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Petitioners filed a joint Federal income tax return for 2003
without reporting income from the policy. Petitioners never
received a Form 1099-R, Distributions from Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., from the insurance company.
Apparently, the insurance company obtained petitioner Mary
Dyer’s Social Security number from the firm’s bookkeeper, but it
never contacted petitioners directly about the situation. The
insurance company notified the IRS that petitioner Mary Dyer was
the recipient of the income referred to in its letter to the law
firm dated January 19, 2003. This resulted in an examination of
petitioners’ 2003 return. In a letter addressed to petitioners
dated May 3, 2006, respondent suggested that petitioners might
qualify to use a Form 8606, Nondeductible IRAs, to show their
cost basis in the “distribution” in question. The letter also
informed petitioners that respondent had contacted the insurance
company, which verified that it paid income to petitioners. In a
letter dated May 29, 2006, petitioner described to respondent his
version of the circumstances surrounding the purchase of the
insurance policy. In the letter, petitioner stated as follows:
There has never been any distribution and the
suggestion that we may qualify to use a Form 8606 to
show our cost basis troubles me because that would
apply to an annuity. * * * All the premiums were paid
by the business and were a business deduction by the
firm under the tax law at that time. The purpose of
the life insurance was solely to benefit the business.
* * * Northwestern [the insurance company] always
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Last modified: March 27, 2008