                        T.C. Memo. 2010-159



                      UNITED STATES TAX COURT



         GERLIE V. AND PATSY R. RICKARD, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5842-06.                 Filed July 22, 2010.



     Gerlie V. and Patsy R. Rickard, pro sese.

     Rebecca Dance Harris, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GALE, Judge:   Respondent determined a deficiency of $75,966

with respect to petitioners’ 2001 Federal income tax.    The sole

issue for decision is whether $233,327 petitioners received

during 2001 to fund their first-year premiums on three life

insurance policies is taxable to them.
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     Unless otherwise noted, all section references are to the

Internal Revenue Code of 1986 as in effect for the year in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.    All dollar amounts have been rounded to the

nearest dollar.

                          FINDINGS OF FACT

     Some facts are stipulated and are so found.    The stipulation

of facts, with accompanying exhibits, is incorporated herein by

this reference.    At the time the petition was filed, petitioners

resided in Tennessee.

     In late 2001 petitioners purchased three life insurance

policies through the same broker, Luther T. Smith.     In each

instance Mr. Smith, through his corporation Eagle Financial

Group, Inc. (Eagle), issued a check to petitioners to cover the

cost of the initial premium on the policy, which petitioners

deposited.   Petitioners wrote their own check to the insurance

company to pay the premium.    Mr. Smith earned commissions on each

of the policy sales to petitioners that ranged from 110 to 145

percent of the initial premium due.     The particulars of each

policy purchase are discussed below.

     On November 27, 2001, Mr. Smith sold petitioners a life

insurance policy issued by Shenandoah Life Insurance, with

petitioner Patsy R. Rickard (Mrs. Rickard) as owner and insured,

and petitioner Gerlie V. Rickard (Mr. Rickard) as beneficiary.
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On or around December 6, 2001, Mr. Smith provided funds to

petitioners for the premium by having Eagle issue a check for

$5,778, the amount of the initial premium on the policy, to Mr.

Rickard.   Petitioners deposited the check into their bank

account.   On December 7, 2001, petitioners’ check to Shenandoah

Life Insurance for $5,778 cleared their bank account.

     On December 1, 2001, Mr. Smith sold petitioners a life

insurance policy issued by Amerus Life Insurance, with Mrs.

Rickard as owner, Mr. Rickard as insured, and Mrs. Rickard as

beneficiary.    On December 20, 2001, petitioners’ check to Amerus

Life Insurance for $195,250, the amount of the initial premium on

the policy, cleared their bank account.   On or around December

21, 2001, Mr. Smith provided funds to petitioners for the premium

by having Eagle issue a check for $195,250 to Mr. Rickard.

Petitioners deposited the check into their bank account.

     On December 14, 2001, Mr. Smith sold petitioners a second

life insurance policy issued by Amerus Life Insurance, with Mr.

Rickard as owner, Mrs. Rickard as insured, and Mr. Rickard as

beneficiary.    On or around December 21, 2001, Mr. Smith provided

funds to petitioners for the premium by having Eagle issue a

check for $32,300, the amount of the initial premium on the

policy, to Mr. Rickard.   Petitioners deposited the check in their

bank account.   On December 27, 2001, petitioners’ check to Amerus

Life Insurance for $32,300 cleared their bank account.
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     On December 1, 2001, Mr. Rickard executed a recourse

promissory note for $201,108 in favor of Eagle.     The note was

payable 1 year from the date of execution, “with interest to be

paid, at the rate of 3 per centum per annum, from date payment is

due.”     As of the time of trial, petitioners had made no payments

on the promissory note.

         On December 1, 2003, petitioners canceled the first Amerus

Life Insurance policy.     On February 14, 2004, petitioners

canceled the second Amerus Life Insurance policy.     On February

27, 2004, petitioners canceled the Shenandoah Life Insurance

policy.

     In 2003 Ohio National Insurance Co. brought suit against Mr.

Smith and his related companies alleging, among other things,

that he engaged in the practice of “rebating”.1

     On their joint Federal income tax return for 2001,

petitioners did not report as income any portion of the amounts


     1
      Rebating is the practice whereby an insurance broker offers
to pay the initial premium on an insurance policy (or provides
some other consideration not authorized by the policy itself) to
induce a buyer to purchase the policy from that broker. See
Tenn. Code Ann. 56-8-104(8)(A) (Supp. 2009) (“The following
practices are defined as unfair trade practices in the business
of insurance by any person: * * * Except as otherwise expressly
provided by law, knowingly permitting or offering to make or
making any policy of insurance, including * * * life insurance *
* * or paying or allowing * * * as inducement to the policy, any
rebate of premiums payable on the policy, or any special favor or
advantage in the dividends or other benefits thereon, or any
valuable consideration or inducement whatever not specified in
the policy”.)
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received from Eagle in 2001.   Respondent mailed a timely notice

of deficiency for 2001 which determined that petitioners were

required to include in income the $233,327 they received from

Eagle in 2001.

                               OPINION

     Respondent’s determinations in the notice of deficiency are

presumed correct, and petitioners bear the burden of proving that

the determinations are in error.   See Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).2

     When a taxpayer purchases insurance coverage but, pursuant

to a rebating scheme, receives a reimbursement of his premium

payment from an insurance broker, the taxpayer has received

income within the meaning of section 61, measured by the amount

of the premium reimbursement, or rebate, received.   Wentz v.

Commissioner, 105 T.C. 1, 12-14 (1995); see also Woodbury v.

United States, 72 AFTR 2d 93-6140, 93-2 USTC par. 50,528 (D.N.D.

1993), affd. per curiam without published opinion 27 F.3d 572

(8th Cir. 1994).   The income must be recognized in the year the

rebate is received.   Wentz v. Commissioner, supra at 14.   While

petitioners insist that they did not engage in an insurance

rebating scheme, the reimbursement arrangements between them and

     2
      Petitioners have not claimed any shift in the burden of
proof to respondent under sec. 7491(a). In any event,
petitioners have not provided “credible evidence” within the
meaning of that section with respect to any factual issue in
dispute. See Higbee v. Commissioner, 116 T.C. 438, 442 (2001).
                                - 6 -

their insurance broker are indistinguishable from the

transactions at issue in Wentz and Woodbury, and the same result

obtains here.

     Petitioners contend, however, that they did not realize

income from the reimbursements because Mr. Rickard gave

promissory notes to Eagle obligating him to repay the reimbursed

amounts.   Where the taxpayer receiving a premium-reimbursing

rebate from the insurance broker gives the broker a nonrecourse

note, secured by the policy, in the amount of the reimbursement,

such a note has not precluded a determination that the rebate is

income to the taxpayer where the note did not constitute genuine

indebtedness.   Sutter v. Commissioner, T.C. Memo. 1998-250;

Haderlie v. Commissioner, T.C. Memo. 1997-525.    Nonrecourse notes

provided by the taxpayer to the rebating insurance broker do not

create genuine indebtedness where there is no evidence of an

intention to repay the notes.    Sutter v. Commissioner, supra;

Haderlie v. Commissioner, supra.
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     The promissory note3 Mr. Rickard executed in favor of Eagle

was recourse.4   However, the recourse nature of the note’s terms

is immaterial because we conclude, as explained hereafter, that

the note did not constitute genuine indebtedness.

     Determining whether a promissory note constitutes genuine

indebtedness requires an examination of all of the facts and

circumstances.   Fisher v. Commissioner, 54 T.C. 905, 909 (1970).

A good faith intent of the debtor to repay and a good faith

     3
      There is only one promissory note in evidence: a note for
$201,108, dated Dec. 1, 2001, and executed by Mr. Rickard in
favor of Eagle. Petitioners attached to their brief what
purported to be two additional promissory notes for $5,951 and
$33,269, dated Nov. 27 and Dec. 14, 2001, respectively.
Petitioners contend that Mr. Rickard executed these two notes in
favor of Eagle in connection with the premium reimbursements for
the Shenandoah policy and the second Amerus policy. However,
attachments to briefs are not evidence in a case, and we do not
consider those attachments here. See Rule 143(c); Kwong v.
Commissioner, 65 T.C. 959, 967 n.11 (1976); Perkins v.
Commissioner, 40 T.C. 330, 340 (1963). Accordingly, the only
purported indebtedness for which there is competent evidence in
this case is the $201,108 promissory note.

     We observe that the face amount of the Dec. 1, 2001, note in
evidence--$201,108--approximates the sum of the first two
reimbursements from Eagle: $5,778 in connection with the Nov.
27, 2001, purchase of the Shenandoah policy and $195,250 in
connection with the Dec. 1, 2001, purchase of the first Amerus
policy. Petitioners offer no explanation as to why the Dec. 1,
2001, promissory note had a face value of $201,108 if its purpose
was to secure repayment of only the $195,250 reimbursement for
the first Amerus policy. Because we conclude that the $201,108
promissory note did not evidence genuine indebtedness, we need
not explore this discrepancy further.
     4
      Respondent contends on brief that the note was nonrecourse.
However, the note on its face is not secured, and Eagle’s
recovery is in no way confined to any identified asset. We
accordingly conclude that by its terms the note was recourse.
                               - 8 -

intent of the creditor to enforce repayment are the most

important elements of this determination.   Id. at 909-910.

Courts look to several factors in determining whether the parties

had the requisite good faith intent, including:   Whether there

was a written loan agreement, whether there was a fixed schedule

for repayment, whether any security or collateral was requested,

whether interest was charged, whether there has been a demand for

repayment, whether the loan was reflected in the parties’ books,

whether any repayments have been made, and whether the borrower

was solvent at the time of the loan.   See Reed v. Commissioner,

T.C. Memo. 1994-611; Sattelmaier v. Commissioner, T.C. Memo.

1991-597.

     The relevant factors in this case rebut the notion that

petitioners had a good faith intent to repay, or that Mr. Smith

intended to enforce repayment, when the note was executed.    Most

significantly, there is no evidence of a demand for repayment or

of any other action by the purported debtor or creditor

occasioned by the failure to make payment when due.   See Reed v.

Commissioner, supra (failure of lender to demand repayment is

factor indicating indebtedness is not genuine).   Moreover,

petitioners had not made any payment of principal or interest on

the note at the time of trial--some 5½ years after the note

became due.   See Fairchild v. Commissioner, T.C. Memo. 1970-329

(lack of any effort to repay is significant factor indicating
                                 - 9 -

indebtedness is not genuine), affd. 462 F.2d 462 (3d Cir. 1972).

Finally, there is no evidence that any collateral was provided.

     Mr. Rickard testified that no payments were made on the note

because he had lent greater amounts to Mr. Smith that had not

been repaid.     Mr. Smith was not called to testify, and in the

absence of his testimony or any competent evidence to corroborate

purported indebtedness running to Mr. Rickard from Mr. Smith, we

do not accept Mr. Rickard’s self-serving testimony.     See Tokarski

v. Commissioner, 87 T.C. 74, 77 (1986); Yang v. Commissioner,

T.C. Memo. 2000-263.

     For the foregoing reasons, we find that there was never any

good faith intention to repay, or to demand repayment of, the

$201,108 note.    There is no competent evidence of any additional

notes.   Consequently, there was no genuine indebtedness

offsetting petitioners’ receipt of the $233,327 in premium

rebates in 2001.    Thus, under Wentz v. Commissioner, 105 T.C. 1

(1995), petitioners received taxable income in this amount in

2001.

     To reflect the foregoing,


                                           Decision will be entered

                                      for respondent.
