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Each of the policies permitted the owner to borrow generally
up to the amount of policy cash value, using the policy as
security. Each contract required payment of a specified rate of
interest on amounts borrowed, with any accrued but unpaid
interest to be added to the loan and to bear interest at the same
rate. Each contract provided for the termination or lapse of the
policy when the total loan, including unpaid interest, exceeded
the policy cash value (the value of the single premium
accumulated with interest less certain specified charges).
Because of financial hardship and in order to pay personal
living expenses, petitioners each borrowed the maximum allowable
amounts against their policies. They each failed to completely
repay these loans or interest thereon, resulting in the
termination of each policy in 1995.
When First Colony terminated petitioner husband’s policy,
his outstanding loan balance, exclusive of certain unpaid
interest, was $39,403.63. The policy had a cash value of
$39,843.11, and a cash surrender value of $439.48
($39,843.11 minus $39,403.63). Upon termination, First Colony
sent petitioner husband a check in the amount of the cash
surrender value ($439.48). First Colony also issued petitioner
husband a Form 1099-R, reflecting a taxable gain of $14,843.11,
which the company computed as the cash value of $39,843.11, less
his investment in the contract of $25,000.
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Last modified: May 25, 2011