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Missouri State University. At the time of Katherine’s
graduation, the cash surrender value of the policy was $27,097.
Petitioners received two loans on the policy in 2001. The
first loan, for $5,000, was received on April 5, 2001. The
second loan, also for $5,000, was received on December 11, 2001.
Both loans carried an interest rate of approximately 8 percent.
Sometime in 2003, and precipitated by a downturn in
petitioners’ business income caused by post-9/11 factors,
petitioners decided to cash out the policy so as to pay
Katherine’s current school expenses and set aside funds for the
remainder of her college education.
Northwestern Mutual reported to respondent a gross
distribution to petitioners in 2003 in the amount of $23,153,
with the taxable portion of that amount being $19,204. In
addition to this distribution, Merrill Lynch and Commerce Bank
reported interest distributions in 2003 to petitioners in the
amounts of $25 and $17, respectively. Petitioners reported
neither the Merrill Lynch nor the Commerce Bank distribution on
their 2003 return. After the Commissioner adjusted petitioners’
income to reflect receipt of these distributions, petitioners’
income was increased to a point where they no longer qualified to
take a Tuition and Fees Deduction in the amount of $3,000. The
combination of these circumstances resulted in the deficiency at
issue.
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Last modified: November 10, 2007