Stephen L. and Colleen Atwood - Page 4




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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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