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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1During trial, respondent conceded the accuracy-related

penalty for 2004.

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.
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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 computergenerated “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.