Some policyholders received stock from their insurance company when the company converted from a mutual form of ownership to a stock insurance corporation. In the past, the IRS has said that such shares had a cost basis of zero. Several Federal court cases have been working their way through the court system disputing the IRS position.
The most recent court decision was handed down 10/9/2009 and was quite favorable to the taxpayer.
The U.S. Court of Appeals issued a ruling in a case brought on behalf of taxpayer Seymour Nagan Irrevocable Trust (who will now be famous in the tax accounting world.) The Court found that the ownership rights in the demutualized shares should in theory receive an allocation of basis from the insurance policy.
However, considering the particular facts and circumstances of demutualization, the Court ruled that the value of the ownership rights was not discernible apart from the value of the insurance policy and therefore an allocation of basis cannot be made currently. Therefore, the "open transaction" method applies and the sales proceeds of the demutualization stock are treated as a return of capital up to the amount of cost basis in the insurance policy as a whole. Only amounts received in excess of the combined cost basis (an unlikely event) are taxable as capital gain.
The combined cost basis in the insurance policy plus the ownership rights to demutualization shares is the cumulative premiums paid less any dividends received.
This ruling is far better than the interim Court rulings that the initial public offering price would be the cost basis of the shares. The Court has essentially declared a complete victory for the taxpayer. Instead of the IRS position that all of the sales proceeds are capital gain, the Court basically ruled that none of the proceeds are taxable. Hurray!
To report the sale of demutualization shares on your Form 1040 Schedule D Capital Gains and Losses, just report the net amount of sales proceeds as your cost basis and declare a capital gain of zero. Your new cost basis in the insurance policy is the cumulative premiums you paid less any dividends received less the return of capital in the amount of the net sales proceeds for the demutualization shares.
This case was originally pursued by a Minnesota accountant, Charles Ulrich, CPA, in the spirit of public service. He just thought the IRS position was unjust to taxpayers.
The Investor Relations websites of some of the demutualized insurance companies may provide further information. However, at the time this page was updated, none of the websites we checked had revised their tax information to reflect the Court case above.
The IPO (initial public offering) prices for various demutualized companies were as follows: AmerUs Life (received Amerus Group Co shares, bought by Aviva).....................$26.00 Anthem Insurance Companies........................................................................$36.00 John Hancock (later acquired by Manulife).....................................................$17.00 MetLife......................................................................................................$14.25 Phoenix Home Life Mutual Insurance............................................................ $17.50 Prudential..................................................................................................$27.50 Indianapolis Life (received Amerus Group Co shares, bought by Aviva)..............$35.63 State Mutual Life Assurance Co (received Allmerica Financial Corp shares)...... $21.00
Your holding period (date of purchase) for the shares would be the date you originally started paying insurance premiums to the company.
The largest life insurance companies that have demutualized include the following firms:
A resource which explains how to file an amended return for refund of capital gain taxes (if you already sold the shares and declared a tax basis of zero or the IPO price) can be found at: www.kiplinger.com/letterlinks/demutualization
If you need assistance filing a refund claim, the following resource may be helpful: www.demutualization.biz
