Posts Tagged ‘demutualization’

Value Determined in Demutualization Case

March 28, 2013

The demutualization saga continues to play out. These cases involve holders of insurance policies issued by mutual insurance companies that convert to business corporations (a transaction known as demutualization). Mutual insurance companies are owned by their policyholders, who therefore receive shares of stock in a demutualization. A number of taxpayers have challenged the IRS position that these shares have zero basis, asserting that a portion of the premiums paid on the insurance policies should be allocated to basis of the shares. We previously reported on the Dorrance case, in which the court determined that a factual determination would be required to allocate premium payments to basis. The court has now published its determination that the basis of the shares was over $1,000,000, which was roughly half the price at which the shares received in the demutualization were sold.

The IRS does not agree with the result in the Dorrance case, and litigation over this issue continues. Taxpayers who sold shares received in a demutualization in years that are still open under the statute of limitations should consider filing protective claims. Under the general rule the oldest year still open is 2009, and that year closes on April 15, 2013, the third anniversary of the due date for income tax returns for that year.

Another Demutualization Case

January 23, 2013

In recent years, many mutual insurance companies, which are owned by their policy holders, have converted to corporations owned by stockholders. In the conversion process, known as demutualization, these companies issued shares of stock to their policyholders. The IRS has taken the position that these shares of stock had zero basis. According to that view, when the shares are sold, the entire proceeds must be reported as capital gain. Some taxpayers have challenged that view, arguing that they acquired these shares as a result of paying insurance premiums, so a portion of the insurance premiums should be considered basis for the shares. Last week, a United States District Court ruling in the Central District of California, Timothy D. Reuben v. United States, disagreed with other courts that have considered the question and held in favor of the IRS, finding that the shares had zero basis.

The courts have now taken three distinct approaches to this issue. The Fisher case applied the open transaction doctrine, so that no gain would be recognized on a sale of the shares. The Dorrance case refused to apply the open transaction doctrine but found that the shares have basis. The Reuben case completes the sandwich, finding that the shares have zero basis.

Demutualization Soup: Another Ruling

July 25, 2012
By Kaye A. Thomas

Nearly four years after the first ruling in a demutualization case we have another one—and it’s inconsistent with the first one. At issue is the proper treatment of taxpayers who receive shares of stock when a mutual insurance company that issued policies to them converts into a regular corporation. The IRS has long taken the position that these shares have zero basis, so that when they are sold, the entire proceeds must be reported as capital gain. The Court of Federal Claims rejected that position in 2008, and in addition found that the open transaction doctrine applied, so that the selling shareholders would report zero gain on the sale.


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