Tax — income tax — surrendered life insurance policies

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United States Court of Appeals For the Seventh Circuit

Civil

Tax — income tax — surrendered life insurance policies

The cash value of a surrendered life insurance policy is includable in gross income to the extent it exceeds the taxpayer’s investment in the insurance] contract, and is taxable as ordinary income.

When Brown’s policy was cancelled, its cash value was $37,365.06. What had he invested in the policy? That is, what was his cost (his ‘basis,’ in tax-speak)? Remember that he had paid a total of $44,205.00 in premiums but had received $35,933.24 from surrendering the additional insurance in 2004 and from using dividends to pay premiums and loans in 2004 and 2005. The difference of $8,271.76 was the net cost to him of the cash surrender value of the policy, and subtracting the $8,271.76 cost from that value resulted in taxable gross income of $29,093.30, just as the Tax Court ruled, even though Brown had received no cash because the cash value of the policy had been used to pay off the loans that he had gotten from the company to pay for his premiums. E.g. Feder v. Commissioner, No. 1628-10, 2012 WL 75114, at *4 (U.S. Tax Ct. Jan. 10, 2012); Sanders v. Commissioner, No. 3395-09, 2010 WL 5327897, at *2 (U.S. Tax Ct. Dec. 20, 2010); McGowen v. Commissioner, No. 14116-07, 2009 WL 4797538, at *4 (U.S. Tax Ct. Dec. 14, 2009), affirmed on other grounds, 438 Fed. Appx. 686 (10th Cir.”

Affirmed.

11-2508 Brown v. CIR

Appeal from the United States Tax Court, Posner, J.