-6-
purchased on Katherine’s life and not, as petitioners contend,
“in her name.” Accordingly, and even though it was petitioners’
intent to use the policy for Katherine’s education, it does not
follow that the policy was akin to a custodial account. Whole
life insurance and custodial accounts are distinct and separate
investment devices, and one cannot be the other.
Second, petitioners argue that the Northwestern Mutual
distribution should be treated as a long-term capital gain and
were this treatment to apply, petitioners’ carryover loss in 2003
($27,703) would more than offset the taxable portion of the
distribution ($19,204). As to this argument, petitioners rely on
the reasoning that life insurance falls within the definition of
a capital asset.
When a life insurance policy, such as the one at issue, is
not a straight-term policy, it will generally have a cash
surrender value. If the policy owner surrenders the policy, the
holder will then pay the cash surrender value in accordance with
policy terms, after withholding for any outstanding loans against
the policy at the time of surrender. Under section 1.72-
11(d)(1), Income Tax Regs., if the amount received by the holder
is greater than the holder’s basis in the policy, the owner will
recognize income in the amount of the difference. This income
will then be treated as ordinary income, irrespective of the
rather inclusive notion of what qualifies as a capital asset,
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: November 10, 2007