                    T.C. Summary Opinion 2009-63


                        UNITED STATES TAX COURT



         REID AND IRENE BURNHAM CHAMBERS, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 28946-07S.               Filed May 4, 2009.



     Reid and Irene Burnham Chambers, pro sese.

     Roger W. Bracken, for respondent.



     NIMS, Judge:     This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the

petition was filed.    Pursuant 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.    Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue.
                                -2-

     Respondent determined a $1,083 deficiency in petitioners’

Federal income tax for the 2005 tax year.   The issue for decision

is whether Ms. Chambers received a deemed distribution under her

life insurance contract which resulted in gross income to

petitioners.

                            Background

     Some of the facts have been stipulated and are so found.

Petitioners timely filed a 2005 Federal income tax return.

Respondent issued a statutory notice of deficiency determining

that petitioners failed to report as gross income the deemed

distribution of the cash value of Ms. Chambers’s life insurance

policy.   Petitioners resided in Virginia when they filed their

petition.

     In 1981 Ms. Chambers obtained whole life insurance from

Nationwide Life Insurance Co. (Nationwide) through its agent

Michael Travis.   She had previously procured home and car

insurance through him, and she relied on his recommendation in

choosing this particular life insurance policy.   In her

application she elected the Automatic Premium Loan (APL)

provision.   Nationwide issued the policy on April 27, 1981.   The

premiums were automatically paid through a monthly debit on Ms.

Chambers’s checking account.

     In early 1986 Ms. Chambers moved to Philadelphia,

Pennsylvania, and moved her checking account to a different bank.
                                -3-

When her former bank declined the next automatic debit payment,

Nationwide wrote to her regarding the unpaid premium.   Ms.

Chambers informed Nationwide of the change in address and the

switch to a new bank, requested a change to a quarterly payment

schedule, and included a check for the missed premium payment.

     Ms. Chambers made the next quarterly payment on March 28,

1986.   However, she then received a whole benefits package from

her employer and no longer needed life insurance from Nationwide.

She therefore orally instructed Mr. Travis to cancel the policy.

He indicated the policy was being canceled, telling her he was

sorry to lose her as a customer.   He did not advise her that she

needed to take any further action to cancel the policy.

     Believing her policy had been canceled, Ms. Chambers ceased

making payments.   In fact, Nationwide had not canceled her

policy, and as a result, the nonpayment of premiums triggered the

APL provision of the policy.   Starting from September 9, 1986,

Nationwide automatically granted her loans (policy loans) to

cover the unpaid premiums.

     Nationwide subsequently sent Ms. Chambers correspondence

that should have alerted her to the fact that the policy had not

been canceled.   A letter dated April 8, 1991, requested

verification of her current address and included the most recent

bill.   Another billing statement was sent to her on March 30,

2001.   A letter dated January 10, 2002, acknowledged her request
                                -4-

to terminate the policy, explained the consequences of

surrendering the policy, and listed her available options.      The

letter also included a surrender application which she never

completed or returned.   A notice dated March 30, 2003, advised

that the annual premium had been reduced to $260.20.    A

confirmation of her change of address was sent to her on May 5,

2003.   Ms. Chambers claims that she did not receive some of this

correspondence because she moved several times during this

period.

     Ms. Chambers disregarded most of the correspondence she did

receive, believing it had been sent in error.    However, on one

occasion she did call Nationwide to question why she was

continuing to receive the notices.    When she insisted that she

had already canceled the policy, the Nationwide representative

indicated that the notices must have been sent by mistake.

     Nationwide continued granting Ms. Chambers policy loans

under the APL provision until June 26, 2003.    When the next

premium came due the following year, the APL provision ceased to

apply because the next policy loan would have caused her total

indebtedness to exceed the cash value of the policy.    Instead,

under the policy’s nonforfeiture provisions, her coverage was

converted from whole life insurance to extended term insurance

for a period based on the policy’s net cash value.
                                 -5-

     On November 7, 2005, Nationwide notified Ms. Chambers that

the extended term insurance would expire without value on

December 7, 2005.   On December 11, 2005, Nationwide informed her

that she had gross income of $8,753.33 as a result of the

expiration of her policy.   On March 20, 2006, Nationwide sent her

a corrected Form 1099-R, Distributions From Pensions, Annuities,

Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,

etc., which reported a gross distribution of $8,753.33 and income

of $3,005.63.   Petitioners did not include these amounts on their

2005 return.

                             Discussion

     In general, any amount received upon the surrender,

redemption, or maturity of a life insurance contract which is not

received as an annuity is gross income to the extent that it,

when added to amounts previously received under the contract and

excluded from gross income, exceeds the aggregate of premiums or

other consideration paid.   Sec. 72(e)(1)(A), (5)(A), (C), (6);

sec. 1.72-11(d)(1), Income Tax Regs.

     When Ms. Chambers’s policy terminated, Nationwide applied

the policy’s cash value to the outstanding balance on the policy

loans.   That constructive distribution is gross income to

petitioners to the extent it exceeds the sum of the premiums paid

by Ms. Chambers.    See Atwood v. Commissioner, T.C. Memo. 1999-61;

Dean v. Commissioner, T.C. Memo. 1993-226.
                                  -6-

     Petitioners argue that Ms. Chambers canceled her insurance

contract with Nationwide in 1986 before any policy loan had been

granted under the APL provision.    Since no policy loans would

have been outstanding, there would have been no deemed

distribution to satisfy that nonexistent debt.

     Ms. Chambers did not comply with the requirements for

termination under the contract.    The contract required her to

give written notice and surrender the policy in order to

terminate the contract and receive payment of the policy’s net

cash value.   She never did so, and the contract did not give her

the right to unilaterally terminate the contract by giving oral

notice to Mr. Travis.

     Though parties to a contract can agree to mutually rescind

the contract, Mr. Travis’s assent to cancellation of the

insurance contract is not binding on Nationwide unless Mr. Travis

possessed the requisite authority.      See Prillaman v. Century

Indem. Co., 49 F. Supp. 197, 202 (W.D. Va. 1943), affd. 138 F.2d

821 (4th Cir. 1943); Zurich Gen. Accident & Liab. Ins. Co. v.

Baum, 165 S.E. 518, 519 (Va. 1932).     Mr. Travis lacked actual,

implied, or apparent authority to enter into that agreement

because the contract expressly stated that “only the President or

Secretary of the Company may make or change a contract on its
                                 -7-

behalf”.   The agreement was not ratified because Nationwide

continued to send Ms. Chambers correspondence indicating that it

considered the policy still effective.

     Moreover, at the time Ms. Chambers instructed Mr. Travis to

cancel the contract, the policy had a significant cash value.

Petitioners do not account for the disposition of that cash value

upon the purported termination of the contract.

     For these reasons, we hold that petitioners have gross

income from the satisfaction of the policy loans granted under

Ms. Chambers’s life insurance contract.

     To reflect the foregoing,


                                            Decision will be entered

                                       for respondent.
