T.C. Memo. 2010-279
UNITED STATES TAX COURT
JOHN MORGAN SANDERS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3395-09. Filed December 20, 2010.
John Morgan Sanders, pro se.
Edwin B. Cleverdon, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a $2,300 deficiency
in petitioner’s 2006 Federal income tax. The issue for decision
is whether a $7,175 constructive distribution from the
termination of petitioner’s life insurance policy is taxable
income to him. All section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule
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references are to the Tax Court Rules of Practice and Procedure.
Figures have been rounded to the nearest dollar.
FINDINGS OF FACT
The parties have stipulated some facts, which we incorporate
by this reference. When he petitioned the Court, petitioner
resided in Alabama.
In 1979 petitioner purchased from New York Life Insurance
Co. (New York Life) a whole life insurance policy with a $25,000
face amount (the policy). From 1979 until March 2006 petitioner
paid premiums of about $31 per month on the policy. The policy
allowed petitioner to borrow generally up to the policy’s cash
value, using the policy as security. Interest on policy loans
accrued at 8 percent, with any accrued but unpaid interest added
to the loan and bearing interest at the same rate. By its terms
the policy terminated if any unpaid loan, including accrued
interest, exceeded the sum of the policy’s cash value and any
dividend accumulations.
Between 1990 and 2004 petitioner borrowed $7,136 against the
policy. Insofar as he recalls, he used the proceeds for personal
purposes. He did not repay these loans.
By letter dated February 9, 2006, New York Life advised
petitioner that his outstanding policy loan balance, including
principal and accrued interest, was $17,203, that this amount
exceeded by $517 the policy’s cash value, and that the policy
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would be canceled unless petitioner paid at least $517 within 30
days. By letter dated March 10, 2006, New York Life advised
petitioner that it had terminated the policy. Petitioner
received no cash or property from New York Life upon the policy
termination.
On Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., for taxable year 2006, New York Life reported a gross
distribution to petitioner of $17,292, with a “Taxable amount” of
$7,175 after taking into account petitioner’s $10,117 of
insurance premiums paid. On his 2006 Federal income tax return
petitioner reported no income with respect to the policy’s
termination. Respondent determined that petitioner improperly
omitted the $7,175 of taxable income shown on the Form 1099-R.
OPINION
As a general matter, the taxpayer bears the burden of
showing that the Commissioner’s determination is in error. Rule
142(a).1 As an exception to this general rule, if a taxpayer who
has fully cooperated with the Commissioner raises a reasonable
dispute with respect to an information return, the Commissioner
may have the burden to produce reasonable and probative evidence
to verify the information return. Sec. 6201(d).
1
Petitioner does not contend and the record does not suggest
that the burden of proof as to any factual issue should shift to
respondent pursuant to sec. 7491(a).
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Petitioner testified that he disagrees with the taxable
amount shown on the Form 1099-R because he “just did the math
basically in my head” and he thinks New York Life’s “mathematics
are way off.”2 These vague contentions do not rise to the level
of a “reasonable dispute” so as to impose any burden of
production on respondent pursuant to section 6201(d). In any
event, stipulated documentation of petitioner’s premium and loan
history with New York Life corroborates the information reported
on the Form 1099-R.
Petitioner seems to suggest that he had no outstanding loans
against the policy but instead merely made “draws” against it
before 2006. Pursuant to the policy’s terms, however, the
distributions that New York Life made to him before 2006, as well
as capitalized interest on these amounts, were bona fide loans,
collateralized by the policy’s value. See Atwood v.
Commissioner, T.C. Memo. 1999-61.
Petitioner’s fundamental contention, as we understand it, is
that he cannot be taxed on any “distribution” from New York Life
in 2006 because he received no cash or other property from New
York Life that year. Petitioner is mistaken.
2
Although he has stipulated that New York Life issued the
Form 1099-R, petitioner contends that he did not receive it
because New York Life mailed it to the wrong address. The record
is inconclusive on this point, which in any event is immaterial
to our analysis.
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An amount received in connection with a life insurance
contract which is not received as an annuity generally
constitutes gross income to the extent that the amount received
exceeds the investment in the insurance contract.3 Sec.
72(e)(1)(A), (5)(A), (C). When it terminated petitioner’s
policy, New York Life applied the policy’s cash value to the
outstanding balance on the policy loans.4 That action was the
economic equivalent of New York Life’s paying petitioner the
policy proceeds, including untaxed inside buildup, and his using
those proceeds to pay off his policy loans. This constructive
distribution is gross income to petitioner insofar as it exceeds
his investment in the contract. See McGowen v. Commissioner,
T.C. Memo. 2009-285; Atwood v. Commissioner, supra; Dean v.
Commissioner, T.C. Memo. 1993-226. The evidence indicates that
petitioner’s investment in the contract was, as New York Life
reported, $10,117. Consequently, as respondent determined,
3
The investment in the contract is defined generally as the
aggregate amount of premiums or other consideration paid for the
contract less aggregate amounts previously received under the
contract, to the extent they were excludable from gross income.
Sec. 72(e)(6).
4
Apparently, when the policy was terminated, its cash value
was about $600 less than the balance of petitioner’s policy
loans. The parties have not raised, and consequently we do not
consider, any issue as to whether a corresponding part of the
gross income that petitioner realized upon the termination of the
policy should be characterized as income from discharge of
indebtedness. In any event, on the facts before us, it would not
appear that such a characterization would affect petitioner’s tax
liability.
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$7,175 of the $17,292 constructive distribution was taxable
income to petitioner.
To reflect the foregoing,
Decision will be entered
for respondent.