1 Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue.

T.C. Summary Opinion 2008-23

UNITED STATES TAX COURT

JOSEPH P. AND MARY A. DYER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20860-06S. Filed March 3, 2008.

Joseph P. Dyer, pro se.

Jeffrey S. Luechtefeld, for respondent.

RUWE, Judge: This case was heard pursuant to the provisions

of section 74631 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.
- 2 -

2 In their petition, petitioners claim that respondent is

barred by the statute of limitations from assessing a deficiency

against them for 2003. In respondent’s answer, he alleged that

petitioners’ 2003 Federal income tax return was filed on Oct. 14,

2004, and that the notice of deficiency was timely sent to

petitioners by certified mail on July 10, 2006, before the

expiration of the 3-year period for assessment applicable under

sec. 6501(a). Petitioners did not argue this issue at trial. 

Accordingly, we find that petitioners conceded the issue, and

respondent timely sent the notice of deficiency in accordance

with the requirements of sec. 6501(a). 

Respondent determined a deficiency in petitioners’ 2003

Federal income tax of $4,675. The only issue we must decide is

whether petitioners received income of $18,171 as a result of the

lapse of a life insurance policy.2

Background

Some of the facts have been stipulated and are so found. 

The parties’ oral stipulation of facts and exhibits is

incorporated by this reference. When the petition was filed,

petitioners resided in Florida.

Joseph Dyer (petitioner) was a partner in the law firm of

Siciliano, Ellis, Sheridan, & Dyer (law firm or firm) in 1978. 

On May 12, 1978, the firm purchased a life insurance policy

(insurance policy or policy) with petitioner as the insured and

his wife, petitioner Mary Dyer, named as the beneficiary. The

firm’s partners, including petitioner, had an oral agreement to

insure each of the partners so that, in case one of the partners

died, the proceeds from the insurance covering that partner would
- 3 -

3 According to petitioner, the firm name was changed in 1980

when “Sheridan” withdrew from the firm to become a judge. 

Petitioner also noted that “Siciliano” died in 1985, “Ellis”

retired from the firm in 1999, and petitioner retired in 2001.

satisfy the partnership’s obligation to his or her spouse for the

deceased partner’s share of the partnership.

Initially, the firm paid significant amounts of money to

fund the policy’s premiums. After 5 years, the firm stopped

paying the premiums and, apparently, the premiums then were paid

by borrowing from the cash value of the policy. The policy was

issued by Northwestern Mutual Life Insurance Co. (the insurance

company). The insurance policy remained in effect from 1978

until 2003. The insurance company never had any direct contact

with petitioners. Petitioners never received any distribution of

money from the policy, nor did they initiate any borrowing

against the policy. 

Petitioner retired from the firm in 2001, and the firm paid

petitioner for his share of the partnership. 

In a letter dated January 19, 2003, the insurance company

informed the law firm that the policy on petitioner’s life had

lapsed. The letter was addressed to “Siciliano Ellis Sheridan &

Dyer”, the name of the law firm at the time the policy was

purchased,3 and stated in pertinent part:
- 4 -

Dear Policyowner:

We have not yet received the current premium for this

policy and it no longer provides the protection you

originally wanted.

The policy lapsed to $40,760 of insurance which will be

in effect until MARCH 9, 2004.

When your policy lapsed, loan interest of $21,955.05

was repaid.

The policy lapse resulted in taxable income of

$18,171.23 which we are required by law to report to

the IRS. A 1099R form will be sent to you in January. 

We are also required to ask that you complete and

return the enclosed Substitute W9 form to ensure the

correct reporting of this income.

However, you can apply to restore full

protection and policy values and avoid the

taxable income. To do so, you must take

these easy steps:

- Complete and sign the enclosed Request for

Reinstatement.

- Return the Request and your payment for the

Amount Due before FEBRUARY 12, 2003.

We will do the rest. If the request is approved, you

will continue to enjoy all the valuable benefits the

policy was designed to provide.

We will not be sending you another reminder, so we urge

you to mail the completed request and your payment

today. If you have any questions, contact your

Financial Representative shown below or your Service

Representative in the Policyowner Services Department

at the home office.

The firm did not apply to restore the policy and did not make any

further premium payments to prevent the policy from lapsing. 
- 5 -

Petitioners filed a joint Federal income tax return for 2003

without reporting income from the policy. Petitioners never

received a Form 1099-R, Distributions from Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., from the insurance company. 

Apparently, the insurance company obtained petitioner Mary

Dyer’s Social Security number from the firm’s bookkeeper, but it

never contacted petitioners directly about the situation. The

insurance company notified the IRS that petitioner Mary Dyer was

the recipient of the income referred to in its letter to the law

firm dated January 19, 2003. This resulted in an examination of

petitioners’ 2003 return. In a letter addressed to petitioners

dated May 3, 2006, respondent suggested that petitioners might

qualify to use a Form 8606, Nondeductible IRAs, to show their

cost basis in the “distribution” in question. The letter also

informed petitioners that respondent had contacted the insurance

company, which verified that it paid income to petitioners. In a

letter dated May 29, 2006, petitioner described to respondent his

version of the circumstances surrounding the purchase of the

insurance policy. In the letter, petitioner stated as follows:

There has never been any distribution and the

suggestion that we may qualify to use a Form 8606 to

show our cost basis troubles me because that would

apply to an annuity. * * * All the premiums were paid

by the business and were a business deduction by the

firm under the tax law at that time. The purpose of

the life insurance was solely to benefit the business. 

* * * Northwestern [the insurance company] always
- 6 -

considered the firm to be the policyholder. (See

Northwestern’s ltr. of Jan. 19, 2003 when they declared

the policy to have lapsed.) * * * Northwestern didn’t

even have our address or social security number and

apparently called the firm in 2003 to get my wife’s

social security number. * * *

On July 10, 2006, respondent issued a notice of deficiency

to petitioners for their 2003 tax year. Under a section in the

notice titled “Reasons for the Changes”, respondent stated in

pertinent part:

These paragraphs explain the items listed in Section 1. 

Information Reported to IRS. * * *

RETIREMENT DISTRIBUTIONS

We need more information for the distribution shown on

this notice. We need to know if the income is a

pension or an annuity, an IRA or lump sum rollover, or

an employee savings plan. If the income is from a

pension/annuity or an Employee Savings Plan and you are

recovering your contributions using the General Rule or

the Simplified General Rule, please send us a signed

statement with the date of your first pension payment,

the amount you receive monthly, and the total amount

you contribute. If the income is an IRA or lump sum

and was rolled over, please send us a signed statement

with the amount of the rollover, the date of the

distribution and the date of the rollover. If the

income is an employee savings plan, please send us a

copy of the document showing the total distribution

amount you received for 2003, and the nontaxable amount

of the distribution.

In a letter sent to the insurance company dated May 22,

2007, respondent requested information relating to the alleged

income and stated as follows:
- 7 -

INFORMATION NEEDED

Our records show that you issued a Form 1099-R to the

Social Security Number (SSN) * * * for the tax year

ending December 31, 2003 to Mary Dyer in the amount of

$ 18,171. Can you please verify the correctness of

this amount? Can you please provide a copy of the 

check issued to Mary Dyer for this amount? This

pertains to Policy Number * * * [the policy at issue].

In another letter to petitioners dated May 23, 2007,

respondent stated as follows:

Dear Mr. and Mrs. Dyer

We have been notified that the United States Tax

Court has docketed this case. It is to our mutual

benefit to settle the case without a trial. This

pertains to the tax year ending December 31, 2003. 

This case is scheduled for trial in Tampa, Florida on

October 1, 2007.

The Statutory Notice of Deficiency (SND) dated

July 10, 2006 proposed an increase to taxable income

for the failure to report the following income on your

tax return:

Taxable annuity income issued in the Social

Security Number (SSN) of Mrs. Dyer from the

Northwestern Mutual Life Insurance Company in the

amount of $ 18,171. * * *

Information received from Northwestern Mutual Life

Insurance Company regarding Policy Number * * *

indicates this policy lapsed and the taxable amount was

$ 18,171.23. I have enclosed a copy of this

information. Per Internal Revenue Code Section 72, if

a loan is still outstanding when the life insurance

policy is surrendered or allowed to lapse, the borrowed

amount becomes taxable at the time to the extent the

loan value exceeds the owner’s basis in the contract,

as if the borrowed amount was actually received at the

time of surrender or lapse and used to pay off the

loan. * * * Please secure a corrected written

statement from them that would verify the corrected

taxable income regarding this policy for tax year 2003.
- 8 -

The remaining items proposed in the SND was [sic]

a computational change to your Schedule A limitation. 

The determination of this issue will depend on the

final resolution of the annuity income issue.

Discussion

Respondent’s position is based on his receipt of a Form

1099-R from the insurance company. That Form 1099-R is not in

evidence. After some confusion, respondent now relies solely on

a theory that petitioners’ “income” is a result of policy loans

made by petitioner Mary Dyer as owner of the policy that were

satisfied when the insurance policy lapsed. Respondent’s

pretrial memorandum cites Atwood v. Commissioner, T.C. Memo.

1999-61. Atwood involved taxpayers who had borrowed against the

cash value of the insurance policies that they owned.

The crux of petitioners’ argument is that they were never

the owners of the insurance policy, that they received no loans

to pay policy premiums, that they never received any payments

from the insurance company, and that they, therefore, never

received any income. Petitioners support this argument by

pointing out that petitioner’s former law firm paid all the

premiums and purchased the policy solely for the purpose of

paying a surviving spouse for a deceased partner’s share in the

firm. This is corroborated by the letter from the insurance

company addressed to the law firm dated January 13, 2003, which

refers to the law firm as the “policyowner” of the policy and
- 9 -

indicates that any income from the policy’s lapse would be the

firm’s income and that a Form 1099-R would be sent to the firm.

Section 6201(d) provides as follows:

SEC. 6201(d). Required Reasonable Verification of

Information Returns.–-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 under subpart B or C of part

III of subchapter A of chapter 61 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.

Petitioners have asserted a reasonable dispute to the item

of income reported to the IRS on the information return and

cooperated fully with respondent’s requests. Accordingly,

respondent has the burden of producing information to show that

petitioners received income.

There is no evidence in the record that petitioners received

the income in question. Indeed, the evidence in the record

indicates that the owner of the policy in question was

petitioner’s former law firm. Petitioner retired from the firm 2

years before the insurance policy lapsed, and neither he nor his

wife received any payments from the insurance company. 

Accordingly, we hold that petitioners are not liable for a 
- 10 -

deficiency in income tax as determined by respondent for the

taxable year 2003.

To reflect the foregoing,

Decision will be entered

for petitioners.