Jonathan D. Sawyer, T. C. Memo. 2026-33, filed 4/16/26, tried to keep the family printing business afloat. He borrowed against his life insurance policy and used the premium loan feature to keep the insurance in force, borrowing against cash surrender value until exhausted.

JD never assigned the policy to the family business, although he credibly testifies he told his manager to do so. The manager testifies he doesn’t remember any such order.

Unhappily, Judge Elizabeth A. (“Tex”) Copeland sticks JD with the policy and the COD income when the insurance company cancels the policy to satisfy the loans.

But JD’s trusty attorneys’ investment interest deduction argument scores a point with Judge Tex Copeland. Even though the business’ records were destroyed when the business folded, JD’s and manager’s testimony is credible. And because keeping the business afloat would earn dividends on JD’s stock in the business, to the extent the business generated income to JD, the interest on the cash surrender value loan was deductible.

“Mr. Sawyer’s investment in [business] was to keep the business afloat, ultimately earning income that would lead to dividends. Consequently, the [business] stock was property held for investment, and the underlying interest paid to support that investment was investment interest. As investment interest, it is likewise subject to the limitations of section 163(d)(1), which provides that ‘[i]n the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year.’

“Thus, as to the $40,107 interest on the $80,000 Policy Loan that was satisfied in [year at issue] with an offset to Mr. Sawyer’s cash surrender value, it was investment interest subject to the limitations of section 163(d)(1) and will only be deductible to the extent of net investment income for the [year at issue].” T. C. Memo. 2026-33, at pp. 10-11.

But failure to prove allocation between insurance and investment features in premium payments prevents JD for getting investment income interest treatment for the premium loans.

JD also escapes Section 6651(a)(2) failure-to-pay add-on.

“There is ample evidence that Mr. Sawyer had neither the assets nor the income to pay his [year at issue] tax. Nor is his inability to pay attributable to a lack of ordinary business care. Mr. Sawyer’s wages were foreseeable, and he paid the tax thereupon; conversely, the cancellation of a life insurance policy he had thought transferred and the magnitude of the constructive income therefrom were not reasonably foreseeable. Mr. Sawyer’s financial difficulties did not arise because of negligence or lavish spending. Nor could Mr. Sawyer realistically borrow to satisfy the tax liability, given his financial history, default on the loan for which his home was collateral, and the lack of other assets. Accordingly, reasonable cause existed with respect to the failure to pay.” T. C. Memo.2026-33, at p. 13.

A Taishoff “Good Job” to JD’s trusty attorneys.