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Has Your Mutual Insurance Company Gone Public? You Could Get a Tax Refund on Stock Gains

Mutual life insurance companies are owned solely by their policyholders, who have similar rights—other than the ability to sell the stock—to stockholders in a publicly traded company.

Since the mid-1990s, many mutual insurance companies have been undergoing demutualization, a process of converting from a policyholder ownership structure to a publicly traded stock company owned by its shareholders. When a company demutualizes, a policyholder's interest is converted into shares of stock, which are subject to capital gains tax if sold at a gain.

 

What is the tax basis of the stock?

The IRS has held that stock received through demutualization has a zero tax basis, i.e., all premium payments were for the insurance and not for the stock.

 

The IRS bases its position on old revenue rulings on the reorganization of insurance companies (Rev. Ruls. 71-233 and 74-277). This position is being challenged in the tax courts (Fischer v. U.S., U.S. Ct. of Fed Claims, 11/15/2006). The taxpayer maintains that he has basis because a portion of his life insurance premium was paid for voting and liquidation rights in the mutual policy.

 

If the tax court rules against the IRS, the taxpayer could have a basis equal to the voting and liquation ownership rights forfeited in exchange for the stock received, resulting in smaller capital gains.

 

File a protective claim now

This is a good time for taxpayers with significant stock gains from demutualization to file protective claims. These claims must be filed within the three-year statute of limitations from the date of filing the return reporting any gain on the sale of shares received during demutualization.

If you have any questions, please contact Alex Winkworth at 312-980-3251 or Michael Calahan at 312-980-2996 for more information.
 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.