Wednesday Tax Tip #23 - IRS loses

In a big tax case that has received little notoriety, the IRS lost a tax case on insurance company demutualizations.

First some background. Many big name insurance companies were "owned" by the policy holders, also known as mutual ownership.

In the late 90's early 2000's, many big insurance companies (John Hancock, Prudential, Western & Southern, etc.) "demutualized" their ownership. Meaning, they gave stock to the policy holders based on their policies and premiums paid over time.

When the stock holders sold that stock the IRS argued that the entire amount of proceeds was fully taxable as a capital gain since the taxpayer did not "pay" anything for the shares.

On it's face I believed that was incorrect because different policy holders received differing number of shares. In my mind, they must have "paid" for the shares otherwise everyone would have received the same number of shares.

Well an ornery accountant in Minnesota took on the IRS and won.

If you own shares of an insurance company as a result of a demutualization, check out his site and it may give you some insight as to how to go about reporting the sale of those shares.

Check with your accountant if you've already filed a return and claimed a full capital gain on the return to see what your recourse is.