulsion." Cf. Ryerson v. United States, (N. D. Ill., 1939) 28 Fed. Supp. 265, 267, affd. (1941) 312 U.S. 260.
In the instant case the fair market value of Policy No. 3170302 in the hands of the insurer on the date it was issued was $ 6,514.40. This was the one agreed upon by the petitioner as a willing buyer and the insurance company as a willing seller. No intervening factor has caused the value of that policy to decrease in the hands of petitioner. Therefore, for the purpose of determining the taxable gain derived by petitioner from the transaction here involved, the fair market value of Policy No. 3170302 in the hands of the petitioner is $ 6,514.40. Accordingly, respondent did not err in his determination, and we so hold.
Decision will be entered for the respondent.
Footnotes
1. SEC. 111. DETERMINATION OF AMOUNT OF, AND RECOGNITION OF, GAIN OR LOSS.
* * * *
(b) Amount Realized. -- The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.↩