In Uncategorized on 10/23/2013 at 16:48

STJ Daniel A. (“Yuda”) Guy has an example of inventive ambiguity in a small-claimer, Jeffrey J. Furnish, 2013 T. C. Sum. Op. 81, filed 10/23/13. For a similar tale, see my blogpost “Ambiguity Is The Best Policy”, 8/23/12.

JJ furnished himself (sorry, guys) with two life insurance policies 40 years ago, while a 20-year old college student, from The Quiet Company, Northwestern Mutual Life Insurance Company (NML).

Of course, these had the usual premium loan from accumulated cash values rider. And JJ stopped paying long ago. But the loans just kept on coming quietly, until finally The Quiet Company bangs JJ with about $50K in deemed distributions, when the cash value is finally exhausted and Section 72(e)(1)(a) kicks in.

JJ spars with The Quiet Folks, gets endless series of numbers, but they don’t tie in. He asks for the whole set of calculations from the get-go, but those go back 40 years and The Quiet Guys won’t provide them.

JJ files two 1040s for the year at issue, one with the deemed distribution, one without, and includes a written statement of his fight with Northwestern. He then tries to deal with Appeals, gets neither a hearing nor relief, invokes the Taxpayer Advocate, ditto, and finally winds up petitioning the SNOD laid on him by virtue of his not paying tax on the $50K.

STJ Yuda: “When NML determined that petitioner’s insurance policies had lapsed, it applied the cash values of the policies to the outstanding balances on petitioner’s loans. As we have explained in numerous cases, the act of applying the cash value of a life insurance policy against an outstanding loan is not different from distributing the proceeds to the taxpayer (including the untaxed inside buildup) to permit the taxpayer to use the proceeds to pay off the loan.” 2013 T. C. Sum. Op. 81, at p. 11.

And the taxpayer has the burden of proof for most arithmetic issues, except that here NML blew the numbers when it gave JJ the 1099-R. Where there is a reasonable dispute with information furnished by a third party, and the taxpayer cooperates with IRS, the burden shifts to IRS per Section 6201(d).

JJ may be hairsplitting, but there’s enough hair to cause STJ Yuda to throw the ball into IRS’ court. “Although petitioner points to relatively minor discrepancies in NML’s records, we agree with petitioner that the discrepancies are of such a nature that their cumulative effect, compounded over the extended terms of the policies in question, would likely be significant and could very well alter the dates that the insurance policies lapsed.” 2013 T. C. Sum. Op. 81, at pp. 14-15.

Well, what about cooperation, asks IRS. IRS claims JJ raised this stuff on the eve of trial.

No, says STJ Yuda, y’all knew about this long ago. “Respondent [IRS] did not present any evidence that petitioner failed to respond to reasonable requests for information. Considering petitioner’s detailed communications with IRS personnel before and after the notice of deficiency was issued and the fact that he apparently was not given the opportunity to discuss the matter with the Appeals Office, we conclude that petitioner fully cooperated with respondent within the meaning of section 6201(d).” 2013 T. C. Sum. Op. 81, at p. 15.

IRS claimed they produced reasonable and probative evidence of the date when the policies lapsed and the deemed distribution was made, but all they had was the same stuff JJ claimed was erroneous, and unlike prior cases, IRS never produced the whole detailed loan history from Day One to the present.

Thus, insufficient evidence to sustain the tax on the deemed distribution.

Takeaway- If you ever get one of these, practitioner, go over the numbers from the insurance company. Then go over them again. Have you got the whole history? What should you do if you don’t?

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