T.C. Summary Opinion 2009-94
UNITED STATES TAX COURT
RAMON EMILIO PEREZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8126-07S. Filed June 15, 2009.
Ramon Emilio Perez, pro se.
Heather K. McCluskey, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure. Dollar amounts are rounded.
After a concession1 the issue for decision is whether
petitioner had a taxable distribution in 2004 related to a Form
1099-R, Distributions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that
Northwestern Mutual Life Insurance Co. (Northwestern) issued.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
California when he filed his petition.
Petitioner is a medical doctor specializing in the treatment
of infectious diseases. He began private practice in 1981 and in
1988 he formed a medical corporation. Petitioner employed one
full-time employee serving as both receptionist and bookkeeper,
and he employed part-time employees. Petitioner’s then wife,
Lorraine Torres, was and presumably remains an attorney. She
operated her legal practice from space in petitioner’s office.
She also managed all of petitioner’s business, financial, and
legal affairs.
1
During trial, respondent conceded the accuracy-related
penalty for 2004.
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Petitioner’s medical practice was hospital based. He would
rarely see patients in his office. He used the office mainly for
administrative purposes such as billing, consultations, and
telephone calls.
Ms. Torres arranged for the issuance of at least two life
insurance policies on petitioner’s life. The policy involved in
this case arises from a life insurance application that Ms.
Torres obtained from Northwestern. Petitioner signed the
application on February 11, 1988. The type of policy requested
was a “Flexible Life Plan”. The application listed petitioner as
the owner and the insured and named Ms. Torres as the direct
beneficiary. “Trustee under will of insured” was listed as the
contingent beneficiary. The amount of life insurance applied for
was redacted from the copy of the application in the record.
However, the application noted another preexisting Northwestern
life insurance policy for $443,401 together with an accidental
death benefit of $100,000.
The following boxes or options were checked on the February
11, 1988, application (capitalization as in the original):
9C. FLEXIBLE LIFE PLANS (CompLife) – Whole Life
9D. ADDITIONAL BENEFITS FOR FLEXIBLE LIFE PLANS – Waiver of
Premium
10. If an additional benefit cannot be approved, should the
Company issue the policy without the benefit? – Yes
11. Shall the PREMIUM LOAN provision, if available, become
operative according to its terms? – Yes
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12. ANNUAL DIVIDENDS until otherwise directed will: – First
policy – Purchase paid-up additions.
13. POLICY LOAN INTEREST RATE OPTION – 8%
14. PREMIUM PAYABLE – Annually
After receipt of the application Northwestern issued a life
insurance policy (the February policy).
In the early 1990s petitioner’s income from his medical
practice dramatically decreased and petitioner could no longer
afford the life insurance premiums. By 1995 petitioner and his
wife had finalized a chapter 13 bankruptcy. As a result he
closed his office, terminated his employees, and lost his home.
The couple separated and in 1998 divorced. Ms. Torres handled
the legal work for the divorce. Petitioner did not hire an
attorney.
Around the time of the marital separation petitioner
starting receiving letters from Northwestern warning that the
policy would lapse if he did not act and the company would report
the lapse. Petitioner consulted his former wife with respect to
the letters, and she told him that she would take care of the
matter and not to worry.
Petitioner never received any cash distributions from
Northwestern. Nonetheless, Northwestern issued petitioner a Form
1099-R for 2003 reporting a taxable distribution of $22,159. We
presume this 2003 Form 1099-R pertained to the preexisiting life
insurance policy for $443,401 listed on the February 11, 1988,
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life insurance application. Petitioner prepared his own 2003
Federal income tax return. He timely filed the return, but he
did not include the $22,159 in income. Instead petitioner
attached the Form 1099-R and a letter stating: “I need your
advice as to the meaning of this. I never received any money
from them. This is all an insurance policy that lapsed.”
Petitioner tried to resolve the matter with the Internal
Revenue Service (IRS) through a series of telephone and written
exchanges, each time hearing from a different representative. He
informed the IRS that he believed the bankruptcy had taken care
of the matter. While petitioner was still waiting for a
clarification from the IRS, the IRS issued a Notice CP2000 dated
July 25, 2005, informing petitioner of an increase in Federal
income tax, penalties, and interest totaling $7,654 for 2003 as a
result of Northwestern’s Form 1099-R. Petitioner paid the entire
$7,654 but he continued to dispute the adjustment and checked a
box on the remittance form stating that he disagreed with the
adjustment. The IRS received the payment on August 26, 2005. As
a result of the full payment the IRS did not issue a notice of
deficiency pertaining to 2003.
While the dispute for 2003 was still ongoing, Northwestern
issued another Form 1099-R. This second Form 1099-R reported a
taxable distribution for 2004 of $25,331 relating to the February
policy in issue. Because petitioner was still waiting for
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clarification regarding 2003, he did not include the $25,331 in
his 2004 income.
The IRS issued a notice of deficiency dated March 5, 2007,
with respect to 2004 determining a Federal income tax deficiency
of $7,072 and a section 6662(a) accuracy-related penalty of
$1,414. On April 10, 2007, petitioner filed a petition with this
Court seeking redetermination of the 2003 and 2004 Federal income
tax deficiencies on the grounds that: (1) He lost all of his
assets in the bankruptcy including the cash value of any life
insurance; and (2) the IRS did not provide any evidence that he
still owned the life insurance policies at issue.
On July 3, 2007, respondent filed a motion to dismiss the
petition as it applied to 2003 on the grounds that: (1) The IRS
had not issued a notice of deficiency for 2003 and accordingly
under sections 6212 and 6213 as well as Rule 13 the Court lacked
jurisdiction to hear the matter; and (2) petitioner had no
Federal income tax deficiency for 2003 because he had fully paid
the deficiency on August 26, 2005. On August 6, 2007, the Court
granted respondent’s motion to dismiss the petition with respect
to 2003.
At trial the Court received into evidence the following
three documents that are relevant to our final decision: (1) A
copy of the February 11, 1988, insurance application discussed
above; (2) a printout of an IRS taxpayer data inquiry computer
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screen replicating information from the 2004 Form 1099-R; and (3)
a signed Form 2866, Certificate of Official Record, with a raised
gold seal and attached to that an IRS internally computer-
generated “Wage and Income Transcript” showing data from all the
information returns that the IRS received for 2004 with respect
to petitioner. The computer replication of the Form 1099-R
reports: (1) Northwestern issued the Form 1099-R as a result of
a policy termination; (2) a taxable amount at lapse of $25,331;
(3) loans repaid at lapse of $106,011; and (4) the last four
digits of a redacted account number. These four digits match the
last four digits of the redacted account number written on the
February 11, 1988, life insurance application. Respondent did
not offer and the Court did not receive into evidence a copy of
the actual Form 1099-R at issue or a copy of the issued life
insurance policy corresponding to the February 11, 1988,
application.
Discussion
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
section 7491(a) the burden of proof regarding a factual matter
may shift to the Commissioner if the taxpayer produces credible
evidence and meets the other requirements of the section.
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In this case however before we apply section 7491(a) we must
first consider section 6201(d), because petitioner reasonably
raised the issue of the correctness of an information return, the
Form 1099-R for 2004. Section 6201(d) provides:
In any court proceeding, if a taxpayer asserts a
reasonable dispute with respect to any item of income
reported on an information return filed with the
Secretary * * * by a third party and the taxpayer has
fully cooperated with the Secretary (including
providing, within a reasonable period of time, access
to and inspection of all witnesses, information, and
documents within the control of the taxpayer as
reasonably requested by the Secretary), the Secretary
shall have the burden of producing reasonable and
probative information concerning such deficiency in
addition to such information return.
Respondent did not challenge and in any event we would find
that petitioner has fully cooperated with respondent’s requests
for information, documents, and meetings. Petitioner on his own
initiative attached a letter to his 2003 Federal income tax
return stating that he disagreed with the Form 1099-R, provided
his reasons for disagreement, and requested clarification from
the IRS. Likewise after filing his return and for the next 4
years through the date of trial petitioner continued to question
why the amounts Northwestern reported on the Forms 1099-R were
taxable as income to him. Petitioner paid the proposed
additional tax, penalties, and interest for 2003 totaling $7,654
even though he disagreed with the additional income that
respondent asserted. He also attempted to dispute the tax for
2003 in the petition that he filed in this case. On the basis of
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the above we hold that under section 6201(d) respondent has the
burden of producing “reasonable and probative information”
regarding the deficiency.
Respondent argues that petitioner’s circumstances are
sufficiently similar to the taxpayers’ circumstances in Atwood v.
Commissioner, T.C. Memo. 1999-61, for us to hold that petitioner
had gross income in 2004 from the lapse of a Northwestern
insurance policy. We disagree.
In Atwood the taxpayers each purchased a single premium
whole life insurance policy. Each policy provided for the lapse
or termination of the policy if the loan balance including unpaid
interest grew to be larger than the cash value of the policy.
After a few years the couple suffered financial setbacks forcing
them to withdraw as loans the maximum amounts that the policies
allowed. They were unable to repay the loans or the accumulated
unpaid interest. As a result the loan balances exceeded the cash
values causing the insurance companies to terminate the policies
in 1995.
The insurance companies issued Forms 1099-R for 1995
reporting taxable distributions in the amounts by which the
ending cash values exceeded the single premium payments. The
taxpayers timely filed their 1995 joint Federal income tax return
without including any income related to the Forms 1099-R. The
Commissioner determined a Federal income tax deficiency for 1995
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and the taxpayers petitioned this Court claiming in pertinent
part they received very little cash and therefore the
terminations were merely “‘paper transactions’ on the books of
the insurance companies.” We held that the lapses gave rise to
income because even though the taxpayers received minimal cash,
upon termination the lapses resulted in a satisfaction of the
loans and were therefore equivalent to payments of the cash
surrender values.
However, respondent puts the cart before the horse by
assuming that our holding in Atwood applies to the facts present
here. In Atwood we analyzed the policies’ terms from which we
found facts to arrive at our holding.
In petitioner’s case the February policy is not in evidence.
We do not know why the policy lapsed, and we do not know the
consequences to petitioner in the event of a lapse. The
insurance application form in evidence merely provides some
suggestive terms such as a “waiver of premium”; “shall the
premium loan provision, if available, become operative according
to its terms? – Yes”; and “annual dividends unless otherwise
directed will, on the first policy, purchase paid-up additions”.
We do not know the precise meaning of these terms with respect to
this particular insurance policy, or whether the terms in the
application were adopted or modified in the February policy or in
subsequent riders. Significantly, the application contains the
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escape clause that Northwestern may issue the policy without
certain requested benefits.
Respondent’s failure to produce a copy of the February
policy or to call a representative from Northwestern prevents us
from applying the holding in Atwood to the facts in this case.
We do not doubt and petitioner did not contest that
Northwestern issued a Form 1099-R for 2004 reporting a taxable
distribution of $25,331. We are likewise persuaded that the
account number on the Form 1099-R ties into the account number
written on the February 11, 1988, insurance application.
Petitioner never disputed and outright acknowledged that he
received the Forms 1099-R for 2003 and 2004 and that he signed
the life insurance application in evidence.
Nonetheless, the point of section 6201(d) is that when a
taxpayer raises a reasonable dispute with respect to an
information return, and when the taxpayer has fully cooperated,
then the Commissioner must produce evidence to establish the
fundamental correctness of the deficiency arising from the
information return, not merely that the information return
existed or that the Commissioner accurately transcribed the
information return into the Commissioner’s own internal records.
See Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991),
affg. in part and revg. in part T.C. Memo. 1990-68, and its
companion case seeking recovery of litigation costs, 988 F.2d 27,
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29 (5th Cir. 1993) holding that as far back as 1935 courts have
followed the principle that the Commissioner’s “naked assertion”
that a taxpayer received unreported income without a proper
foundation is not sufficient support for a notice of deficiency
and is therefore not entitled to a presumption of correctness),
revg. T.C. Memo. 1992-99.
The February 11, 1988, life insurance application is the
only evidence respondent produced to show the foundational
accuracy of the Form 1099-R. Without the actual February policy
in the record or a Northwestern representative testifying as to
how the provisions in the policy applied when a lapse in premium
payments occurred, the record is silent as to how Northwestern
determined the amounts reflected on the Form 1099-R. Moreover,
we also do not know whether the February policy changed over the
years or whether petitioner’s subsequent bankruptcy allowed his
creditors to receive the cash value of his life insurance
policies in effect at the time.
In summary, businesses can make mistakes in reporting data
on information returns, and, decisive here, respondent offered no
evidence showing that the amounts on the 2004 Form 1099-R are
correct. We conclude respondent has not met his burden of
producing reasonable and probative information concerning the
deficiency.
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To reflect our disposition of the issue,
Decision will be entered
for petitioner.