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When National Western terminated petitioner wife’s policy,
her outstanding loan balance was $73,274.49. National Western
issued petitioner wife a Form 1099-R, reflecting a taxable gain
of $23,274.49, which the company computed as the outstanding loan
balance of $73,274.49, less her investment in the contract of
$50,000.
On their 1995 joint Federal income tax return, petitioners
reported no taxable distributions from their terminated insurance
policies. Respondent determined that petitioners had income of
$14,843 from the First Colony policy and $23,274 from the
National Western policy.
OPINION
In general, with exceptions not applicable here, any amount
which is received under a life insurance contract or endowment
contract before the annuity starting date and which is not
received as an annuity is included in gross income to the extent
it exceeds the investment in the contract. Sec. 72(e)(1)(A),
(5)(A), (C). The investment in the contract is defined generally
as the aggregate amount of premiums or other consideration paid
for the contract less aggregate amounts previously received under
the contract, to the extent they were excludable from gross
income. Sec. 72(e)(6).
The derivation and computation of the amounts reported on
the Forms 1099-R by First Colony and National Western upon
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Last modified: May 25, 2011