Robert Doggart V. Comm., TCS 2023-25
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Failure to Pay Premiums on Life Insurance Securing Loans Resulted In Taxable Income (Robert Doggart V. Comm., TCS 2023-25)
Before 2017, Robert Doggart took out a series of loans against two life insurance policies that he held with Prudential Insurance Co. The cash value of his policies served as collateral for the loans. While incarcerated, Mr. Doggart stopped paying premiums on the two policies. As a result, each policy lapsed and Prudential used the cash values of the policies to repay the loans plus interest due. Prudential subsequently issued Mr. Doggart Form 1099–R for 2017 with respect to each policy and reported taxable distributions from life insurance to the IRS of $13,214 and $5,366, calculated as the outstanding loan amount repaid by the cash value of the policy less the total premiums Mr. Doggart paid with respect to the policy. Mr. Doggart failed to file a 2017 tax return.
Constructive distribution occurred from termination of life insurance policy. A taxpayer can receive a constructive distribution from the termination of his life insurance policy, which must be included in gross income, even if the taxpayer does not physically receive cash or other property from the policy during the tax year (see Black v. Comm., TCM 2014-27; Brown v. Comm., TCM 2011-83.) A constructive distribution is included in gross income insofar as it exceeds the taxpayer’s investment in the life insurance contract (see Sanders v. Comm., TCM 2010-279.)