Joseph P. & Mary A. Dyer - Page 8




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               INFORMATION NEEDED                                                     
               Our records show that you issued a Form 1099-R to the                  
               Social Security Number (SSN) * * * for the tax year                    
               ending December 31, 2003 to Mary Dyer in the amount of                 
               $ 18,171.  Can you please verify the correctness of                    
               this amount?  Can you please provide a copy of the                     
               check issued to Mary Dyer for this amount?  This                       
               pertains to Policy Number * * * [the policy at issue].                 
               In another letter to petitioners dated May 23, 2007,                   
          respondent stated as follows:                                               
               Dear Mr. and Mrs. Dyer                                                 
                    We have been notified that the United States Tax                  
               Court has docketed this case.  It is to our mutual                     
               benefit to settle the case without a trial.  This                      
               pertains to the tax year ending December 31, 2003.                     
               This case is scheduled for trial in Tampa, Florida on                  
               October 1, 2007.                                                       
                    The Statutory Notice of Deficiency (SND) dated                    
               July 10, 2006 proposed an increase to taxable income                   
               for the failure to report the following income on your                 
               tax return:                                                            
                    Taxable annuity income issued in the Social                       
               Security Number (SSN) of Mrs. Dyer from the                            
               Northwestern Mutual Life Insurance Company in the                      
               amount of $ 18,171.  * * *                                             
                    Information received from Northwestern Mutual Life                
               Insurance Company regarding Policy Number * * *                        
               indicates this policy lapsed and the taxable amount was                
               $ 18,171.23.  I have enclosed a copy of this                           
               information.  Per Internal Revenue Code Section 72, if                 
               a loan is still outstanding when the life insurance                    
               policy is surrendered or allowed to lapse, the borrowed                
               amount becomes taxable at the time to the extent the                   
               loan value exceeds the owner’s basis in the contract,                  
               as if the borrowed amount was actually received at the                 
               time of surrender or lapse and used to pay off the                     
               loan.  * * *  Please secure a corrected written                        
               statement from them that would verify the corrected                    
               taxable income regarding this policy for tax year 2003.                







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