Over the past few years many of the nation's oldest and largest life insurance companies - including Prudential, John Hancock, MetLife, Principal, Mutual of New York – which began as mutual insurance companies have “demutualized”. This is converting from a mutual life insurance company owned by its policyholders to a publicly traded stock company owned by shareholders. In the process of demutualization qualified policyholders receive shares of stock in the converted public company. The policyholders can keep the shares, receiving annual dividends from the stock, or sell them on the open market.
The official IRS position is that the policyholder’s cost basis in the shares of stock it has received as a result of demutualization is “0”. If the policyholder sells the shares the gross proceeds are fully taxed as a capital gain.
The holding period for determining long-term capital gain treatment is the period of time that the taxpayer has held the underlying policy and not the period of time that the taxpayer has held the actual shares. If a company demutualized in January of 2005 and the policyholder sold the shares in October of 2005, but had purchased the qualifying insurance policy in March of 1990, then the holding period is March 1990 to October 2005. In most cases the sale of shares received in demutualization result in a long-term capital gain.
The official IRS position is that the policyholder’s cost basis in the shares of stock it has received as a result of demutualization is “0”. If the policyholder sells the shares the gross proceeds are fully taxed as a capital gain.
The holding period for determining long-term capital gain treatment is the period of time that the taxpayer has held the underlying policy and not the period of time that the taxpayer has held the actual shares. If a company demutualized in January of 2005 and the policyholder sold the shares in October of 2005, but had purchased the qualifying insurance policy in March of 1990, then the holding period is March 1990 to October 2005. In most cases the sale of shares received in demutualization result in a long-term capital gain.
.
The United States Court of Federal Claims in Eugene A. Fisher et al. v. United States has ruled that a taxpayer recognizes no gain from the demutualization of a mutual insurance company. The basis of “demutualized” shares is not “0”, as the IRS claimed, and we tax preparers had reported on sales of such shares over the years. A basis is allowed against demutualization proceeds.
.
According to the Court decision the basis of the shares in the insurance company received in demutualization is equal to the value of the shares on the date of the demutualization, up to a maximum equal to the total of the premiums the taxpayer had paid for the insurance policy up to the point of the demutualization.
.
In its decision the court cited Burnet v Logan and the “open transactions” exception to Regulation 1.61-6.
.
Thanks to former NATP Research Department head David Mellem of Ashwaubenon Tax Professionals for an analysis of the decision. Dave provides tax professionals with frequent email updates on federal tax law and tax court decisions.
.
FYI the IRS Chief Counsel told us at yesterday's IRS Forum in NYC that the US Solicitor General has not yet decided if it will appeal the decision, and that his office is in the process of deciding on its recommendation in the matter.
.
What I plan to do once I have gotten “caught up” is to go through my files of completed returns for 2005 through 2007 and pull out all those on which I reported a sale of demutualized shares. I will need to prepare amended 1040X returns for all of them to, I expect, report a cost basis equal to the number of shares sold multiplied by the value of a share on the date of demutualization. Just where I will get these values I am not quite sure. I must do more research before I can start the 1040Xs – but it will be at least a month before I am anywhere near “caught up”.
.
If you had sold shares in 2005, 2006 or 2007 in an insurance company that you received as a result of demutualization you should contact your tax professional and ask him to prepare the appropriate Form 1040X.
.
You may be entitled to money from a demutualization that occurred in past years. If the insurance company cannot locate a policyholder to send them their shares it is required to turn the shares over to the State under local unclaimed property laws. This happened with my uncle, who had passed away. My father, as beneficiary, ended up with over $4,500 in "found money" (check out my posts “How I Made Over $4,500 By Watching Good Morning America” Part One and Part Two)!
You may be entitled to money from a demutualization that occurred in past years. If the insurance company cannot locate a policyholder to send them their shares it is required to turn the shares over to the State under local unclaimed property laws. This happened with my uncle, who had passed away. My father, as beneficiary, ended up with over $4,500 in "found money" (check out my posts “How I Made Over $4,500 By Watching Good Morning America” Part One and Part Two)!
.
You can go to the Unclaimed Property website of your individual state or you can check out these web sites (one, two, and three), which you can use to inquire about the status of a policy or your ownership rights, or any other questions you may have about demutualization.
You can go to the Unclaimed Property website of your individual state or you can check out these web sites (one, two, and three), which you can use to inquire about the status of a policy or your ownership rights, or any other questions you may have about demutualization.
I will post more on this topic as information becomes available or my research progresses.
.
TTFN
TTFN
1 comment:
Thank you so much for this post. I'm doing a 2010 tax return for a mom's friend, and she sold stock she received from a demutualization. Your post was extremely helpfull.
Post a Comment