TAX COURT OPINION

Case: Reid & Irene Burnham Chambers
Docket Number: 28946-07S
Judge: Nims
Opinion Type: summary
Filed: 05/04/2009
Pages: 7

.1 T .C . Summary Opinion 2009-6 3 UNITED STATES TAXICOUR T REID AND IRENE BURNHAM CHAMBERS, Petitioners v . COMMISSIONER OF INTERNAL RE ENUE, Responden t Docket No . 28946-07S . Filed May 4, 2009 .. Reid'and Irene Burnham Chambers, fro sese . Roger W . Bracken , for respondent' . NIMS, Judge : This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when th e petition was filed Pursuant to secti n,7463(b), the decision, to be entered is not reviewable by any of er court, and this opinion shall not be treated as precedent for ny other case . Unles s otherwise indicated, all section refer nces are to the Interna l Revenue Code in effect for the year inlissue . SERVED MAY - 4- 2009 I 11 -2- Respondent determined a $1,083 deficiency in petitioners' . Federal '~income tax for the 2005 tax year . The issue for decisio n is whether Ms .'Chambers received a deemed distribution under her life insurance contract which resultedilin gross income to petitioners . Background ,, II Some of the facts have been . stipulated and are so found . Petitioners timely filed a 2005 Federal income tax return . w~ w;, I I I Respondent issued a statutory notice of deficiency determinin g that petitioners failed to report as gross income the deemed distribution of the cash value of Ms . Chambers 's life insurance policyr, Petitioners resided in Virginia when they filed . thei r petition . --In 1981 Ms . Chamber s obtained whole life insurance fro m Nationwide Life Insuranc e Co . (Nationwide) through its agen t Michael Travis . She had previously procured home and ca r insurance through him, and she relied on his recommendation in .choosing this particular life insurance policy . In he r application she elected the Automatic Premium Loan (APL) ; provision . . Nationwide issued the policy on April 27, 1981 . The premiums were automatically paid through a monthly debit on Ms . Chambers's checking . account . In early 1986 Ms . Chambers moved'to Philadelphia , Pennsylvania, and moved her checking account to a different bank . -3- When her former bank declined the next automatic debit paymen t Nationwide wrote to her regarding the unpaid premium . Ms . Chambers informed Nationwide of the ch Inge in address and the, switch to a new bank, requested a chan e to a quarterly paym enlt schedule, and included a check for th e missed premium payment . Ms . Chambers made the next quarte ly payment on March 28, 1986 . However, she .then received a wh le benefits package fro m her employer and no longer needed lif e insurance from Nationwide . She therefore orally instructed Mr . Tr vis to cancel the poli°cy . .He indicated the policy was being canc led, telling her he wa s sorry to lose her as a customer . He d d not advise her that she needed to .take any further action to c ncel the policy . .Believing her policy had'been can ~eled, Ms . Chambers ceas d making payments . In fact, Nationwide ad not canceled her -' . policy, and as a result, the nonpaymen of premiums triggered the APL provision of the policy . Starting from September 9, 1986, Nationwide automatically granted her 1 ans (policy loans) t o cover the unpaid premiums . Nationwide subsequently sent Ms . hambers correspondence' that should have alerted her to the fa t that the policy had no t been canceled . A letter dated April 8, 1991, requested verification of her current address an included the most recent bill . Another billing statement was sent to her on March 30,1 2001 .. A letter dated January 10, 2002, acknowledged her request I II -4- terminate the policy, explained the consequences . o f surrendering the policy, and listed her available options . 'The letter also ,included asurrender application=which she never, completed or returned . A notice dated March 30, 2003, advised that the annual premium . had been reduced to $260 .20 . A ;;confirmation of her,change of address was sent to her on May 5, 2003 . Ms . Chambers claims that she did not receive some of this correspondence because she moved several times during this period : r 2 it Ms ... Chambers disregarded most of the correspondence she di d receive, believing . it had been sent in error . However, on on e ,occasion she did call Nationwide to giuestion why 'she wa s continuing to receive the notices ., When she insisted that she had already canceled the policy, the Nationwide representative indicated that the notices must have been sent by mistake . Nationwide continued granting Ms . Chambers policy loans under the APL provision until June 26, 2003 . When the next premium came due the following year, the APL provision ceased t o 'applyljbecause the next policy loan would have caused her total indebtedness to exceed the cash value of the policy . Instead, under the policy's nonforfeiture provisions, her coverage was converted from whole life insurance,to extended term insuranc e for .a;.,period based on the policy's net cash value . -5- On November 7, 2005, Nationwide n~tified Ms . Chambers tha t the extended term insurance would expi e without value on December 7, 2005 . On December 11, 2005, Nationwide informed her that she had gross income of $8,753 .33 as .a result of the expiration of her policy . On March 20 2006, Nationwide sentlher a corrected Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, ) etc ., which reported a gross distribution of $8,753 .33 and incom e of $3,005 .63 . Petitioners did not include these amounts on thei r 2005 return . Discussio n In general, any amount received upon the surrender, redemption, or maturity of a life insu ance contract which is not received as an annuity is gross income to the extent that it, when added to amounts previously received under the contract and excluded from gross income, exceeds the aggregate of premiums or . other consideration paid . Sec . 72(e) ( ) (A) , (5) (A) , (C), (6) ; sec . 1 .72-11( d)(1), Income Tax Regs . When Ms . Chambers ' s policy termin ted, Nationwide applie d ,the . policy's cash value to the outstanding balance on-the polic y loans . That constructive distribution is gross income t o petitioners to the extent it exceeds t le sum of the premiums paid by Ms . Chambers . See Atwood v . Commis ioner, T .C . Memo . 1999-61 ; Dean v . Commissioner , T .C . Memo . 1993- 26 . -6- Petitioners argue that Ms . Chambers canceled her insuranc e contract with Nationwide in 1986 before any policy loan had bee n granted under the APL provision . Since no policy loans woul d have been outstanding, there would have been no deeme d distribution to satisfy that nonexistent debt . Ms . Chambers did not comply with, ; the requirements for 'termination under the contract . The contract required her t o :;give written notice and surrender theq policy in,order t o terminate the contract and re,ceive payment of the policy's net- cash value . She never did so, and the contract did not give her . the right to unilaterally terminate the contract by giving oral notice to Mr . Travis . Though parties to a contract can agree to mutually rescind the contract, Mr . Travis's assent to cancellation of th e 'in sur,ance contract is not binding on Nationwide unless Mr . Travis possessed the requisite authority . See Prillaman v . Centur y Indem . Co . , 49 F . Supp . 197, 202 (W .D . Va . 1943), affd . 138 F .2d 61' . 821 (;4th Cir . 1943) ; Zurich Gen . Accident & Liab . Ins . Co . v . Baum , 165 S .E . 518, 519 (Va . 1932) . Mr . Travis lacked actual, implied, or apparent authority to enter into that agreement because the contract expressly stated that "only the President o r iS'ecretary of the Company may make or 'change a contract on its -7- behalf The agreement was not ratifi d because Nationwide continued to send Ms . Chambers corresp ndence indicating that i t considered the policy still effective . Moreover, at the time Ms . Chambe r instructed Mr . Travis to cancel the contract, the policy had a ignificant cash value ., Petitioners do not account for the di s osition of that cash value upon the purported termination of the ontract . For these reasons, we hold that p titioners have gross income from the satisfaction of the po icy loans granted unde r Ms . Chambers's life insurance contract To reflect the foregoing, Decision will be entere d for respondent . f