Seventh Circuit: Individual who borrowed against insurance policy is liable for income tax on its cancellation

September 11: The U.S. Court of Appeals for the Seventh Circuit today affirmed a decision of the Tax Court that the taxpayer was liable for an income tax deficiency when he failed to include in taxable income an amount realized on the cancellation of a $100,000 (whole-life) life insurance policy.

The taxpayer had borrowed against the policy’s cash surrender value to pay premiums, and the deficiency was the amount by which the policy’s cash value exceeded what the taxpayer had paid for the policy, net of additional insurance purchased with policy dividends and of dividends applied to pay premiums and repay policy loans. Brown v. Commissioner, No. 11-2508 (7th Cir. September 11, 2012)

Read a September 2012 report [PDF 153 KB] prepared by KPMG LLP.

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© 2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.