Insurance Stock Shares And Recent Federal Court Hearings


If you owned stock shares of an insurance company in which you acquired them by what was called Demutualization, you may want to consider taking action to amend your past tax returns!

A recent Federal Court ruling in Phoenix, AZ has opened a potential tax refund door for a lot of taxpayers who acquired shares through the Demutualization method and have since sold those shares.   Demutualization occurs when an insurance company wishes to “go public” or raise capital through selling shares of stock to the public.

Prior to the process, the owners of certain policies in that insurance company were known as Mutual Owners.   When the company demutualizes, they had to reward their then current owners, the mutual owners, for their ownership interest in the company.

When the process was complete, the company had awarded those owners with shares of their stock that the owner could then either hold onto or sell at a later time.   Most of the national insurance companies engaged in the Demutualization process in the late 1990’s and early 2000’s up to today.

When a taxpayer sold those demutualized shares, they reported a capital gain to the IRS with NO cost basis; meaning the selling price was deemed fully taxable.   Because of this court ruling, however, this has changed.   What it means is that, the cost basis is not zero, but a cost up to the price of the shares when the taxpayer/owner acquired them!   Some owners had a couple thousand dollars capital gain as originally reported; now they may wish to amend those tax returns to claim a refund for that past gain!

Remember that the Statute of Limitations permits a taxpayer to claim refund for a particular tax return for up to three years from the filing due date of the return in question.   As the court ruling happened in 2008, this means that, currently, only those taxpayers can amend returns from as far back as Tax Year 2005.   Those 2005 returns have until April 15, 2009 to file amended returns to claim their refund.


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