Tax Tips: Demutualized Insurance Companies

Tax Tips: Demutualized Insurance Companies

During the 2000s many insurance companies — including Prudential, John Hancock, MetLife and MONY — "demutualized." They converted from a mutual insurance company owned by its policyholders to a publicly-traded company owned by shareholders. Qualified policyholders received shares of stock in the new public company.

The official IRS position was that the cost basis of the stock received as a result of demutualization was zero. If the policyholder sold the shares, the gross proceeds were fully taxable.

In 2008 the U.S. Court of Federal Claims ruled that a taxpayer recognizes no gain from the demutualization of a mutual insurance company.  The basis of the shares is not zero, as the IRS held. The Court said the basis of stock in the insurance company received in demutualization is equal to the value of the shares on the date of the demutualization (not to exceed the total of the premiums the taxpayer had paid for the insurance policy up to the point of conversion).

Metlife, Inc. was created via demutualization on April 5, 2000. At that time, policyholders could receive cash in lieu of stock at $14.25 a share. If you sell shares of MetLife you received when the company converted back in 2000, your cost basis is $14.25 a share.

For details on specific insurance companies, go to the Unclaimed Demutualization Proceeds Information Web site.

An item I recently came across in a tax newsletter reported the IRS will not seek to overturn the U.S. Supreme Court decision.

New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.