                  T.C. Summary Opinion 2004-66



                     UNITED STATES TAX COURT



                  ROMAN G. SATKO, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12427-02S.            Filed May 14, 2004.


     Roman G. Satko, pro se.

     John W. Stevens, for respondent.



      DEAN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue.    The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined for 1999 a deficiency in petitioner’s

Federal income tax of $658.    The issue for decision is whether

$2,326.33 of interest distributed to petitioner from the

Prudential Life Insurance Company is taxable as income to

petitioner.

                              Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.    Petitioner

resided in Warren, Michigan, at the time the petition in this

case was filed.

     In 1985, petitioner purchased a "variable/appreciable

policy" (VAP) from the Prudential Life Insurance Company

(Prudential).   Petitioner believed it was an investment vehicle

through which he could fund his retirement.    At the time he

purchased the VAP, petitioner also had an existing life insurance

policy with Prudential.   Petitioner agreed to have the premiums

for the VAP paid through loans against the cash value of his

existing life insurance policy and from investment earnings

derived from the VAP.

     The VAP premiums, totaling $4,647.83, were paid by loans

taken from the cash value of the life insurance policy.    By 1987,

the cash value of the life insurance policy had been borrowed in

full.   Petitioner was unemployed and unable to pay the premiums

on the VAP which caused the policy to lapse.
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     In 1998, a class action lawsuit was initiated against

Prudential for misleading its clients about the VAP policies.

Petitioner received a settlement in the amount of $6,974.16.

     Prudential issued petitioner a Form 1099-R, Distributions

From Pensions, Annuities, Retirement or Profit-Sharing Plans,

IRAs, Insurance Contracts, etc., reporting the $6,974.16 payment.

Of this amount, $4,647.83 constitutes a return of petitioner's

premiums.   The Form 1099-R indicates that the remaining $2,326.33

is a taxable amount.

     Petitioner timely filed a Form 1040, U.S. Individual Income

Tax Return, for tax year 1999, claiming the standard deduction.

On his Schedule B, Interest and Ordinary Dividends, petitioner

reported $2,326.33 of interest from the Prudential settlement.

On that same schedule, petitioner subtracted the $2,326.33 from

the subtotal as an "adjustment".

                            Discussion

     The Commissioner's determinations in the notice of

deficiency are presumed correct, and generally, taxpayers bear

the burden of proving that the Commissioner's determination of

income tax deficiencies is incorrect.    Welch v. Helvering, 290

U.S. 111, 115 (1933).   Section 7491 was added under the Internal

Revenue Service Restructuring & Reform Act of 1998, Pub. L. 105-

206, sec. 3001, 112 Stat. 685, 726.    If certain requirements of

section 7491 are met, the burden of proof with respect to factual
                                 - 4 -

issues relevant to ascertaining the tax liability of the taxpayer

may shift to the Commissioner.    See Higbee v. Commissioner, 116

T.C. 438, 442-443 (2001).    Because the issue in this case is a

question of law, section 7491 is inapplicable, and the Court

decides the issue without regard to the burden of proof.

       In general, with exceptions not applicable here, any amount

which is received under a life insurance contract before the

annuity starting date and which is not received as an annuity is

included in gross income to the extent it exceeds the investment

in the contract.    Sec. 72(e)(1)(A), (5)(A), (C).   The investment

in the contract is defined generally as the aggregate amount of

premiums or other consideration paid for the contract less

aggregate amounts previously received under the contract, to the

extent they were excludable from gross income.    Sec. 72(e)(6).

       The insurance premiums petitioner paid for the policy were

returned to him through the settlement.    Petitioner does not deny

that the additional $2,326.33 is interest or that he received

such an amount.    Indeed, he refers to it as "relief interest".

       Petitioner contends that he paid $3,404.25 in interest on

the loans made against the cash value of his Prudential life

insurance policy, and that he incurred a loss of $1,077.92 on the

overall transaction.    He argues that since he sustained a loss on

the overall transaction, there cannot be any income attributed to

him.    The Court interprets petitioner's argument to be that if
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the distribution pertaining to the VAP policy is taxable, then

the interest incurred on the borrowed funds is investment

interest which should be netted against the interest income

petitioner received via the settlement.

     Section 163(a) generally allows as an interest deduction all

interest paid or accrued within the taxable year on indebtedness.

Section 163(d)(1), however, limits a noncorporate taxpayer's

deduction for investment interest to "the net investment income

of the taxpayer for the taxable year".    Furthermore, section

163(d)(2) allows the taxpayer to carry forward any investment

interest expense disallowed under the general limitation for the

taxable year and deduct it as an investment expense paid or

accrued in the succeeding taxable year to the extent that the

taxpayer has net investment income in that year.

     Section 163(d)(4)(A) defines "net investment income" as the

excess of investment income over investment expenses.    Investment

income includes interest, dividends, annuities, or royalties not

derived in the ordinary course of a trade or business.    Secs.

163(d)(5)(A)(i), 469(e)(1).

     Petitioner would have to have investment interest expenses

incurred in or carried forward to 1999 in order to have something

to offset against the interest income he received from the 1999

settlement.   A "Statement of Policy Loan" from Prudential to

petitioner shows that petitioner made an interest payment of
                                 - 6 -

$13.12 in 1986.   Petitioner did not make any other interest

payments until July of 2000 when unpaid interest of $4,904.69 was

paid.   Petitioner's inability to document any interest he paid on

the loans against his life insurance policy up to or during tax

year 1999 precludes a deduction for investment interest for 1999.

Furthermore, an interest deduction here would provide no benefit

for petitioner because it is less than the standard deduction

amount.   Greenspun v. Commissioner, 72 T.C. 931, 949 n.20 (1979),

affd. 670 F.2d 123 (9th Cir. 1982).

     Petitioner has not presented any evidence which would

demonstrate that the interest he received in the settlement is

not income to him.   Thus, respondent's determination is

sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
