Court Ruling: Insurance Company - Demutualization - Cost Basis

When mutual insurance companies (where policy owners are the owners of the companies) first began to demutualze (change to companies owned by stockholders who may not be policy owners), the IRS held that a shareholder's basis in the stock received for his ownership interest was zero.

Thus, if you held such shares and sold them for, say $300, the entire amount would be long-term capital gain.

In a recent Court of Federal Claims case (Eugene A. Fisher, et al) the Court applied the open transaction doctrine, finding the value of the ownership rights was not discernible and the amount received by the taxpayer being less than its cost basis in the insurance policy as a whole, the Court found the taxpayer did not realize any income from the sale.

Basically, under this approach no income is recognized until the proceeds from the stock sales exceed the taxpayer's basis in the insurance policy.

Note, many taxpayers are likely to be affected by this ruling.More than likely the IRS will announce that it will not agree with the decision or will abide by it and issue a procedure for claiming a refund.Some taxpayers approaching the deadline for filing a claim may wish to do so.

A/N Group Inc.