TAX COURT OPINION

Case: John G. O'Donnell, II
Docket Number: 29920-08S
Judge: Colvin
Opinion Type: bench
Filed: 02/25/2010
Pages: 10

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 JOHN G . O'DONNELL, II , Petitioner, V . COMMISSIONER OF INTERNAL REVENUE , Respondent . Docket No . 29920-08 S ORDE R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of this case before Judge Haines at Portland, Oregon on January 27, 2010, containing his oral findings of fact and opinion rendered at the conclusion of the trial . in accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed) Harry A. Haines Judge Dated : Washington, D .C . February 23, 2010 SERVED FEB 2 5 2010 1 Bench Opinion by Senior Judge Harry A . Haine s 2 Docket No . 29920-08S January 27, 2010 3 O'Donnell v . Commissione r 4 THE CLERK : Recalling from the calendar Docket No . 5 29920-08 S, John G . O'Donnell, II . 6 THE COURT : The Court has decided to render ora l 7 findings of fact and opinion in this case and the following 8 represents the Court's oral findings of fact and opinion . 9 The oral findings of fact and opinion shall not be relied 10 upon as precedent in any other case . Unless otherwis e 11 indicated, subsequent section references are to the Internal 12 Revenue Code in effect for the year in issue, and all Rule 13 references are to the Tax Court Rules of Practice and 14 Procedure . Dollar amounts are rounded . 15 The issue for decision is whether petitioner had a 16 taxable distribution of $5,387 in 2006 related to a Form 17 1099-R, Distributions from Pensions, Annuities, Retirement 18 or Profit-Sharing Plans, IRAs, Insurance Contracts, etc ., 19 issued by State Farm Life Insurance Co . (State Farm) . 20 Background 21 Some of the facts have been stipulated and are so 22 found . The stipulation of facts, supplemental stipulation 23 of facts and the attached exhibits are incorporated herein 24 by this reference . Petitioner resided in Oregon when he 25 filed his petition . Heritage Reporting Corporation (202) 628-4888 3 1 Petitioner was born in 1974 to Barbara O'Donnell 2 Stahl and given the name John Karl Stahl . When petitioner 3 was 11, his mother took out a life insurance policy o n .4 petitioner's life having a face amount of $100,000 . The 5 policy was a universal life policy issued by State Farm . 6 7 9 10 Petitioner's mother named herself as owner and named an attorney as custodian for petitioner as successor owner . Although the facts are not clear from the record, petitione r subsequently acquired ownership of the policy and changed his name to John G . O'Donnell, II . 11 The State Farm policy accumulated cash value by 12 payment of premiums in excess of those necessary to keep the 13 life insurance in force . During 2004 and 2005, petitione r 14 received cash distributions from the policy totaling 15 $13,700 . On March 11, 2006, State Farm sent a notice of 16 loan status and potential lapse to petitioner at P . 0 . Box 17 20021 in Santa Barbara, California, which stated : 18 On March 12, 2006, your policy loan, plus 19 interest, exceeded your policy's value . 20 An additional payment of $1,636 .08 will keep your 21 insurance in force . 22 Please send a check for $1,636 .08 in the enclosed 23 return envelope . If payment is not received by May 24 11, 2006, your insurance will terminate, a s 25 provided by your contract . Heritage Reporting Corporation (202) 628-4888 4 Petitioner did not receive the notice and did not make th e 2 required payment . 3 Petitioner timely filed a Form 1040, U .S . 4 Individual Income Tax Return for 2006 . As a result of the 5 termination of the State Farm policy , State Farm issued a 6 Form 1099 - R reporting $ 5,387 of taxable income received b y petitioner . The Form 1099 - R was sent to the same post office box in Santa Barbara , California , as the notice of lapse . However , petitioner was living in Oregon at the time . He did not receive the Form 1099 - R and did not report the income on his 2006 return . The $ 5,387 reported on th e 8 1 0 11 12 Form 1099 - R as taxable income was the amount by which th e 13 cash surrendered to pay off the loans received by petitioner 14 exceeded the amount of petitioner ' s investment in the policy 15 at the time of termination . No money was distributed t o 16 petitioner . 17 The IRS issued a notice of deficiency dated October 18 27, 2008 , which included the $5,387 in petitioner ' s income 19 in 2006 determining a Federal income tax deficiency of $810 20 and no penalties due . On December 11, 2008, petitione r 21 filed a petition .with this Court seeking redetermination of 22 the 2006 Federal income tax deficiency on the grounds that : 23 (1) he did not receive the Form 1099- R for 2006 from State 24 Farm ; (2) he did not receive any cash distributions from 25 State Farm in 2006 ; and (3) there is no evidence to suppor t Heritage Reporting Corporation (202) 628-4888 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 5 the amounts specified in the Form 1099-R . Petitioner contacted State Farm to determine wha t had happened and received correspondence showing th e calculation of the amount reported on the Form 1099-R . At trial the Court received into evidence the followin g documents : (1) A copy of the State Farm Life Insuranc e Policy issued on the life of petitioner with attache d insurance application ; (2) copies of checks issued by Stat e Farm for the disbursements made to petitioner wit h endorsements for deposit by petitioner ; (3) a computer replication of the 2006 Form 1099-R ; and (4) letters date d October 3, 2008, from State Farm confirming the calculatio n of taxable amounts based on application of cash values . The calculated amount was based upon total disbursed cash valu e of $19,187 (each disbursement separately identified on a separate schedule) less the amount invested in the contrac t of $13,800 resulting in taxable income of $5,387 . Discussion In general, the Commissioner's determination se t forth in the notice of deficiency is presumed correct and the taxpayer bears the burden of showing that th e determination is in error . Rule 142(a)(1) ; Welsh v . Helvering , 290 U .S . ill, 115 (1933) . Under section 7491(a ) the burden of proof regarding a factual matter may shift t o the Commissioner if the taxpayer produces credible evidenc e Heritage Reporting Corporation (202) 628-4888 1 and meets the other requirements of the section . In thi s 2 case, however, before we apply section 7491(a) we must firs t 6 consider section 6201(d), because petitioner reasonably raised the issue of the correctness of an information return, the Form 1099-R for 2006 . 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 Secretar y 4 7 8 9 10 11 (including providing, within a reasonable period of 12 time, access to and inspection of all witnesses , 13 information, and documents within the control of 14 the taxpayer as reasonably requested by th e 15 Secretary), the Secretary shall have the burden o f 16 producing reasonable and probative information 17 concerning such deficiency in addition to such 18 information return . 19 Respondent did not challenge, and in any event we 20 would find that petitioner has fully cooperated with 21 respondent's requests for information, documents, and 22 meetings . Petitioner has provided respondent with all 23 copies of correspondence with State Farm includin g 24 correspondence supporting the accuracy of the amount s 25 reported on the Form 1099-R that was issued . On the basis Heritage Reporting Corporation (202) 628-4888 7 of the above we hold that under section 6201(d .) responden t 2 has the burden of producing "reasonable and probative 3 information" regarding the deficiency . Respondent introduced into evidence cancelled checks endorsed by petitioner for the loans received by petitioner during 2004 and 2005 . A summary of loans prepared by State Farm was also introduced . Respondent introduced letters prepared by State Farm based upon th e records of the company setting out the calculations necessary to determine the amount taxable for the Form 1099- 5 9 10 11 R . Petitioner makes much of the fact that two differen t 12 calculations of the amount taxable were made in the letters 13 from State Farm . In one letter the taxable gain wa s 14 computed based upon the total investment in the policy over 15 the life of the policy compared to the total disbursed cash 16 value, i .e ., $13,800 was invested over the life of th e 17 policy and the total disbursed cash value was $19,18 7 18 resulting in taxable income of $5,387 . In another letter 19 the calculation was based on the deemed distribution in the 20 year of termination compared to the investment in the policy 21 that remained after applying prior loans, i .e ., $4,60 0 22 remaining investment in the policy in the year o f 23 termination and the total disbursed cash value in the year 24 of termination of $9,987 resulting in taxable income o f 25 $5,387 . In either case, the amount of taxable income Heritage Reporting Corporatio n (202) 628-4888 8 1 remains the same . Respondent has met the burden of 2 production pursuant to section 6201(d) . 3 Respondent argues that petitioner's circumstances 4 are sufficiently similar to the taxpayers' circumstances in 5 Atwood v . Commissioner , T .C . Memo . 1999-61, for us to hold 6 that petitioner had taxable income of $5,387 in 2006 from 7 the termination of the State Farm life insurance policy . We 8 agree . 9 In Atwood the taxpayers each purchased a single 10 premium whole life insurance policy . Each policy provided 11 for the lapse or termination of the policy if the loa n 12 balance including unpaid interest grew to be larger than the 13 cash value of the policy . After a few years the coupl e 14 suffered financial setbacks forcing them to withdraw a s 15 loans the maximum amounts that the policies allowed . They 16 were unable to repay the loans or the accumulated unpaid 17 interest . As a result the loan balances exceeded the cash 18 values causing the insurance companies to terminate th e 19 policies in 1995 . 20 The insurance companies issued Forms 1099-R fo r 21 1995 reporting taxable distributions in the amounts by which 22 the ending cash values exceeded the single premium payments . 23 The taxpayers timely filed their 1995 joint Federal income 24 tax return without including any income related to the Forms 25 1099-R . The Commissioner determined a Federal income ta x Heritage Reporting Corporation (202) 628-4888 2 1 deficiency for 1995 and the taxpayers petitioned this Court 2 claiming in pertinent part they received very little cas h 9 and therefore the terminations were merely "'paper transactions' on the books of the insurance companies . " 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 payment of the cash surrender values . The holding in Atwood controls the outcome of this case . Section 72 provides that any amount received under a 4 5 1 0 11 12 life insurance contract before the annuity starting date and 13 which was not received as an annuity is includable in gross '14 income to the extent it exceeds the investment in th e 15 contract . Investment in the contract is generally th e -16 aggregate amount of premiums or other consideration paid for d7 the contract less any aggregate amounts previously received 18 under the contract, to the extent that they were excludable 19 from gross income . Section 72(e)(6) . The loans t o 20 petitioner were not treated as income at the time of the .21 distributions . Thus the petitioner received income at the 22 time the policy terminated and the proceeds of the policy 23 were used to repay the loans . Atwood v . Commissioner , T .C . 24 Memo . 1999-61 . 25 Although petitioner did not receive the Form 1099-R Heritage Reporting Corporatio n (202) 628-4888 10 1 and thereby did not disclose the taxable income on his 200 6 2 Federal income tax return, such an argument goes to th e 3 penalties that might be assessed for the understatement of '4 income . No penalty has been asserted in the notice o f 5 deficiency or by respondent in the trial of this case . 6 In reaching our holding, we have considered all 7 arguments made, and, to the extent not mentioned, we 8 conclude that they are moot, irrelevant, or without merit . 9 To reflect our disposition of the issue, decision 10 will be entered for respondent . 11 This concludes the Court's oral findings of fact 12 and opinion . 13 (Whereupon, at 10 :21 a .m ., the bench opinion in the 14 above-entitled matter was concluded . ) 15 16 17 18 19 20 2 1 22 23 2 4 25 Heritage Reporting Corporation (202) 628-4888