In Uncategorized on 08/23/2012 at 18:41

And, Dogged Persistence Doesn’t Always Win

Two for the price of one today, 8/23/12, from the hardworking Judges at 400 Second Street, N.W., in Our Nation’s Capital.

Leading off, a “not for nuthin’” from the pen of Judge Goeke, Ronald Webster Moore, T. C. Sum. Op. 2012-83, filed 8/23/12, and the taxpayer wins.

In his young days as a GI, Ron buys a whole life policy from The Company That’s On Your Side, Nationwide Insurance. Ron pays the twenty bucks a month premium for about two years, from 1975 to 1977, and stops. He reckons he’s surrendered whatever cash value accumulated (couldn’t have been much, he thought).

The policy says that if a premium isn’t paid for 31 days, policy is forfeited unless within 90 days the owner pays up with interest. Also, Ron elected the automatic premium loan; that means that cash surrender is used to pay premiums until exhausted. It’s a true loan, and if the payments are used to pay premiums, they are deemed distributed to the owner, and if not repaid by owner are income to owner at exhaustion of the cash surrender value. The excess of loan over premiums paid is taxable as ordinary income. Thus, IRS argues, the cash surrender value was enough to pay premiums through 2008, at which point Ron is deemed to get a distribution and to pay it back to Nationwide to satisfy the loan.

See my blogpost, “A Dangerous Thing,” 4/13/11.

But Ron says no, the policy is ambiguous, I cooperated with IRS, so IRS has burden of proof. Judge Goeke agrees.

Here’s Judge Goeke’s take: “The policy contract provides: (1) premium payments not paid on or before their due date ‘will be in default’; (2) after default, the policy will remain in effect for a 31-day grace period; and (3) the policy will terminate if premiums are unpaid by the end of the grace period. Furthermore, the policy contract goes on to explain that: (1) the policy may be reinstated within five years after the due date of the premium payment first in default upon Nationwide’s receipt of certain evidence from petitioner; (2) an automatic premium loan will automatically be granted to pay a premium in default when the policy has a net cash value; and (3) the policy will automatically be placed on extended term insurance if no payment is made by the end of the 31-day grace period.

“Several of the premium payments were made after the expiration of the grace period–the payments were not made in time to prevent the insurance policy from terminating.” T. C. Sum. Op. 2012, at p. 17.

Nationwide sent Ron letters about the premium loan, but he tossed them unread, thinking they were just sales pitches.

It gets better. “Moreover, all premium payments due beginning September 28, 1980 through 2007, were not made within the grace period. Automatic premium loans were issued to pay the premiums three months after their respective due dates. The automatic premium loan provision functions to pay premiums in default. If a premium was not paid by the end of the grace period, the policy terminated. After termination the policy had to be reinstated by certain affirmative actions by petitioner–the automatic premium loan provision could not reinstate the policy after it had terminated.

“The policy contract provided that the frequency of premium payments could be altered only by a written request to Nationwide; however, there is no evidence in the record that such request was made. Accordingly, by the very terms of the contract, the policy should have terminated at the expiration of the grace period for any of the aforementioned premium payment due dates.” T. C. Sum. Op. 2012-82, at p. 18.

Now for the good news for Ron: “We are not persuaded that petitioner’s life insurance policy terminated in 2008 resulting in a taxable deemed distribution. Respondent’s (IRS’) argument would have us construct a multitude of inferences in his favor and simultaneously turn a blind eye to several unexplained discrepancies in the record. This we will not do. We believe a plain reading of the terms in the life insurance contract signifies that the policy should have terminated and been converted to extended term insurance on several occasions before 2008.” T. C. Sum. Op. 2012-83, at p. 18.

No distribution in 2008, no deficiency, Ron wins it.

Now for the “dogged determination” subheading. That’s Ralph Galyean and Laraine Galyean, T. C. Memo. 2012-242, filed 8/23/12. Judge Foley has this sad tale and it ends badly for the taxpayers.

Ralph loses his job on an oil rig, gets a shore-based consultancy, and when that goes south, takes Social Security. Laraine had a job as an administrative assistant, but between the two of them that wasn’t enough to stave off bankruptcy.

Ralph and Laraine lose their house, and rent an apartment for themselves and their two dogs (breed and names not stated, except dogs are styled as “large dogs”). But the rent is over the famous IRS local housing and utility standards. See my blogpost “A Home Is Not a House”, 8/16/12.

Ralph and Laraine filed returns for the years at issue, but didn’t pay the tax. They seek CDP, claiming they should be in “not currently collectible” status, because they have nothing left after paying living expenses. IRS says “you’re over the schedule on house and utilities, so pay up”.

True, say Ralph and Laraine, but if we rent a cheaper pad, it would be on a higher floor, and the dogs would have to go. Or, put more lawyerly, “Petitioners acknowledge the availability of apartments at or below the local standard but assert that first floor apartments, which would allow them to keep their dogs, are more expensive. Respondent reasonably determined that these preferences did not justify a deviation from the local standard in determining petitioners’ reasonable basic living expenses.” T. C. Memo. 2012-242, at p. 5.

Unfortunately, Ralph and Laraine had other arguments, but they weren’t raised at the CDP, so they’re non-starters in Tax Court. Again, put more lawyerly, “Petitioners make two contentions that were not raised at their CDP hearing. They contend that respondent failed to consider vehicle expenses and the impact of petitioners’ bankruptcy. We reject both contentions because they were not raised at the hearing. See Murphy v. Commissioner, 125 T.C. 301, 315 (2005) (holding that in reviewing the Commissioner’s determination the Court generally only considers evidence that was brought to the attention of the Appeals officer), aff’d, 469 F.3d 27 (1st Cir. 2006).” T. C. Memo. 2012-242, at p. 5, footnote 4.

Use it or lose it, guys. And too bad for the dogs. They’ve either got to climb or go.

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