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termination of petitioners’ policies are not in dispute. The
only issue is whether these amounts are includable in
petitioners’ gross income as amounts received within the meaning
of section 72(e).
Noting that very little cash was paid directly to them upon
cancellation of the policies, petitioners argue that the amounts
at issue represent merely “paper transactions” on the books of
the insurance companies. They argue that, in borrowing against
the policies, they were borrowing their own money, and that
capitalized interest on the loans merely increased their
investments in the contracts. We disagree.
Petitioners’ insurance contracts, by their terms, treated
the policy loans, including capitalized interest, as bona fide
indebtedness. For Federal income tax purposes, their policy
loans constituted true loans, rather than cash advances, and were
not taxable distributions when received. See Minnis v.
Commissioner, 71 T.C. 1049, 1057 (1979).2 The capitalized
interest on these loans is properly treated as part of the
principal of this indebtedness. See Allan v. Commissioner, 86
2 Subsequent to the decision in Minnis v. Commissioner, 71
T.C. 1049 (1979), which dealt specifically with loans under an
annuity contract, Congress enacted sec. 72(e)(4), which generally
treats loans under annuity contracts as taxable distributions.
Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248,
sec. 265(a), 96 Stat. 544. Loans under life insurance contracts
and endowment contracts (other than modified endowment contracts)
are excepted from this treatment. See sec. 72(e)(5)(A)(i).
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