T.C. Memo. 2012-10
UNITED STATES TAX COURT
YULIA FEDER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1628-10. Filed January 10, 2012.
Frank Agostino, Lawrence M. Brody, and Jeffrey M. Dirmann,
for petitioner.
Sze Wan Florence Char, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$1,713 in petitioner’s 2007 Federal income tax. The issue for
decision is whether petitioner received a taxable constructive
distribution in 2007 as reported on a Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans,
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IRAs, Insurance Contracts, etc., that Northwestern Mutual Life
Co. (Northwestern) issued to her.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in New
Jersey when the petition was filed.
On August 18, 1982, petitioner purchased a life insurance
policy with a $50,000 death benefit from Northwestern. The
policy required quarterly premiums of $73.1 Petitioner paid the
premiums as they became due until November 1987.2 On January 3,
1988, petitioner sent Northwestern a letter requesting that her
policy be canceled immediately (1988 letter). The 1988 letter
also requested that future communications be sent to her new
address, 1829 East 13th Street, Brooklyn, New York (13th
Street).3 Petitioner thought Northwestern would send her any
forms needed to cancel the policy. She never received any
further communication from Northwestern and assumed the policy
was canceled.
1
All amounts are rounded to the nearest dollar.
2
Although petitioner does not remember making any premium
payments after 1987, Northwestern’s records show that it received
premium payments on Aug. 2, 1988, and Mar. 6, 1989.
3
Before moving to 13th Street petitioner resided on
Homecrest Avenue in Brooklyn.
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In 2008 Northwestern issued to petitioner a Form 1099-R for
2007 reporting a gross distribution of $12,654 and a taxable
amount of $5,625.4 Petitioner did not receive the Form 1099-R
because Northwestern sent it to 1204 Avenue U, Brooklyn, New York
(Avenue U), the address Northwestern had on file for the policy.
This address was a mailbox petitioner had rented for 6 months in
late 1987 to receive wedding RSVPs. Petitioner does not know how
Northwestern learned of the Avenue U address.
Petitioner and her husband,5 unaware of the Form 1099-R
issued by Northwestern, did not report the $5,625 taxable
distribution on their 2007 Federal income tax return. In 2009
petitioner became aware that the IRS had received a Form 1099-R
from Northwestern reporting that she had $5,625 of taxable income
in 2007. Petitioner, thinking her policy had been canceled for
more than 20 years, contacted Northwestern. A Northwestern
representative sent letters to petitioner on July 31 and
September 16, 2009 (collectively, the 2009 correspondence),
explaining that her policy had not been canceled and Northwestern
had never received a change of address request. The
representative further informed petitioner that when petitioner
stopped making premium payments the policy’s automatic premium
4
See infra p. 4 for discussion of how Northwestern
calculated the amounts reported on the Form 1099-R.
5
Petitioner’s husband did not join in the petition to this
Court.
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loan provision went into effect.6 Neither party introduced the
policy into evidence.
From 1987 to 2007, Northwestern loaned petitioner $73 each
quarter she missed her premium payment and used the loan proceeds
to pay petitioner’s premiums as they became due. As of the May
18, 2007, premium due date, the amount of petitioner’s loan
equaled the cash value of the policy and Northwestern was unable
to lend petitioner the $73 necessary to pay the premium.7 The
policy lapsed on July 23, 2007.
Upon lapse, Northwestern used the policy’s cash value,
$12,654, to pay off the loan of the same amount. Northwestern
deducted total premiums paid of $7,029 from the loan amount to
arrive at a taxable distribution of $5,625.
OPINION
I. Burden of Proof
As a general rule, the Commissioner's determinations in a
notice of deficiency are presumed correct, and the taxpayer bears
6
Pursuant to the automatic premium loan provision, when
the insured misses a premium payment Northwestern automatically
lends the insured the amount of the premium and uses it to pay
the premium. Northwestern will lend the insured an amount up to
the cash value of the insured’s policy. Interest accrues on the
amount lent and is added to the principal balance of the loan if
it remains unpaid.
7
Northwestern sent the quarterly premium notice for the
May 18, 2007, premium to the Avenue U address on Apr. 29, 2007.
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the burden of proving that those determinations are erroneous.
Rule 142(a);8 Welch v. Helvering, 290 U.S. 111 (1933).
A. Section 6201(d)
If an information return, such as a Form 1099-R, serves as
the basis for the determination of a deficiency, section 6201(d)
may apply to shift the burden of production to the Commissioner.
Section 6201(d) provides that in any court proceeding, if a
taxpayer asserts a reasonable dispute with respect to the income
reported on an information return and the taxpayer has fully
cooperated with the Commissioner, then the Commissioner has the
burden of producing reasonable and probative information in
addition to the information return. See McQuatters v.
Commissioner, T.C. Memo. 1998-88.
Petitioner argues that she canceled the policy in 1988 and
therefore no deemed distribution could have occurred in 2007.
Alternatively, she argues that if there was a deemed distribution
it occurred in a year other than 2007. These constitute
reasonable disputes with an information return. See Kleber v.
Commissioner, T.C. Memo. 2011-233 (finding a reasonable dispute
when the taxpayers argued that the amount of cancellation of
indebtedness, if any, was incorrect). Furthermore, petitioner
8
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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has cooperated with the IRS. Therefore, we hold that section
6201(d) applies and that the burden is shifted to respondent to
produce reasonable and probative information concerning the
deficiency in addition to the Form 1099-R Northwestern issued.
To prove that the Form 1099-R properly and accurately
reported petitioner’s 2007 taxable income, respondent introduced
a declaration from the assistant director of policyowner services
at Northwestern (declaration).9 The declaration includes
petitioner’s premium loan history and the 2009 correspondence.
The declaration also explains how Northwestern calculated the
figures on the Form 1099-R. Thus, we find that respondent
produced reasonable and probative information concerning the
deficiency, thereby meeting his burden of production under
section 6201(d). See Sanders v. Commissioner, T.C. Memo. 2010-
9
On reply brief, petitioner objects for the first time to
the declaration as inadmissible hearsay. The declaration was a
joint exhibit which petitioner, while unrepresented, and
respondent stipulated. When respondent moved at trial to have
the declaration introduced into evidence, there was no objection
from petitioner. Rule 91(d) requires that “Any objection to all
or any part of a stipulation should be noted in the stipulation,
but the Court will consider any objection to a stipulated matter
made at the commencement of the trial or for good cause shown
made during the trial.” Additionally, “A fundamental rule of
evidence is that an objection not timely made is waived.” Estate
of Smith v. Commissioner, T.C. Memo. 2001-303 (citing United
States v. Jamerson, 549 F.2d 1263, 1266-1267 (9th Cir. 1977)),
affd. 54 Fed. Appx. 413 (5th Cir. 2002); see Fed. R. Evid.
103(a)(1). Petitioner waived her right to contest the admission
of the declaration when she did not make a timely objection. See
Armstrong v. Commissioner, T.C. Memo. 2002-224 (taxpayer waived
objection to admissibility of evidence after failing to make
timely objection at trial).
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279 (“stipulated documentation of petitioner’s premium and loan
history with * * * [insurance company] corroborates the
information reported on the Form 1099-R”).
B. Unreported Income
When a case involves unreported income and is appealable to
the Court of Appeals for the Third Circuit, like this case, the
Commissioner’s determination of unreported income is entitled to
the presumption of correctness only if the determination is
supported by some evidence linking the taxpayer to the
tax-generating activity. Anastasato v. Commissioner, 794 F.2d
884, 887 (3d Cir. 1986), vacating and remanding T.C. Memo.
1985–101. Respondent has linked petitioner to the tax-generating
activity by showing that the income reported on Form 1099-R
resulted from a life insurance policy petitioner had with
Northwestern. Thus, respondent’s determination of unreported
income is entitled to the presumption of correctness.
C. Section 7491
Petitioner also argues that the burden of proof shifts to
respondent under section 7491. Section 7491(a)(1) and (2) shifts
the burden of proof to the Commissioner as to any factual issue
relevant to a taxpayer’s liability for tax if (1) the taxpayer
introduces credible evidence with respect to such issue and (2)
the taxpayer satisfies certain other conditions, including
cooperation with the Government’s requests for witnesses,
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information, and documents. See also Rule 142(a)(2). The burden
is on the taxpayer to show that she satisfied these
prerequisites. See Richardson v. Commissioner, T.C. Memo.
2005–143; H. Conf. Rept. 105–599, at 240, 242 (1998), 1998–3 C.B.
747, 994, 996.
The factual issue in this case is whether petitioner
canceled her life insurance policy in January 1988. Under New
York law,10 an insured must cancel the policy pursuant to the
terms of the policy. See Lofaro v. John Hancock Mut. Life Ins.
Co., 265 N.Y.S. 724, 727 (App. Div. 1933) (“To be effective, the
surrender or cancellation of this double indemnity provision of
the policy must be made in accordance with the requirements
imposed by the policy.”), affd. 5 N.E.2d 365 (N.Y. 1934); Pica v.
Profl. Risk Insurers Mgmt. Exclusive, Ltd., 614 F. Supp. 536, 537
(S.D.N.Y. 1985) (stating that terms of policy control whether
surrender of policy is required to effect cancellation).
Petitioner did not present any evidence that she canceled
the life insurance policy pursuant to its terms. Petitioner
credibly testified that she sent a letter to Northwestern
requesting that it cancel her policy. She did not, however,
introduce the policy or testify to its terms, and without
evidence as to the terms of the policy we do not know whether the
10
The parties agree that New York law governs the life
insurance contract.
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letter was an effective means of canceling the policy.11 On the
basis of petitioner’s testimony at trial, it appears that when
she sent the 1988 letter she did not think it was sufficient to
cancel the policy. Petitioner stated that “my train of thought
was that I’m going to send the letter, and whatever forms need to
be filled out, they will mail it to me.” Petitioner has failed
to present credible evidence that she effectively canceled the
insurance policy, and thus the burden of proof does not shift to
respondent.
II. Taxation of Deemed Distribution
Petitioner’s primary argument is that she canceled the
policy in 1988 and therefore could not have received a deemed
distribution in 2007. As discussed above, petitioner was
required to cancel the insurance policy pursuant to its terms.
She did not introduce the policy or testify to its terms
regarding cancellation. Thus, there is no evidence petitioner
canceled the policy in 1988 according to the terms of the policy.
Although petitioner stopped paying her premiums in 1988, the
automatic loan provision in the policy resulted in the premiums’
being paid and the policy’s remaining in effect until 2007.12
11
Additionally, there is no evidence that Northwestern
received the 1988 letter.
12
Petitioner also argues that the automatic premium loan
was not a bona fide loan. This Court has held that loans against
cash values of insurance policies are bona fide indebtedness.
(continued...)
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When the May 18, 2007, premium was not paid, the policy lapsed on
July 23, 2007.13
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.14 Sec.
72(e)(1)(A), (5)(A), (C). When Northwestern terminated
12
(...continued)
McGowen v. Commissioner, T.C. Memo. 2009-285, affd. 438 Fed.
Appx. 686 (10th Cir. 2011); Atwood v. Commissioner, T.C. Memo.
1999-61.
13
In the alternative, petitioner argues that under N.Y.
Ins. Law sec. 3211 (McKinney 2006 & Supp. 2011) the policy did
not lapse until 2008 and thus the deemed distribution did not
occur in 2007. New York law prevents a life insurance policy
from terminating for nonpayment of a premium within a year of
default unless the insurance company has given valid notice. Id.
sec. 3211(a)(1). The notice must be mailed to the last known
address of the policy owner at least 15 but not more than 45 days
before the due date. Id. sec. 3211(a)(1), (b)(1). The notice
must state the amount of the payment, how to make the payment,
the payment due date, and that the policy will lapse without
payment. Id. sec. 3211(b)(2). Petitioner has not shown that
Northwestern failed to comply with N.Y. Ins. Law sec. 3211.
Northwestern sent petitioner a notice on Apr. 29, 2007, that
stated that the $73 quarterly premium payment was due on May 18,
2007, and that the policy would lapse without payment.
Northwestern sent the notice to the address they had on record
for petitioner, the Avenue U address. Petitioner has failed to
show that Northwestern did not send the notice to petitioner’s
last known address within the meaning of the New York statute.
Therefore, petitioner has not shown that Northwestern failed to
satisfy N.Y. Ins. Law sec. 3211.
14
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).
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petitioner’s policy, it applied the policy’s cash value ($12,654)
to the outstanding balance on the policy loans ($12,654). That
action was the economic equivalent of Northwestern’s distributing
to petitioner $12,654 and her using that amount to pay off the
policy loan. This constructive distribution of $12,654 is gross
income to petitioner insofar as it exceeds her $7,029 investment
in the contract. See McGowen v. Commissioner, T.C. Memo.
2009–285, affd. 438 Fed. Appx. 686 (10th Cir. 2011); Atwood v.
Commissioner, T.C. Memo. 1999-61; Dean v. Commissioner, T.C.
Memo. 1993–226. Consequently, $5,625 of the $12,654 constructive
distribution was taxable income to petitioner.
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit. To reflect
the foregoing,
An appropriate order will
be issued denying petitioner’s
oral motion to shift the
burden of proof, and decision
will be entered for
respondent.