The switch by many mutual insurers to stockholder ownership in recent years has provided a windfall to many policyholders. The IRS has long argued that insurance company shares received in demutualizations had zero basis. In 2009 the Federal Circuit upheld a Court of Claims decision (Fisher) against the IRS that allowed taxpayers to consider premiums paid as stock basis, reducing their gain when the stock is sold.
The IRS is now litigating the issue in another forum. We are informed that the IRS Office of Chief Counsel has authorized this letter to taxpayers claiming refunds based on the prior Claims Court decision:
Your protective claim for refund in the amount of $______________ for the year____________ is currently held in suspense by this office. As you may be aware, there was a recent decision concerning the basis of stock received in a demutualization, which was affirmed in an unpublished and non-precedential opinion. (Eugene A. Fisher, Trustee, Seymour P. Nagan Irrevocable Trust v. United States, 82 Fed.Cl. 780, 102 A.F.T.R.2d 2008-5608, 2008-2 USTC P 50,481, affirmed Fed. Cir. 2009-5001.) The United States is actively litigating the demutualization issue in another Court (Dorrance v. US, Civil Action No. 09-cv1284-PHX-ROS (D. Arizona)). Once the law on taxpayers' basis in stock received in a demutualization becomes well defined, we will act on your claim for refund. If you are not willing to wait for a final resolution of that issue, you can bring a refund suit after your claim has been pending for six months without the Internal Revenue Service taking action. See Page 2 of Publication 5. We would encourage you to wait until the issue is finally resolved. If it is determined that you are entitled to a refund, you will receive the refund plus interest.
So the demutualization battle continues, and shareholders of insurers like Principal, Prudential and Sun who have filed for refund claims will have to keep waiting.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
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