Did You Receive Stock in an Insurance Demutualization?

You may be eligible for a capital gains tax refund, but time is running out

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

Between 1986 and 2005, at least 34 insurance companies “demutualized.” Prior to the demutualization, these companies were known as mutual companies, which meant that the company was owned by the policyholders. As a part of the demutualization, policyholders received stock in the newly formed corporation. The value of this stock in most cases is not insignificant. For example, one Met Life policyholder with a $17,000 whole life policy received 239 shares of stock in the newly formed company. Today those shares are worth approximately $15,000. A list of companies who have demutualized is included at the end of this article.


The IRS has taken the position that shareholders have a zero basis (cost) in this stock, meaning that the entire proceeds from the sale of the stock is a taxable gain. In a lawsuit filed in the Federal Court this position was rejected. A trial has been set to determine what basis stockholders have in the stock received. If successful, the basis of the stock is likely to be treated as a return of premiums. Any decision by the courts is likely to be appealed. Of course, this will take time.


If you sold this stock and paid tax on the proceeds, the statute of limitations is running on you. If you sold the stock prior to 2003, the statue has run out and you will be unable to get a refund of overpaid taxes. If you sold stock in 2003, 2004, 2005, or 2006 the statute of limitations is still open. This means that you can potentially receive a refund of overpaid taxes due to the IRS position. However, it is unlikely that the issue will be settled in the courts anytime in the near future. You can take action to preserve your right to a refund, however.


If you do not take action now, you may lose your right to a refund if you sold your stock since 2003. In order to preserve your rights, you should file an amended return for the year in question. An amended return should be filed using Form 1040X. Since it has not been determined what basis you may have in the stock you should fill out the 1040X for the year in question. At the top of the form write “Protective Claim.” In the explanations section of the form, explain that you are filing a protective claim to recover taxes paid due to an incorrect basis on the sale of stock received in a demutualization. If you do this, the IRS will hold your request to file for a refund at a later date until the case is resolved.


The statute of limitations is three years from the due date of the return or three years from when the return is filed, whichever is later. This means that, for a return filed on a timely basis, you cannot file for a refund for 2003 after April 15, 2007.


If you have questions about filing an amended return, you should consult your CPA or other tax professional. Additional information can be obtained at www.webtaxcenter.com.


Companies That Have Demutualized

1. Acacia Mutual
   
   
2. American Mutual
   
   
3. American United
   
   
4. Ameritas
   
   
5. Canada Life
   
   
6. Central Life Assurance
   
   
7. Equitable Life Assurance Society
   
   
8. General American
   
   
9. Guarantee Mutual Life
   
   
10. Indianapolis Life
    
    
11. Industrial-Alliance
    
    
12. John Hancock
    
    
13. Lafayette Life
    
    
14. Manulife
    
    
15. Metropolitan Life
    
    
16. Midland Life
    
    
17. Minnesota Mutual Life
    
    
18. Mutual of New York
    
    
19. Mutual Life of Canada
    
    
20. Mutual Service Life
    
    
21. National Travelers
    
    
22. Nationwide Life
    
    
23. Northwestern National
    
    
24. Ohio National
    
    
25. Phoenix Home Life
    
    
26. Principal Mutual
    
    
27. Provident Mutual
    
    
28. Prudential
    
    
29. Security Mutual Life of Nebraska
    
    
30. Standard Insurance Co.
    
    
31. State Mutual Life
    
    
32. Sun Life of Canada
    
    
33. Union Mutual
    
    
34. Western & Southern Life
    
    

________________________________________
Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

• File Your Return Online! Free Online Tax Preparation! FreeTaxUSA.com 100% Accuracy Guarantee Safe & Secure Free Federal, State Only $9.95 learn more...