David Byron Fugler & Cindy Diane Fugler
27150-21
| Tax Ct. | Nov 17, 2025|
Check Treatment|
Docket
United States Tax Court
T.C. Summary Opinion 2025-10
DAVID BYRON FUGLER AND CINDY DIANE FUGLER,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 27150-21S. Filed November 17, 2025.
—————
David B. Fugler and Cindy D. Fugler, pro sese.
Peter N. Tran, Jeffrey Phillips, and Yvette Nunez, for respondent.
SUMMARY OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 1 of the Internal Revenue Code in effect
when the Petition was filed. Pursuant to section 7463(b), the decision
to be entered is not reviewable by any other court, and this Opinion shall
not be treated as precedent for any other case.
In a Notice of Deficiency (Notice) dated May 24, 2021, respondent
determined a deficiency in petitioners’ 2018 federal income tax and a
section 6662(a) accuracy-related penalty for that year.
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, and Rule references are to
the Tax Court Rules of Practice and Procedure.
Served 11/17/25
2
Background
Some of the facts have been stipulated and are so found. When
the Petition was filed, petitioners lived in Texas. David Fugler
(petitioner) is an attorney with more than 25 years of experience.
Petitioners are married to each other and have several children.
They timely filed a joint 2018 federal income tax return. As relevant
here, there is no income from Massachusetts Mutual Life Insurance Co.
(Mass Mutual) reported on that return.
On December 14, 1987, petitioner applied for and purchased a
whole life insurance policy from Mass Mutual insuring one of
petitioners’ children. On that date, Mass Mutual issued Policy No. 1 2
with a face amount of $16,394 with respect to that child. Petitioner was
the owner and beneficiary of Policy No. 1. He paid $2,500 for Policy
No. 1, of which $150 was the cost of the initial premium and $2,350 was
the cost of the Additional Life Insurance Rider. Annual premiums of
$150 were payable to Mass Mutual for Policy No. 1 until the child’s 65th
birthday or to the date of the child’s death, whichever occurred first.
Also in December 1987, petitioner applied for and purchased a
whole life insurance policy from Mass Mutual insuring another one of
his children. On December 28, 1987, Mass Mutual Issued Policy No. 2
with a face amount of $18,692 with respect to that child. Petitioner was
the owner and beneficiary of Policy No. 2. He paid $2,500 for Policy
No. 2, of which $150 was the cost of the initial premium and $2,350 was
the cost of the Additional Life Insurance Rider. Annual premiums of
$150 were payable to Mass Mutual for Policy No. 2 until that child
attained age 65 or to the date of the child’s death, whichever occurred
first.
From 1988 through 2006, petitioner paid $150 in annual
premiums for each policy.
Policy Nos. 1 and 2 allowed for borrowing against each policy for
a maximum amount equal to the policy’s cash surrender value. Interest
was chargeable on the loans and payable on the policies’ annual
anniversary date; loans were subject to a flexible interest rate charge
2 We use Policy No. 1 and Policy No. 2 to refer to the policies in this Opinion.
Those are not the actual numbers of the policies.
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not to exceed 8% per year. Any unpaid interest was added to the loan
balance and subject to interest at the rate payable on the loan.
On August 29, 2006, petitioner borrowed $10,500 from Policy
No. 1 and $11,000 from Policy No. 2.
From 2007 through 2016, 3 petitioner did not pay annual
premiums on either of the policies out of his own pocket. Instead he
borrowed from Policy Nos. 1 and 2 to cover the annual premiums for the
policies. Interest on the borrowed premiums was added to the loan
balance on each policy.
On February 14, 2018, the policies had the following loan
balances:
Policy No. 1 Policy No. 2
Initial Loan (2006) $10,500 $11,000
Premiums Paid by Loan 1,500 1,500
(2006–17)
Capitalized Interest 7,125 7,448
(2006–16)
Uncapitalized Interest 720 751
(2017)
Total Loan Balance $19,845 $20,699
(2018)
Policy Nos. 1 and 2 could be surrendered for their cash surrender
values at any time before the insureds’ death. The cash surrender
values of the policies increased over time as accumulated dividends built
up within the policies but were reduced by the amounts of outstanding
policy debt set out in the table above.
In January 2018 petitioner notified Mass Mutual of his intent to
terminate both policies. On January 18, 2018, Mass Mutual
acknowledged petitioner’s decision and requested that he submit
surrender forms to finalize the terminations. Mass Mutual further
3 In 2016 the 2017 premium for the policies was paid via loan.
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advised petitioner that surrendering the policies could result in taxable
income.
On or about January 29, 2018, petitioner sent Mass Mutual the
necessary surrender forms for both policies. Mass Mutual processed the
forms and terminated the policies on February 14, 2018. It also issued
two checks to petitioner, one for $3,033, representing the cash surrender
value of Policy No. 1, and the other for $2,729, representing the cash
surrender value of Policy No. 2.
Mass Mutual issued Form 1099–R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance
Contracts, etc., for each policy. The Forms 1099–R show the following:
Policy No. 1 Policy No. 2
Gross distribution $22,878 $23,428
Taxable Amount 16,028 16,578
Insurance Premiums 6,850 6,850
For Policy No. 1, the gross distribution of $22,878 represents the
$3,033 cash paid to petitioner plus the $19,845 outstanding policy loan
balance. For Policy No. 2, the gross distribution of $23,428 represents
the $2,729 cash paid to petitioner plus the $20,699 outstanding policy
loan balance.
The taxable amount for each policy is the gross distribution
reduced by the $6,850 of policy premiums paid (or deemed paid for the
policy via loan).
In the Notice respondent increased petitioners’ income by the
taxable amounts shown in the Forms 1099–R, which income was not
included on petitioners’ return. Other adjustments/determinations
made in the Notice have been resolved between the parties or are
computational and will not be discussed further. Respondent now
concedes that petitioner Cindy Diane Fugler is entitled to relief under
the provisions of section 6015(b) for any income tax liability resulting
from determinations made in the Notice.
The issues for decision are whether (1) distributions from Policy
Nos. 1 and 2 are includible in petitioners’ 2018 income, (2) petitioners
are entitled to a deduction for interest expenses paid on policy loans on
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those life insurance policies, and (3) petitioner is entitled to equitable
relief under section 6015(f).
Discussion
The Commissioner’s determinations in a Notice of Deficiency are
generally presumed correct, and the taxpayer bears the burden of proof
to establish error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Petitioners do not argue that respondent bears any burden of
proof with respect to the issues before us, and we find that he does not.
Section 61(a) defines gross income to include income “from
whatever source derived,” including “[i]ncome from life insurance and
endowment contracts.” I.R.C. § 61(a)(9). Section 72(a)(1) further
provides that gross income includes any amount received under an
annuity, endowment, or life insurance contract. Amounts received from
a nonannuity life insurance contract are included in gross income to the
extent that those amounts exceed the investment in the contract. See
I.R.C. § 72(e)(1)(A), (3).
A loan against a life insurance policy’s cash value (a policy loan)
is a loan from the insurance company to the policyholder. See Brown v.
Commissioner, T.C. Memo. 2011-83,101 T.C.M. (CCH) 1374, 1376
, aff’d,693 F.3d 765
(7th Cir. 2012). Because policy loans are treated as loans, they are not taxable distributions to the distributee when the funds are received. See Minnis v. Commissioner,71 T.C. 1049, 1057
(1979); Mallory v. Commissioner,T.C. Memo. 2016-110
, at *8–9.
A taxpayer constructively receives proceeds from a terminated
life insurance policy to the extent that existing policy loans are satisfied
with the policy’s available proceeds. See Mallory, T.C. Memo. 2016-110,
at *9–10.
In 2006 petitioners took out loans against Policy Nos. 1 and 2, and
received the loan amounts of $10,500 and $11,000, respectively. When
petitioner terminated the policies on February 14, 2018, petitioners
constructively received proceeds in the amount of the outstanding policy
loan balances (which were completely satisfied) in addition to receiving
a check for the remaining balance of each policy.
The proceeds that petitioners actually received (the checks) as
well as the proceeds that petitioners constructively received (the
amounts used to satisfy the outstanding policy loan balances) represent
taxable income to petitioners in 2018 to the extent that the proceeds
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exceeded the premiums paid. See I.R.C. § 61(a)(9), (11); see also Mallory,
T.C. Memo. 2016-110, at *9–10.
In addition to their unclear reasons why the above analysis,
which is consistent with respondent’s position, is erroneous, petitioners
also argue that if the termination of the loans resulted in taxable
income, the income is includible for 2017, not 2018. As petitioners view
the matter, the “effective date” provision in the policies shows that the
termination of the policies was deemed to be effective in 2017. 4 The
policies were terminated on February 14, 2018, and the loan balances
were paid off and checks were cut on that day. Because petitioners
requested termination of the policies in January 2018 and received the
proceeds in February 2018, the resultant income from the terminations
is includible in their 2018 income (regardless of their method of
accounting). See I.R.C. § 451(b)(1)(C).
Next we consider petitioners’ claim for an interest expense
deduction made after the Notice was issued. We begin by noting, as we
have done in opinions too numerous to count, that deductions are
matters of legislative grace, and the burden is on the taxpayer to clearly
show the right to the claimed deduction. See Rule 142(a); INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
According to petitioners, the proceeds of the policy loans were
used in connection with petitioner’s trade or business of mining and
logging. According to respondent, the interest is properly treated as
nondeductible personal interest.
Section 163(a) provides a general rule that “[t]here shall be
allowed as a deduction all interest paid or accrued within the taxable
year on indebtedness.” However, section 163(h) disallows a deduction
for personal interest paid or accrued during the taxable year.
Section 163(h)(2) defines personal interest as any interest other than
4 Although petitioners’ method of accounting has not been expressly addressed,
they have not shown that the terms of the contracts, which made the “effective date”
of the surrender December 2017, would make the income received from the policies
attributable to 2017 under any method of accounting. The “effective date” provision
might be important for certain terms of the policies between petitioner and Mass
Mutual, but petitioners have failed to show that the “effective date” provision affects
the timing of the income at issue in this case.
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(A) interest paid or accrued on indebtedness
properly allocable to a trade or business (other than the
trade or business of performing services as an employee),
(B) any investment interest (within the meaning of
subsection (d)),
(C) any interest which is taken into account under
section 469 in computing income or loss from a passive
activity of the taxpayer,
(D) any qualified residence interest (within the
meaning of paragraph (3)),
(E) any interest payable under section 6601 on any
unpaid portion of the tax imposed by section 2001 for the
period during which an extension of time for payment of
such tax is in effect under section 6163, and
(F) any interest allowable as a deduction under
section 221 (relating to interest on educational loans).
While we agree with petitioners that interest “paid or accrued on
indebtedness properly allocable to a trade or business” is not treated as
personal interest, other than petitioner’s vague testimony on the point,
they have offered no evidence to show (1) that petitioner was engaged in
a mining and logging trade or business during 2018, or if so, (2) that the
loan proceeds were actually used in any such trade or business.
Petitioners have failed to show that interest paid on the policy
loans is other than personal interest, and their claim for such a
deduction is rejected.
Lastly we consider petitioners claim that petitioner is entitled to
section 6015(f) equitable relief from any income liability resulting from
the termination of the loan polices. As noted, respondent now concedes
that Cindy Diane Fugler is entitled to section 6015(b) relief from any
liability resulting from determinations made in the Notice, and
petitioners do not challenge that concession. Nevertheless, petitioners
argue that the Court has the authority to grant petitioner relief from the
federal income tax consequences resulting from the termination of the
life insurance loans. We disagree.
Aside from petitioners’ failure to show that any of the factors that
are taken into account in deciding whether a spouse is entitled to section
6015(f) relief apply to petitioner, it would seem to offend common sense
to allow both spouses section 6015 relief with respect to the same income
tax liability. As we have previously noted, section 6015 relief is
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generally available to only one spouse for a single tax year, see Abelein
v. Commissioner, T.C. Memo. 2004-274,88 T.C.M. (CCH) 549, 559
(“The
purpose of section 6015 is to protect one spouse from the overreaching
or dishonesty of the other spouse.”), and in this case it is not petitioner.
To reflect the foregoing,
Decision will be entered under Rule 155.