T.C. Summary Opinion 2009-114
UNITED STATES TAX COURT
ALEX AND HELEN A. GIANNARIS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21098-08S. Filed July 22, 2009.
Alex and Helen A. Giannaris, pro sese.
Sara D. Trapani, for respondent.
LARO, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
Some dollar amounts are rounded.
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this opinion shall not be treated as precedent for any other
case.
Petitioners petitioned the Court to redetermine respondent’s
determination of a $22,039 deficiency in petitioners’ 2006
Federal income tax. We decide whether petitioners may deduct as
an itemized deduction interest paid on a life insurance policy
loan. We hold they may not.
Background
I. Preliminaries
The parties have submitted to the Court stipulations of fact
with accompanying exhibits. The stipulated facts and the
accompanying exhibits are incorporated herein by this reference.
Petitioners are husband and wife, and they filed a joint Form
1040, U.S. Individual Income Tax Return, for 2006. They resided
in Texas when their petition was filed.
II. Policy Loan Interest
On or about October 11, 1965, petitioner husband
(petitioner) purchased a life insurance policy (policy) from
Massachusetts Mutual Life Insurance Co. (MassMutual). The face
value of the policy was $50,000. Beginning in the early 1970s,
petitioner periodically borrowed against the value of the policy
and used the proceeds to supplement petitioners’ income.
Petitioner made no significant repayments on those loans or on
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any interest that accrued thereon. The unpaid interest became a
part of the indebtedness.
In 2005 when the loan balance (including unpaid interest)
exceeded the value of the policy, MassMutual notified petitioner
that the policy would terminate pursuant to its terms unless the
shortage was paid. Petitioner did not make the required payment,
and the policy terminated in February 2006. Petitioner received
$792 as the net proceeds of the policy upon its termination;
i.e., the difference between the total loan amount of $149,872
and the $150,664 cash value of the policy.
For 2006 MassMutual issued a Form 1099-R, Distributions from
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., to petitioner reporting a taxable gain
of $105,190 resulting from termination of the policy.
Petitioners reported that taxable gain on their 2006 income tax
return. Petitioners also claimed a deduction for the total
unpaid interest of $111,727 included in the loan balance,
reporting that this interest was home mortgage interest.
III. Respondent’s Determination
Respondent determined in the notice of deficiency that
petitioners were not entitled to deduct any of the $111,727 as
home mortgage interest because petitioners paid no home mortgage
interest during that year.
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Discussion
A. Burden of Proof
Taxpayers bear the burden of proving that the Commissioner’s
determinations set forth in the notice of deficiency are
incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933). In certain cases, however, section 7491(a) shifts the
burden of proof to the Commissioner. We need not decide which
party bears the burden of proof because we decide this case
without regard to the burden of proof.
B. Interest Expense
Section 163 generally allows a deduction for any interest
paid or accrued in the taxable year on indebtedness. Personal
interest, however, is excluded. Sec. 163(h)(1). In this context
the term “personal interest” includes all interest except to the
extent the interest is: (1) Trade or business interest; (2)
investment interest; (3) interest used to compute passive income
or loss; (4) qualified residence interest; (5) interest used in
extended estate tax payments; and (6) educational loan interest.
Sec. 163(h)(2).
Petitioners claimed the interest expense as home mortgage
interest on their tax return for 2006. In that year, however,
petitioners paid no home mortgage interest. The interest is not
home mortgage interest (or more specifically qualified residence
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interest) because the loans underlying the interest were not
secured by a residence. See sec. 163(h)(3)(B)(i), (C)(i).
Petitioner’s life insurance policy, and not petitioners’
residence, collateralized the loan. Petitioners make no further
claim as to why the interest is not personal interest, and the
limited facts at hand do not establish any other characterization
of the interest. Petitioners contend that it is unjust to
include the $105,190 in their income when they actually received
only $792 in cash upon termination of the policy. This is
especially so, petitioners assert, because they are in poor
health and suffering financially. While we sympathize with
petitioners’ predicament, the fact of the matter is that the
interest is personal and under the law cannot be deducted. We
note, however, that petitioners did benefit personally from the
use of the loan proceeds and that the $792 they received
corresponds to the net proceeds of the policy after subtracting
the loan amount, including interest accrued thereupon.
We hold that petitioners are not entitled to deduct any of
the $111,727 as an interest expense. Accordingly,
Decision will be entered
for respondent.