                  T.C. Memo. 2011-183



                UNITED STATES TAX COURT



       JAMES AND DEBORAH LEDGER, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 4901-09.               Filed August 2, 2011.



     R determined a deficiency in income tax for Ps’ 2006
tax year. The issue for decision is whether Ps had taxable
income for their 2006 tax year upon the maturity of P-H’s
life insurance contract.

     Held: The maturity of P-H’s insurance contract
resulted in taxable income to Ps for the 2006 tax year.



James Ledger, pro se.

Sebastian Voth, for respondent.
                                -2-

              MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of an income tax deficiency that respondent

determined for petitioners’ 2006 tax year.     After concessions,

the issue for decision is whether petitioners recognized taxable

income of $40,992.28 as a result of the maturity of petitioner

James Ledger’s (Mr. Ledger’s) life insurance policy.1

                         FINDINGS OF FACT

     Some of the facts have been stipulated.    The stipulations,

with accompanying exhibits, are incorporated herein by this

reference.   At the time the petition was filed, petitioners

resided in California.

     Mr. Ledger purchased a life insurance policy (policy) from

Prudential Insurance Co. of America (Prudential) in April 1974.

The face amount of the policy was $31,448, the maturity value

considered for gain was $61,722.31, the endowment maturity value

was $42,403, and the monthly premiums were set at $100.    The

policy was payable upon either Mr. Ledger’s death or his reaching

age 65.


     1
      Petitioners conceded that they failed to report for their
2006 tax year: (1) Wages of $503 received from Mobile Mini,
Inc.; (2) dividends of $2 received from the Walt Disney Co.; (3)
income of $1,287 received from Whirlpool Corp.; and (4) Social
Security benefits of $15,310 received from the Social Security
Administration. Respondent conceded that for their 2006 tax year
petitioners are entitled to a Lifetime Learning Credit of $2,000
and are not liable for an accuracy-related penalty.
                                  -3-

     In October 1978, Mr. Ledger borrowed $2,000 against the

policy.   Over approximately the next 27 years, Mr. Ledger took

out an additional 13 loans against the policy, making a final

loan request in March 2005.

     As of May 27, 2005, Mr. Ledger’s final loan balance and

accrued interest against the policy totaled $56,219.61.    The

policy matured on April 12, 2006, with a gross maturity value of

$61,787.72 and a maturity value considered for gain value of

$61,772.31.   Prudential paid Mr. Ledger $5,568.11 (gross maturity

value less final loan balance).    Prudential determined Mr.

Ledger’s investment in the contract at the time of maturity to be

$20,780.03.

     Prudential issued to Mr. Ledger a Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, etc., for the 2006 tax year,

identifying taxable distributions of $40,992.28 (calculated as

maturity value considered for gain less cost basis).2

     Respondent issued to petitioners a notice of deficiency on

December 15, 2008, determining a $7,184 deficiency in income tax



     2
      Although Mr. Ledger stipulated that Prudential issued the
Form 1099-R, he contends that he did not receive it. The record
is inconclusive on this point, which in any event is immaterial
to our analysis. In par. 14 of the stipulation of facts the
parties rounded the amount to $40,992.
                                 -4-

and a section 6662(a) accuracy-related penalty of $1,433 for the

2006 tax year.3   Petitioners filed a timely petition with this

Court on March 2, 2009.

     Prudential issued to Mr. Ledger a letter dated March 9, 2010

(correspondence), explaining how it calculated Mr. Ledger’s cost

basis and taxable distributions in the policy.   The

correspondence indicates that a Form 1099-R was issued to Mr.

Ledger with respect to the policy identifying a distribution of

$4,434.89 for the 1990 taxable year but does not indicate that

any additional Forms 1099 were issued to Mr. Ledger during the

term of the policy.   The correspondence further indicates that

the policy’s premiums were paid using the annual dividends from

1996 to 2005.

     A trial was held on September 13, 2010, in Los Angeles,

California.

                               OPINION

     The Commissioner’s determination of a taxpayer’s liability

for an income tax deficiency is generally presumed correct, and

the taxpayer bears the burden of proving that the determination

is improper.    See Rule 142(a); Welch v. Helvering, 290 U.S. 111,

115 (1933).    However, pursuant to section 7491(a)(1), the burden



     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986 (Code), as amended and in
effect for the tax year at issue. The Rule reference is to the
Tax Court Rules of Practice and Procedure.
                                -5-

of proof on factual issues that affect the taxpayer’s tax

liability may be shifted to the Commissioner where the “taxpayer

introduces credible evidence with respect to * * * such issue.”

The burden will shift only if the taxpayer has, inter alia,

complied with substantiation requirements pursuant to the Code

and “cooperated with reasonable requests by the Secretary for

witnesses, information, documents, meetings, and interviews”.

Sec. 7491(a)(2).   Petitioners did not argue that the burden

should shift, and they failed to introduce credible evidence that

respondent’s determinations are incorrect.   Accordingly, the

burden of proof remains on petitioners.

     Section 61(a) defines gross income as “all income from

whatever source derived,” unless otherwise provided.   Section

72(e)(1)(A), (5)(A), (C) provides that an amount received under a

life insurance contract that is not received as an annuity is

included in gross income to the extent it exceeds the investment

in the contract.

     The term “investment in the contract” is defined under

section 72(e)(6) as “(A) the aggregate amount of premiums or

other consideration paid for the contract before such date, minus

(B) the aggregate amount received under the contract before such

date, to the extent that such amount was excludable from gross

income”.
                                -6-

     For Federal income tax purposes, loans against a life

insurance contract’s cash value are treated as true loans from

the insurance company to the policyholder with the policy serving

as collateral.   See Minnis v. Commissioner, 71 T.C. 1049, 1054

(1979); Sanders v. Commissioner, T.C. Memo. 2010-279; Atwood v.

Commissioner, T.C. Memo. 1999-61.     Thus, using the policy’s

proceeds to satisfy the loans has the same effect as paying the

proceeds directly to the policyholder.    See, e.g., Atwood v.

Commissioner, supra.

     Mr. Ledger testified at trial that he had already “paid

taxes” on any money he took out of the policy, specifically any

dividends that were issued to him.    Mr. Ledger also testified at

trial that he does not “know the difference between a dividend or

calling the insurance company and say [sic], I need another

$3,000 for the kids school and they sent it to me.”

     Other than Mr. Ledger’s oral testimony and the 1990 Form

1099-R identifying a distribution of $4,434.89, petitioners

introduced no evidence at trial to demonstrate that they had

previously paid taxes on any funds borrowed or received from the

policy.

     Petitioners’ fundamental contention, as we understand it, is

that they should not be taxed on any distribution from Prudential

in 2006 because they had already paid taxes on all funds issued
                                 -7-

to them under the policy.    On the factual record, petitioners are

mistaken.

     When it terminated Mr. Ledger’s policy in 2006, Prudential

applied the policy’s maturity value to the outstanding balance on

the policy loans.   That action was the economic equivalent of

Prudential’s paying petitioners the policy proceeds, including

untaxed inside buildup, and petitioners’ using most of those

proceeds to pay off the policy loans.    This constructive

distribution is pro tanto a payment of the policy proceeds and as

such is gross income to petitioners insofar as it exceeds their

investment in the contract.    See McGowen v. Commissioner, T.C.

Memo. 2009-285; Atwood v. Commissioner, supra.

     The evidence indicates that upon termination in 2006, the

policy’s cash value for tax purposes was $61,772.31 and Mr.

Ledger’s investment in the policy was $20,780.03.    Petitioners

have produced no evidence to indicate that Prudential’s

calculation are incorrect.    Nor have they substantiated their

claim that they previously paid any taxes on distributions

received under the policy not properly considered in Prudential’s

calculations.   Consequently, as respondent determined,

petitioners received $40,992.28 as a constructive distribution,

taxable as income to them for their 2006 tax year.
                                 -8-

     The Court has considered all of petitioners’ contentions,

arguments, requests, and statements.     To the extent not discussed

herein, we conclude that they are meritless, moot, or irrelevant.

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
