MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $1,713 in petitioner's 2007 Federal income tax. The issue for decision is whether petitioner received a taxable constructive distribution in 2007 as reported on a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that Northwestern Mutual Life Co. (Northwestern) issued to her.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of facts and the attached exhibits are incorporated herein by this reference. Petitioner resided in New Jersey when the petition was filed.
On August 18, 1982, petitioner purchased a life insurance policy with a $50,000 death benefit from Northwestern. The policy required quarterly premiums of $73.
In 2008 Northwestern issued to petitioner a Form 1099-R for 2007 reporting a gross distribution of $12,654 and a taxable amount of $5,625.
Petitioner and her husband,
From 1987 to 2007, Northwestern loaned petitioner $73 each quarter she missed her premium payment and used the loan proceeds to pay petitioner's premiums as they became due. As of the May 18, 2007, premium due date, the amount of petitioner's loan equaled the cash value of the policy and Northwestern was unable to lend petitioner the $73 necessary to pay the premium.
Upon lapse, Northwestern used the policy's cash value, $12,654, to pay off the loan of the same amount. Northwestern deducted total premiums paid of $7,029 from the loan amount to arrive at a taxable distribution of $5,625.
Burden of Proof
As a general rule, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a);
If an information return, such as a Form 1099-R, serves as the basis for the determination of a deficiency, section 6201(d) may apply to shift the burden of production to the Commissioner. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to the income reported on an information return and the taxpayer has fully cooperated with the Commissioner, then the Commissioner has the burden of producing reasonable and probative information in addition to the information return. See
Petitioner argues that she canceled the policy in 1988 and therefore no deemed distribution could have occurred in 2007. Alternatively, she argues that if there was a deemed distribution it occurred in a year other than 2007. These constitute reasonable disputes with an information return. See
To prove that the Form 1099-R properly and accurately reported petitioner's 2007 taxable income, respondent introduced a declaration from the assistant director of policyowner services at Northwestern (declaration).
When a case involves unreported income and is appealable to the Court of Appeals for the Third Circuit, like this case, the Commissioner's determination of unreported income is entitled to the presumption of correctness only if the determination is supported by some evidence linking the taxpayer to the tax-generating activity.
Petitioner also argues that the burden of proof shifts to respondent under section 7491. Section 7491(a)(1) and (2) shifts the burden of proof to the Commissioner as to any factual issue relevant to a taxpayer's liability for tax if (1) the taxpayer introduces credible evidence with respect to such issue and (2) the taxpayer satisfies certain other conditions, including cooperation with the Government's requests for witnesses, information, and documents. See also Rule 142(a)(2). The burden is on the taxpayer to show that she satisfied these prerequisites. See
The factual issue in this case is whether petitioner canceled her life insurance policy in January 1988. Under New York law,
Petitioner did not present any evidence that she canceled the life insurance policy pursuant to its terms. Petitioner credibly testified that she sent a letter to Northwestern requesting that it cancel her policy. She did not, however, introduce the policy or testify to its terms, and without evidence as to the terms of the policy we do not know whether the letter was an effective means of canceling the policy.
Taxation of Deemed Distribution
Petitioner's primary argument is that she canceled the policy in 1988 and therefore could not have received a deemed distribution in 2007. As discussed above, petitioner was required to cancel the insurance policy pursuant to its terms. She did not introduce the policy or testify to its terms regarding cancellation. Thus, there is no evidence petitioner canceled the policy in 1988 according to the terms of the policy. Although petitioner stopped paying her premiums in 1988, the automatic loan provision in the policy resulted in the premiums' being paid and the policy's remaining in effect until 2007.
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.
In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit. To reflect the foregoing,