-7-
since the surrender of the policy is not deemed as a “sale or
exchange” as required for capital assets under section 1211.
Accordingly, we cannot accept petitioners’ reasoning that, as a
capital asset, the proceeds from the Northwestern Mutual
distribution should be excluded from their gross income.
Third, and finally, petitioners argue that had they known
that the Northwestern Mutual distribution would be included in
their 2003 gross income they would have certainly taken planning
steps to eliminate this result; namely, by making tax-free gifts
to Katherine. Petitioners argue that the Court should treat the
distributions now as if they did, in fact, do this and
accordingly, exclude the entire distribution from their gross
income, treat the entire distribution as transferred to their
daughter, and then allow either petitioners or their daughter to
pay tax on the distribution at Katherine’s applicable income tax
rate (approximately 10 percent). Simply put, there is no
authority under which we may provide such relief. Taxpayers are
bound to the form in which they cast their transaction.
Commissioner v. Natl. Alfalfa Dehydrating & Milling Co., 417 U.S.
134, 148-149 (1974). Accordingly, we sustain respondent’s
determination as to the amount in deficiency.
As to the second issue, whether petitioners are liable for
the accuracy-related penalty arising from a substantial
understatement of tax under section 6662, we start our discussion
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