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In 1998, a class action lawsuit was initiated against
Prudential for misleading its clients about the VAP policies.
Petitioner received a settlement in the amount of $6,974.16.
Prudential issued petitioner a Form 1099-R, Distributions
From Pensions, Annuities, Retirement or Profit-Sharing Plans,
IRAs, Insurance Contracts, etc., reporting the $6,974.16 payment.
Of this amount, $4,647.83 constitutes a return of petitioner's
premiums. The Form 1099-R indicates that the remaining $2,326.33
is a taxable amount.
Petitioner timely filed a Form 1040, U.S. Individual Income
Tax Return, for tax year 1999, claiming the standard deduction.
On his Schedule B, Interest and Ordinary Dividends, petitioner
reported $2,326.33 of interest from the Prudential settlement.
On that same schedule, petitioner subtracted the $2,326.33 from
the subtotal as an "adjustment".
Discussion
The Commissioner's determinations in the notice of
deficiency are presumed correct, and generally, taxpayers bear
the burden of proving that the Commissioner's determination of
income tax deficiencies is incorrect. Welch v. Helvering, 290
U.S. 111, 115 (1933). Section 7491 was added under the Internal
Revenue Service Restructuring & Reform Act of 1998, Pub. L. 105-
206, sec. 3001, 112 Stat. 685, 726. If certain requirements of
section 7491 are met, the burden of proof with respect to factual
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