During the years 1997 to 2001, many life insurance companies engaged in demutualization transactions pursuant to which the owners of life insurance policies received stock distributions from the life insurance company. Policyholders who sold this stock generally reported the full proceeds from the sale as capital gain income. This was in accordance with a private letter ruling issued by the IRS which stated that the cost basis of the stock received by policyholders in a demutualization transaction would be zero.
However, in a major taxpayer victory, the Federal Court of Claims in Fisher v. United States, August 6, 2008, held that a trust was allowed a refund of taxes paid on the sale of stock received in an insurance company demutualization transaction. The trust successfully argued that no gain was realized on the sale of stock received in the transaction because the proceeds were fully offset by its cost basis in the stock.
Taxpayers who sold stock received in a demutualization transaction during tax years 2004 (assuming that the due date for this return was extended to October 15, 2005) to 2007 should consider filing claims for a refund of tax paid on their gains. Taxpayers who are still holding stock should be aware of the recent court decision.
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