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the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined a deficiency in petitioners’ Federal
income tax for the year 2003 in the amount of $5,879, and an
accuracy-related penalty of $1,176 under section 6662. The
issues for decision are whether the distributions of the cash
value of a whole life insurance policy and interest in 2003 are
taxable to petitioners, and whether petitioners are liable for
the accuracy-related penalty under section 6662 arising from a
substantial understatement of tax for that year.
Background
The stipulation of facts and the attached exhibits are
incorporated herein by reference. At the time the petition was
filed, petitioners resided in Springfield, Missouri.
When Katherine Straus, petitioners’ daughter, was 3 years
old, petitioners purchased a whole life insurance policy (policy)
from Northwestern Mutual Life Insurance Company (Northwestern
Mutual) which insured Katherine. Petitioners were listed as the
sole owners on the policy. Annual premiums on the policy were
approximately $1,000. Petitioners purchased the policy for the
purpose of covering educational costs for Katherine if and when
she decided to pursue a college degree. Katherine graduated from
high school in 2000, and thereafter enrolled at Southwest
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