Steven H. and Anna J. Jensen - Page 4

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          beneficiary.3  During the year in issue, petitioners wholly owned           
          the policy.                                                                 
               Sometime in 2000, petitioners surrendered the policy and               
          received a total distribution in the amount of $33,850.  For the            
          taxable year 2000, Transamerica Occidental Life Insurance Co.               
          (Transamerica)4 sent petitioners a Form 1099-R, Distributions               
          From Pensions, Annuities, Retirement or Profit-Sharing Plans,               
          IRAs, Insurance Contracts, etc., reporting a gross distribution             
          of $33,850 and a taxable distribution of $12,213.  Petitioners              
          disputed the computation by Transamerica of the taxable gain and            
          requested the company to reexamine the amount of premiums paid              
          towards the policy.   Transamerica recalculated the cost basis of           
          the policy and sent petitioners a letter explaining the cost                
          basis determination as follows:                                             
               The total dividends earned over the life of the policy                 
               are deducted from the total premiums [$50,570.50] to                   
               arrive at the cost basis.  The total dividends were                    
               $26,481.00.  So, the net cost is $24,089.50.                           
          Transamerica then issued to petitioners a corrected Form 1099-R             
          for 2000 reporting the following:                                           




               3  A complete copy of the policy is not in the record, but             
          the evidence indicates that the policy provided for annual                  
          dividends, premiums payable during life of insured, and face                
          amount payable at death of insured.                                         
               4  At some point in time, Occidental Life Insurance Co. of             
          California merged with Transamerica Life Insurance Co.                      




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