William Ivan Doty and Sandra Ann Doty - Page 3

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               Respondent determined that petitioner had $8,786 in                    
          additional pension and annuity income resulting in a deficiency             
          in the amount of $1,320 in petitioners’ 1998 Federal income tax.            
          This Court must decide whether petitioners must include in gross            
          income $8,786 in proceeds from the termination of life insurance            
          policies.                                                                   
               Some of the facts in this case have been stipulated and are            
          so found.  Petitioners resided in Kingston, Wisconsin, at the               
          time they filed their petition.                                             
               On October 8, 1998, petitioners sent a letter to                       
          Northwestern Mutual Life Insurance Company (Northwestern) to                
          request the termination of six life insurance policies.  Only               
          five of the six surrendered policies are at issue and all                   
          subsequent references are to the policies in issue.                         
               On October 15, 1998, Northwestern sent a letter to                     
          petitioner which stated that the cancellation of each of the five           
          life insurance policies would result in taxable gain to                     
          petitioners which Northwestern was required to report to the                
          Internal Revenue Service.  Northwestern’s letter also listed the            
          estimated taxable gain with respect to each of the five                     
          surrendered life insurance policies.                                        
               For the taxable year 1998, Northwestern issued to                      
          petitioners two Forms 1099 which reported gross distributions               
          totaling $19,241 and taxable distributions totaling $8,786 with             






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