Your Tax Questions Answered
Finding a Basis for Demutualized Stock
Kiplinger editorial director Kevin McCormally and fellow tax experts Peter Blank and Mary Beth Franklin tackle your most pressing tax challenges.
By Kevin McCormally, Editorial Director, Kiplinger.com
January 12, 2010
QUESTION:
What amount should be used as the tax basis for money received from the sale of demutualized insurance company stocks? I understand that the IRS lost a lawsuit regarding this issue. They had claimed that the tax basis should be $0 but the federal court disagreed. What is the correct tax basis?
KEVIN ANSWERS:
Great question…but I’m afraid there’s no definitive answer. You are correct that a federal court ruled -- despite what IRS says -- policyholders who receive shares in a demutualization do indeed have some tax basis in the shares. And, when IRS appealed that ruling, the agency lost. Unfortunately, the judge in the original case didn't say what the basis of the shares should be.
Tax experts we've consulted suggest that taxpayers in your shoes -- who sold in 2009 shares received in an earlier distribution -- have a right to claim some basis when they report the proceeds of the sale on their Schedule D. Most experts suggest that the proper basis is the value of the market value of the shares at the time of their distribution to shareholders. You can probably find that amount at the insurance company's Web site.
Claiming a basis guarantees to cut your tax bill. If your return happens to be audited, it will probably be at least one year from now, by which time we hope the matter will be more settled, one way or another. Even if the rejects your claim of basis, you'll likely just have to pay the tax you saved, plus interest. It's unlikely any negligence penalty would be imposed, thanks to the taxpayer's win in the Fisher case, which is discussed here.
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