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liability for repayment of the loans, and when he surrendered the
policy, the outstanding loan debt (including interest) was
charged against the available proceeds in the policy’s
accumulated value. This satisfaction of the policy loans was in
effect a pro tanto payment of the policy proceeds to petitioners
and constituted income to them. See Minnis v. Commissioner, 71
T.C. 1049, 1056 (1979).
In the alternative, petitioners argue that taxable gain is
calculated using the cash value rather than the accumulated
value. In support of this contention, petitioners rely on the
use of the term “cash value” in section 72(e)(3)(A) regarding the
allocation of amounts to income and investment. Section
72(e)(3)(A) provides, in part:
(3) Allocation of amounts to income and
investment.--For purposes of paragraph (2)(B)--
(A) Allocation to income.--Any amount to
which this subsection applies shall be
treated as allocable to income on the
contract to the extent that such amount does
not exceed the excess (if any) of--
(i) the cash value of the
contract (determined without regard
to any surrender charge)
immediately before the amount is
received, over
(ii) the investment in the
contract at such time. [Emphasis
added.]
Petitioners’ reliance is misplaced.
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