|
 Mutual insurance companies are those that are owned by their policyholders. In a demutualization, the company reorganizes and becomes a publicly traded company. The policyholders typically receive cash, stock or both as a distribution from the company in exchange for the policyholder’s interest, when the company demutualizes. Since the late 1990s, more than 30 life insurance companies have demutualized.
According to guidance from the IRS, the policyholder’s basis in the equity interest of the mutual insurance company is considered to be zero, and therefore the policyholder recognizes capital gain on the value of the cash and stock received in a demutualization. The IRS ruled in the 1970s that the payment of the premiums by the policyholders represented a payment for the cost of insurance and an investment in the life insurance contract, and not an investment in the mutual insurance company.
However, a group of accountants and attorneys are challenging the IRS in Federal Court. The group asserts that the distributions received from an insurance company that demutualized should be treated as a return of the premiums paid by the policyholders for their ownership interests. Many tax experts feel that the IRS will likely lose the case based on a procedural ruling by the court.
There is a three-year statute of limitations on filing an amended return to claim a refund. This means that the statute will soon close for 2003 returns, which were originally due April 15, 2004. However, the trial is not scheduled to start until June 18, which is after the date that the statute closes.
So…what does this mean to you? If you reported the proceeds from a demutualization on your 2003 income tax return, you can file a protective claim for refund before the statute expires. Even if the claim is rejected before the case is decided, the refund claim extends the deadline for a potential refund another 2 years.
You need to take action NOW, in order to preserve your chances for a refund! Please look over your 2003, 2004 and 2005 income tax returns to determine whether you reported income from a demutualization on Schedule D. If so, contact your Rea team member as soon as possible to file a protective refund claim.
In addition, many of the former mutual insurance companies report that there are millions of shares of stock that have gone unissued because contact efforts were unsuccessful. This may happen due to name changes, address changes, non-current beneficiary information, etc. If you think you or someone that you might have been a beneficiary of had an interest in a mutual insurance company that went public, you should institute a search for the unclaimed stock or cash. Please see the Web site www.unclaimed-demutualization.com for further information on this.
If you have any questions, please do not hesitate to contact your Rea team member.
-By Robin Y. Retzler, CPA (Shareholder, Director of Tax)
|
Full Newsletter
