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Three Court Opinions on the Tax Impact of Demutualization- Three Different Outcomes


In August 2008, the U.S. Court of Federal Claims ruled against the IRS position of assigning zero income tax basis to stock received in an insurance company demutualization. Instead, the court ruled that basis is to be allocated to the stock of the policy up to the amount of the selling price of the stock. The court’s opinion comes as no surprise – they ruled in November of 2006 against an IRS motion for summary judgment. What was not known was how income tax basis would be computed.

In late 2009, the U.S. Court of Appeals for the Federal Circuit issued a decision without a published opinion. However, IRS continued to litigate the issue in an Arizona federal district court. On July 9, 2012, the court, on motion for summary judgment, disagreed with both the IRS position and the taxpayer’s position setting the stage for a trial on the issue of how basis is to be allocated between the premium and the stock.On January 15, 2013, a California federal district court determined, on opposing motions for summary judgment, that the taxpayer failed to establish that the taxpayer had any income tax basis in the shares of stock received upon demutualization.

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