                          T.C. Summary Opinion 2012-83



                         UNITED STATES TAX COURT



               RONALD WEBSTER MOORE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28869-10S.                       Filed August 23, 2012.



      Ronald Webster Moore, pro se.

      Mark J. Tober, for respondent.



                              SUMMARY OPINION


      GOEKE, Judge: This case was heard pursuant to the provisions of section

74631 of the Internal Revenue Code in effect when the petition was filed. Pursuant



      1
       Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                           -2-

to section 7463(b), the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other case.

      Respondent determined a $2,7682 deficiency in petitioner’s Federal income

tax for 2008. The issue for decision is whether petitioner received a taxable deemed

distribution in 2008 upon the expiration of his life insurance policy. For the reasons

stated herein, we hold that petitioner did not receive a taxable deemed distribution in

2008 and therefore is not liable for the $2,768 deficiency.

                                       Background

      Petitioner resided in Florida when he filed his petition. On September 28,

1975, while residing in Virginia, petitioner contracted with Nationwide Life

Insurance Co. (Nationwide) to obtain whole life insurance. The face amount of the

life insurance policy was $20,000; the policy required a monthly premium payment

of $26 beginning September 28, 1975.3 Petitioner elected the automatic premium

loan provision, explained infra, in the contract.




      2
          All amounts are rounded to the nearest dollar.
      3
       Premium payments for whole life insurance are bifurcated so that part of
each payment is attributed to the cost of insurance and part accumulates as cash
value. The insurer invests the cash value, which continues to grow tax deferred as
long as the policy is in force. The insured can borrow against the cash value, but
unpaid policy loans and interest will be subtracted from the death benefit.
                                        -3-

I. The Life Insurance Contract

      The pertinent provisions of petitioner’s life insurance policy contract are as

follows:

                       Premium Payment and Reinstatement

              Payment of Premiums and Grace Period--Each premium after the
      first is payable on or before its due date * * *. Any premium not paid
      on or before its due date will be in default.

             A grace period of 31 days will be allowed for payment of each
      premium after the first, during which period the policy will continue in
      force. * * * If a premium remains unpaid at the end of the grace period
      the policy shall thereupon terminate and be without further value
      except as may be provided under the Nonforfeiture Provisions.
      [Emphasis added.]

            Upon written request to the Company, the frequency of premium
      payment may, with respect to premiums not yet paid, be changed to
      annual, semi-annual, quarterly or monthly * * *.

              Reinstatement--If a premium is in default beyond the grace
      period and if this policy has not been surrendered for its cash value, it
      may be reinstated within five years after the due date of the premium
      first in default upon receipt by the Company of (a) evidence of
      insurability of the insured satisfactory to the Company and (b) payment
      of all overdue premiums and payment or reinstatement of any
      indebtedness to the Company on this policy, together with payment of
      compound interest on such premiums and indebtedness at 5% per year.

                                  Loan Provisions

            Automatic Premium Loan--If this provision is elected * * * in the
      application * * * , then at any time after the policy has a net cash value
                                  -4-

as defined in the Nonforfeiture Provisions a loan will be automatically
granted to pay a premium in default. If the resulting total indebtedness
with interest to the end of the current policy year would exceed the
cash value of the policy plus the cash value of any existing dividend
additions or the amount of dividend accumulations on such date * * *
then this provision shall not be effective and the Nonforfeiture
Provisions shall apply. Revocation of this provision shall be made by
written notice filed at the Home Office.

                       NonForfeiture Provisions

      Nonforfeiture Options--Within three months after the due date of
any premium in default one of the nonforfeiture options may be elected.
Such election shall be by proper written request to the Company.

*          *           *            *          *           *           *

      If by the end of the 31 day grace period following the due date
of any premium in default no option has been elected, an option will be
determined automatically as follows, subject to the right to revoke such
option by election of another available option at any time within the
three month election period:
                                            -5-

           (1) [Extended Term Insurance][4] * * * will be effective
      automatically if this policy is in a Standard Premium Class;[5]

II. Nationwide’s Records

      At respondent’s request, Nationwide provided the following information

relating to petitioner’s life insurance policy: (1) a record of premium payments

made by petitioner; (2) a record of automatic premium loans made by Nationwide;

(3) several letters from Nationwide to petitioner sent between 2005 and 2010; and

(4) Nationwide’s calculation of petitioner’s taxable gain arising from the

termination of his life insurance policy.




      4
        The extended term insurance option allows the policyholder “[t]o continue
this policy as nonparticipating extended term insurance from the due date of the
premium in default for an amount equal to the face amount, plus the face amount of
any paid-up additions and the amount of any dividend accumulations and less any
indebtedness to the Company on this policy.”

       The period of extended term insurance “shall be such as the net cash value
will provide when applied as a net single premium at the attained age of the Insured
on the date the premium is in default.”
      5
          Petitioner’s policy was in a standard premium class.
                                     -6-

     A. Nationwide’s Record of Premium Payments

     The following schedule reflects Nationwide’s record of petitioner’s premium

payments (premium record):

       Due Date      Received Date    Transaction Amount   Payment Frequency

        9/28/75         10/20/75            26.22             Monthly
       10/28/75          1/27/76            26.22             Monthly
       11/28/75          2/12/76            26.22             Monthly
       12/28/75          3/10/76            26.22             Monthly
        1/28/76          3/10/76            26.22             Monthly
        2/28/76          3/11/76            26.22             Monthly
        3/28/76           4/6/76            26.22             Monthly
        4/28/76          5/12/76            26.22             Monthly
        5/28/76           6/9/76            26.22             Monthly
        6/28/76          7/26/76            26.22             Monthly
        7/28/76          8/16/76            26.22             Monthly
        8/28/76          9/15/76            26.22             Monthly
        9/28/76         10/20/76            26.22             Monthly
       10/28/76         11/16/76            26.22             Monthly
       11/28/76         12/14/76            26.22             Monthly
       12/28/76          1/10/77            26.22             Monthly
        1/28/77          2/14/77            26.22             Monthly
        2/28/77           3/7/77            26.22             Monthly
        3/28/77          6/17/77            77.65             Quarterly
        6/28/77          6/17/77            77.65             Quarterly
        9/28/77         10/11/77           301.30             Annual
        9/28/78          9/20/78           301.30             Annual
        9/28/79          9/28/79           301.30             Annual
        9/28/80           1/9/81           301.30             Annual - APL
        9/28/81         12/23/81           301.30             Annual - APL
        9/28/82         12/27/82           301.30             Annual - APL
        9/28/83         12/23/83           301.30             Annual - APL
        9/28/84         12/27/84           301.30             Annual - APL
        9/28/85         12/27/85           301.30             Annual - APL
        9/28/86         12/24/86           301.30             Annual - APL
        9/28/87         12/23/87           301.30             Annual - APL
        9/28/88         12/27/88           301.30             Annual - APL
        9/28/89         12/27/89           301.30             Annual - APL
        9/28/90         12/27/90           301.30             Annual - APL
        9/28/91         12/27/91           301.30             Annual - APL
        9/28/92         12/23/92           301.30             Annual - APL
        9/28/93         12/27/93           301.30             Annual - APL
        9/28/94         12/23/94           301.30             Annual - APL
        9/28/95         12/27/95           290.60             Annual - APL
        9/28/96         12/23/96           290.60             Annual - APL
                                          -7-
          Due Date      Received Date     Transaction Amount   Payment Frequency

          9/28/97         12/27/97              290.60           Annual - APL
          9/28/98         12/27/98              290.60           Annual - APL
          9/28/99         12/23/99              290.60           Annual - APL
          9/28/00         12/27/00              290.60           Annual - APL
          9/28/01         12/23/01              290.60           Annual - APL
          9/28/02         12/23/02              290.60           Annual - APL
          9/28/03         12/27/03              290.60           Annual - APL
          9/28/04         12/27/04              290.60           Annual - APL
          9/28/05         12/23/05              290.60           Annual - APL
          9/28/06         12/26/06              290.60           Annual - APL
          9/28/07         12/23/07              290.60           Annual - APL

      Petitioner stated that he made the first 18 monthly premium payments totaling

$472 and then ceased making payments after February 28, 1977.6 He did nothing to

cancel the policy because he believed that the policy would eventually terminate

according to the terms of the contract.

      B. Nationwide’s Record of Loan Payments

      Nationwide’s record of automatic loan payments (loan record) coincides with

the information in the premium record7–Nationwide issued its first automatic

premium loan to petitioner on January 9, 1981, and continued issuing automatic

premium loans annually through 2007.


      6
       Respondent alleged in his pretrial memorandum that petitioner stopped
making payments after the September 28, 1979, payment. However, at trial
respondent seemed to agree that petitioner ceased making payments after the
February 28, 1977, payment.
      7
      The “APL” reference in the premium record indicates that the payment was
made through an automatic premium loan. The loan record shows automatic
premium loan payments issued on the same dates as in the premium record.
                                         -8-

      C. Correspondence Between Nationwide and Petitioner

      As mentioned supra, petitioner resided in Virginia at the time he entered into

the life insurance contract with Nationwide. At that time, he was in the military.

For the past 12 years, petitioner has lived at the same address in Florida. He

received mail from Nationwide at that address but generally believed that this mail

was marketing materials. Nationwide provided copies of letters sent to petitioner on

the following dates at his Florida address:

               1. November 27, 2005--Nationwide sent petitioner a letter informing

him that “[s]ince we have not received payment for your past due premium, and,

there was sufficient cash value on your policy, the premium has been paid by the

Automatic Premium Loan Provision.” The letter also stated that: (1) the premium

due date was September 28, 2005; (2) the loan amount used to pay the premium was

$291;8 and (3) the total loan on the policy was $18,722.9

               2. November 27, 2006--The following year Nationwide sent petitioner

a letter informing him that because Nationwide had not received his past due


      8
          The loan was not issued until December 23, 2005.
      9
       Aside from petitioner’s election of the automatic premium loan provision in
the 1975 life insurance contract, the November 27, 2005, letter is the earliest record
supporting that petitioner received notice that the automatic premium loan provision
was being implemented to pay the outstanding premium on his policy.
                                          -9-

premium on his life insurance policy “the automatic premium loan provision has

jumped in to help”. The letter stated that the loan amount used to pay the premium

was $29110 and the total loan on the policy was $20,154.

               3. December 8, 2006--This letter informed petitioner that his current

surrender value in the policy was $856. Moreover, the letter stated that Nationwide

was aware of petitioner’s request to terminate his policy and enclosed a pamphlet to

help him decide whether that decision was really best for him. 11 Finally, the letter

stated that petitioner would have to complete a “surrender application” to officially

terminate the policy.12

               4. November 27, 2007--The next year Nationwide sent another letter to

petitioner informing him that once again “the automatic premium loan provision has

jumped in to help”. The letter stated that the loan amount used to pay the premium

was $29113 and the total loan on the policy was $21,671.



      10
           The loan was not issued until December 28, 2006.
      11
        On the contrary, as noted supra, petitioner testified that he did not attempt to
cancel his policy. It is unclear from the record whether petitioner requested to
terminate the policy in 2006.
      12
        There is no evidence in the record indicating that petitioner completed the
surrender application.
      13
           The loan was not issued until December 23, 2007.
                                        - 10 -

             5. November 30, 2008--One year later, Nationwide sent petitioner a

letter informing him that he was in default and therefore the policy had been

converted to extended term insurance effective September 28, 2008.14 Moreover,

the letter stated that because the policy had been converted, the automatic premium

loans were now permanent withdrawals resulting in taxable income of $17,941 for

the 2008 tax year.

             6. August 5, 2009--This letter informed petitioner of the requirements

to reinstate his policy: (1) complete and return the reinstatement application; and

(2) upon approval of the reinstatement application, make a premium payment of

$581 and a loan payment of $1,255.

             7. February 21, 2010--This letter informed petitioner that his extended

term insurance had expired without value.

      D. Nationwide’s Calculation of Petitioner’s 2008 Constructive Distribution

      Nationwide sent a letter to respondent dated March 14, 2012, explaining how

Nationwide had determined petitioner’s 2008 taxable distribution. The letter

explained that petitioner’s premiums were due on the “anniversary of the policy”

and that when premiums were not paid, the automatic premium loan provision was


      14
       At that time the cash available in the policy was $253, which was used to
purchase extended term insurance that would expire March 23, 2010.
                                           - 11 -

used to pay the premiums. The letter went on to explain that the automatic premium

loan provision continued to pay the premium until the policy value could no longer

continue supporting additional loan amounts, which occurred in 2008.15 Finally, the

letter provided the following calculation of petitioner’s taxable gain:

                              Cash Value                             Amount
            Loan paid off at time policy was placed on
             extended insurance effective 9/28/2008                   $21,671
            Investment in the policy
            Premiums paid on base policy                                   9,293
            (-) Dividends earned (does not include interest)               5,563
            (=) Investment in policy                                       3,730
            Taxable gain (cash value - investment in policy)              17,941

Nationwide supported its calculation with the premium record and the loan record,

discussed supra. However, the sum of the premiums in the premium record does not

reconcile with the “premiums paid” amount in the calculation.16 Moreover, there is

no supporting documentation for the “dividends earned”. Finally, Nationwide has




      15
        It is unclear from the record how the automatic premium loans affected the
policy value and how the policy value continued to support the issuance of the
automatic premium loans for approximately 30 years when petitioner made premium
payments totaling only $472.
      16
           The sum of premium payments in the premium record is $9,828.
                                         - 12 -

not provided any documentation indicating that the policy value supported the

issuance of any automatic premium loans.

III. Notice of Deficiency

      Nationwide issued to petitioner a Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for

the 2008 tax year, reporting a taxable distribution of $17,941. On his 2008 Federal

income tax return petitioner reported no income with respect to the policy’s

termination. In a notice of deficiency respondent determined that petitioner had

improperly omitted from taxable income the $17,941 reported on the Form 1099-R.

Petitioner timely filed a petition with this Court contesting the notice of deficiency.

                                      Discussion

I. Burden of Proof

      As a general rule, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer bears the burden of proving that

those determinations are erroneous.17 Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). However, section 7491(a)(1) and (2) shifts the burden of proof to



      17
         While we recognize that sec. 6201(d) may shift the burden of production to
respondent, because respondent has met this burden, we do not address the issue
further.
                                         - 13 -

the Commissioner as to any factual issue relevant to a taxpayer’s liability for tax if

(1) the taxpayer introduces credible evidence with respect to such issue, and (2) the

taxpayer satisfies certain other conditions, including cooperation with the

Government’s requests for witnesses, information, and documents. See also Rule

142(a)(2). The burden is on the taxpayer to show that he satisfied these

prerequisites. See Richardson v. Commissioner, T.C. Memo. 2005-143; H.R. Conf.

Rept. No. 105-599, at 240, 242 (1998), 1998-3 C.B. 747, 993.

      The factual issue in this case is whether the life insurance policy expired

during the 2008 tax year. Petitioner argues that the policy expired around the time

when he ceased making premium payments, by the very terms in the contract. He

introduced the life insurance policy contract and credibly testified as to his

understanding of how the reinstatement, automatic premium loan, and nonforfeiture

provisions interacted. Furthermore, petitioner has cooperated with the Internal

Revenue Service. We find that petitioner has produced credible evidence that the

policy should have terminated before the 2008 tax year, and thus the burden of

proof shifts to respondent.

II. The Constructive Distribution

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

derived” unless otherwise provided. Section 72(e)(1)(A) and (5)(A) and (C)
                                        - 14 -

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”.

      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, T.C. Memo. 1999-61. In V.R. Deangelis

M.D.P.C. v. Commissioner, T.C. Memo. 2007-360, aff’d, 574 F.3d 789 (2d Cir.

2009), we explained the significance of automatic premium loan provisions--

      [Automatic premium loan] provisions allow an insurance company to
      pay a premium due on a policy by way of a loan taken out against the
      cash value of the policy. The loan is subject to interest charges and
      affects the policy’s cash value only as a potential reduction of that
      value. The total amount of outstanding loans on the policy is usually
                                         - 15 -

      less than the policy’s cash value because the policy will generally
      lapse when the total amount of the loans exceeds the cash value.

      Respondent argues that the policy contract remained valid for 30 years after

petitioner’s final payment because the automatic premium loan provision required

Nationwide to lend petitioner a premium payment if he was in default on the policy

contract and the only way to revoke the provision was by written notice filed with

the “Home Office”. Because petitioner did not file written notice revoking the

automatic premium loan provision, respondent asserts that the policy remained in

effect until 2008 when the policy value no longer supported another automatic

premium loan. Respondent concludes that petitioner received a taxable distribution

from Nationwide in 2008 when the policy contract terminated--Nationwide was

deemed to make a distribution to petitioner, and petitioner was deemed to use the

distribution to repay Nationwide the automatic premium loan balance.

      Petitioner argues that the automatic premium loan provision did not prevent

his policy contract from terminating after he ceased making payments. He believes

that the nonforfeiture provisions operated to convert the policy to term insurance

when he ceased making payments unless he took affirmative steps to reinstate the

original policy. On the basis of his interpretation of the life insurance policy
                                          - 16 -

contract, petitioner stopped making premium payments in 1977 and considered the

policy abandoned.

      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. Premium payments due October 28, November 28, and December 28,

1975, January 28, 1976, and March 28, 1977, were not made within the grace

period, and Nationwide did not issue automatic premium loans to prevent the policy
                                        - 17 -

from terminating.18 Accordingly, the policy should have terminated and been

converted to extended term insurance following the expiration of the grace period

for any of the aforementioned due dates.

      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. Respondent has failed to




      18
        It is unclear why Nationwide did not issue automatic premium loans to pay
these premiums.
                                         - 18 -

explain why the policy continued to remain in effect when by the very terms of the

contract it should have terminated on several occasions.

      We are not persuaded that petitioner’s life insurance policy terminated in

2008 resulting in a taxable deemed distribution. Respondent’s 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.

III. Conclusion

      For the reasons stated herein, we find that petitioner is not liable for the

deficiency in income tax for the 2008 tax year.

      To reflect the foregoing,


                                                             Decision will be entered

                                                      for petitioner.
