Wednesday, April 13, 2011
In 2005, Bruce Brown held a life insurance contract with Northwestern Mutual Life Insurance Company. On December 18, 2005, Northwestern terminated the contract, using its entire cash value of $37,365.06 to pay policy debt. Petitioners (the Browns) did not report any gain or loss on their 2005 federal income tax return from the termination of the life insurance contract.
In a notice dated December 24, 2007, respondent (the IRS) determined a deficiency in tax of $8,553 for tax year 2005. The deficiency was the result of the IRS’s determination that Mr. Brown recognized a taxable gain of $29,093.30 on termination of the Northwestern contract. The IRS also determined that the Browns were liable for a penalty of $1,711 under § 6662. The Browns dispute those determinations. ...
Bruce Brown is a commercial litigation attorney who has been licensed since 1973. His wife, Carol Anfinson Brown, is also an attorney. She has a master of laws degree (LL.M.) in taxation. ...
Northwestern sent Mr. Brown a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Form 1099-R showed a gross distribution of $37,365.06 and a taxable amount of $29,093.30. ... According to Northwestern’s calculations, the $29,093.30 taxable amount was equal to the policy’s cash value of $37,365.06 minus what it called “net cost” of $8,271.76. ... [W]e agree with the IRS that the Browns were required to include $29,093.30 in gross income from the termination of the Northwestern life insurance contract. ...[T]he Browns’ experience, knowledge, and education weigh against them: both are licensed attorneys, and one has a master of laws degree (LL.M.) in taxation. In short, the Browns have failed to show that they had reasonable cause for and acted in good faith regarding the underpayment. We therefore find that the IRS correctly determined that the Browns are liable for the substantial understatement penalty under § 6662(a).
(Hat Tip: Bob Kamman.)
Update: Tax Update Blog, The Perils of Too Much Education