Insurance Co Demutualizations

Today TaxMama hears from Richard in the TaxQuips Forum who is well-informed about his issue. “I received stock when John Hancock Life was merged or purchased by Manulife Insurance Company several years ago. It went from a Mutual Insurance company  to a Stock Insurance Company. Originally the IRS said that all of the income from the sale of the Stock was taxable. However a Court decision on a lawsuit that was filed by one of the Stockholders, overturned the IRS ruling. Is this still the case? This was covered in a Kiplinger letter a year or so ago. Another source, said the Stock was taxable; less the premiums that was paid on the Life Insurance Policy up until the date of sale. I’ll appreciate your advice.”

Dear Richard,

 I remember this situation well. Brings back some interestingly painful memories. Ask me about it someday. 

 Roger McEowen at the Iowa State University Center for Agricultural Law and Taxation wrote an excellent analysis of this situation, updated as recently as October 2009.  

You’re right. At first, IRS said these stocks have no basis. Then the Fisher case was brought to the Federal Claims Court, who said, there is a basis. The question is – how much of a basis. That decision was left up to the U.S. Court of Appeals for the Federal Circuit.  They have issued a ruling on how much basis to assign to the stock.

 The Federal Claims Court  on Treas. Reg. §1.61-6(a) which specifies that when part of a larger property is sold, the cost basis of the entire property is to be equally apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost basis allocated to the part that is sold.

 In plan English?

1)      Track down the details, prepare a schedule listing all the premiums you have paid.

2)      Compute the value of the stock at the time you received it – total shares x opening stock price.

3)      Subtract the stock price from the premiums you have paid.

4)      The difference is your gain or loss.

The plaintiff in Fisher had a cost basis in the insurance policy (as determined by the amount of premiums that had been paid) that exceeded the value of stock received in the demutualization resulting in zero tax liability. 

It’s quite possible that you can use the same concept with respect to your stock sales.

If you have never sold any of these shares before, you’re in an excellent position.

Read this report in depth. It does contain a brief summary of the John Hancock demutualization.

There is also a list of all the companies affected, with a brief summary on each.

And remember, you can find answers to all kinds of questions about the value of your demutualized insurance policy, and other tax issues, free. Where? Where else? At

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