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
- 2 -

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
- 3 -

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). 

1Petitioner 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).
- 4 -

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.

2Although 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. 
- 5 -

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,

3The 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).

4Apparently, 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.
- 6 -

$7,175 of the $17,292 constructive distribution was taxable

income to petitioner. 

To reflect the foregoing, 

Decision will be entered

for respondent.