TAX COURT OPINION

Case: Thomas J. Culhane
Docket Number: 5750-18
Judge: Buch
Opinion Type: bench
Filed: 10/09/2019
Pages: 10

JRB UNITED STATES TAX COURT WASHINGTON, DC 20217 THOMAS J. CULHANE, Petitioner, v. ) ) ) ) Docket No. 5750-18. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent as to the tax and petitioner as to the penalty. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. October 9, 2019 SERVED Oct 09 2019 RECEIVED 9/27/19 IN THE UNITED STATES TAX COURT In the Matter of: THOMAS J. CULHANE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 5750-18 ) ) ) ) ) ) ) ) Pages: 1 through 8 Place: Los Angeles, California Date: September 13, 2019 IN THE UNITED STATES TAX COURT In the Matter of: THOMAS J. CULHANE, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 5750-18 ) ) ) ) ) ) ) ) Edward R. Roybal Center & Fed. Bldg. 255 East Temple Street Room 1167, 11th Floor Los Angeles, California 90012 September 13, 2019 The above-entitled matter came on for bench opinion, pursuant to notice at 8:58 a.m. BEFORE: HONORABLE RONALD L. BUCH Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 P R O C E E D I N G S 2 (8:58 a.m.) THE CLERK: Recalling docket number 5750-18, Thomas J. Culhane. (Whereupon, a bench opinion was rendered.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . c.nc;er s 3 1 2 3 4 5 6 7 8 9 10 11 12 13 Bench Opinion by Judge Ronald L. Buch september 13, 2019 Thomas J. Culhane v. Commissioner Docket No. 5750-18 THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at issue, and Rule references are to the Tax Court Rules of 14 Practice and Procedure. 15 Mr. Culhane took out loans against a life 16 insurance policy. When that policy lapsed many years 17 later, Mr. Culhane received gross distributions in excess 18 of his basis in the insurance policy. The insurance 19 company reported the excess distributions as income, which 20 Mr. Culhane did not report. Mr. Culhane was the victim of 21 embezzlement, and he was (and remains) uncertain whether 22 some of the distributions made with respect to the 23 insurance policy might have been embezzled. Because Mr. 24 Culhane failed to meet his burden to prove that he did not 25 receive the distributions, we enter decision for the Commissioner. Facts 4 In 1985, Mr. Culhane took out a whole life insurance policy. He elected an "Automatic Premium Loan" to be in effect. This allows the insurance company to deduct the amount of a premium that is due from the value of the policy. Over the years, Mr. Culhane took out many loans against the policy. Most notably, he took out a $45,600 loan in 1999 to purchase property in connection with an investment in a tavern. That loan was repaid in 2003, but 1 2 3 4 5 6 7 8 9 10 11 12 he took out several more loans over the years. Some of 13 those were automatic loans used to pay policy premiums, 14 but many were loans made in response to loan requests 15 bearing his signature. The loan checks were mailed to his 16 residences at the time they were made. 17 18 Eventually, the policy lapsed because it had no remaining cash value. In 2014, the insurer notified Mr. 19 Culhane that the policy lapsed for nonpayment of premiums, 20 but that the insurer continued the policy as a reduced 21 paid up contract. But by mid-2015, the policy had no 22 23 remaining cash value and was terminated. At the time that it terminated, there had been gross distributions from the 24 policy of $136,486. Mr. Culhane's basis in the insurance 25 Policy was $74,096. Because there had been net gain in the policy, the insurer issued a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc., showing a taxable distribution of $62,390. 5 When filing his 2015 Form 1040, U.S. Individual Income Tax Return, Mr. Culhane did not include the taxable distribution in income. Having received information reported by the insurer, the Commissioner determined additional income for Mr. Culhane and on March 12, 2018, issued a notice of deficiency determining additional tax and penalties. While residing in California, Mr. Culhane filed a petition challenging the Commissioner's 1 2 3 4 5 6 7 8 9 10 11 12 13 determinations. 14 15 While this case was docketed, the parties reached agreement as to some items in that notice, 16 including the penalties. The only item remaining in 17 18 19 dispute is the fact question of whether Mr. Culhane received a taxable distribution from the insurer. Mr. Culhane neither admits nor denies that he 20 received the income. Sometime after 2015, Mr. Culhane 21 discovered that, in connection with the tavern in which he 22 had invested, he was the victim of embezzlement. Mr. 23 Culhane does not know whether those embezzlers may have 24 25 further embezzled from him by taking the loan proceeds from his insurance policy. He has no proof that policy coners distributions were stolen, rather he questions whether 6 embezzlement might have occurred. Discussion As a general matter, the Commissioner's determinations in the notice of deficiency are presumed correct, and the taxpayer bears the burden of proving an error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In limited situations, the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established, therefore, the burden of proof remains on Mr. Culhane. 1 2 3 4 5 6 7 8 9 10 11 12 13 Unreported Income 14 Where the Commissioner determines that a 15 taxpayer received unreported income, he must "offer some 16 substantive evidence showing that the taxpayer received 17 income from the charged activities" before he may rely on 18 the presumption of correctness. Weimerskirch v. 19 Commissioner, 596 F.2d 358, 360 (9th Cir. 1979), rev'g 67 20 T.C. 672 (1977). 21 The Commissioner submitted a Form 1099-R, 22 Distributions from Pensions, Annuities, Retirement or 23 Profit-Sharing Plans, IRAs, Insurance Contracts, etc., 24 from Pacific Life Insurance Company showing that Mr. 25 Culhane received taxable income in the amount of $62,398. cr ners Mr. Culhane is not able to clearly dispute that he 7 received this income. We find that the Commissioner has introduced sufficient evidence to connect Mr. Culhane with the income-producing activity. Section 61(a) defines gross income as "all income from whatever source derived", including distributions from qualified retirement plans. See Cabirac v. Commissioner, 120 T.C. 163, 167 (2003). Section 72(e)(2) generally includes in gross income 1 2 3 4 5 6 7 8 9 10 amounts received under a life insurance contract, 11 attributable to income on the contract, that are not 12 received as an annuity. 13 14 15 That income is taxable unless Mr. Culhane can show otherwise. He has only speculated that the insurance income may have been embezzled. He has presented no 16 documentation or evidence of embezzlement or when any such 17 18 embezzlement may have been discovered. Mr. Culhane has not met his burden to show that the income is not taxable. 20 Decision will be entered for the Commissioner 6 nd for e†itrDrwr as +o the Pertal (Whereupon, at 9:04 a.m., . he above-entitled 21 22 23 24 25 matter was concluded.) 19733406-2250|operationseescrbers.net|wwwescribersmet CERTIFICATE OF TRANSCRIBER AND PROOFREADER 8 CASE NAME: Thomas J. Culhane v. Commissioner DOCKET NO.: 5750-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 8 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Troy Ray on September 13, 2019 before the United States Tax Court at its session in Los Angeles, CA, in accordance with the 1 2 3 4 5 6 7 8 9 10 applicable provlslons of the current verbatim reporting 11 12 contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript 13 against the verbal recording. 14 6 17 18 19 20 22 23 24 25 Meribeth Ashley, CET-507 Transcriber 9/23/19 Date Lori Rahtes, CDLT-108 Proofreader 9/23/19 Date