Demutlization and Capital Gains

[Bonnie]

In a case of Demutlization and the Taxpayer is issued stock that is then cashed in is there any way to justify any basis?? My customer would qualify for EIC and so needs it with 3 children, except for the Capital Gain on the sale of the stock which sold for 3189 added to 14 of dividends from the same stock, which puts him over the limit of 3200 to receive EIC by 12 dollars. It gets even more interesting as he didn't even know he had this stock. Worked for his dad doing construction and dad paid insurance premiums as part of his compensation. Somewhere along the way the stock was issued but he didn't know about it. Then it was cashed in and he was told he had a check. (I have no idea how this happened and he doesn't know either). To top it off, Dad went through divorce and it was decided that half of this money belonged to dad because he paid the premiums so my customer had to give half of the proceeds to dad. Now he comes to do his taxes and looses over 5000 in EIC because of this. I know this man personally and I cried when I realized what happened. And I know all this is true as far fetched as it sounds. I know the dad and step mom who divorced too. Trying to decided now if I can justify any type of cost basis to lower investment income below the 3200 (only takes 12). If not is there anyway to show that he had to give dad half of the proceeds that would help the situation?

[Koss]

Demutualization

The question of whether a policyholder had any basis in the stock issued through the demutualization process is a very complicated issue. There have been several different federal court cases dealing with this, and they have reached different conclusions. The facts were a little different in each case.

The case that is most favorable for taxpayers is an appeals court decision known as Fisher v. United States. If you Google it together with the word demutualization, you'll find all kinds of information.

You said that the parents divorced and that "it was decided" that half of the money belonged to dad. Decided by whom?

Was the father the policyholder?

I think this is an interesting question. But regardless of the answer, the economic reality is that your client split the money with his father, based on the fact that the father had paid the premiums.

I think this gives you a rational basis for treating half the proceeds from the sale--and therefore half the gain--as a nominee distribution.

BMK

[Bonnie]

Not sure what I need to do to treat it as a nominee distribution. Does my client need to issue something to father for amount he gave father? Not sure how this would work??

[Burke]

I would be very careful in arbitrarily doing a nominee distribution in this case, especially if it results in more (or any) EIC to the son. What probably happened is that the son was the insured on the policy. You don't tell us the name of the company, but most of these demutualized in the late 90's. You can find out by Googling the company and "demutualization." Prudential was one of the last ones to do so, and that was April 2002. The son might have been a minor when the life insurance policy was issued, so the father or mother would have been the owner. But the son would have become the owner at 18 or 21, depending on how the ownership clause was written when the policy was issued. If he had reached the age of majority when this stock was issued, it would have been in the son's name and rightfully his. He could have given his father half the money if he wished, but the tax liability is his and can't be transferred under these circumstances, IMO. I am assuming you have a 1099-B in the son's name and SSN. I understand the circumstances and feel bad for the son, but the facts as presented are what they are and it is extremely unfortunate that this has occurred over $12 in addl income. With a little planning, he could have sold some of the shares in one year and the rest the following year to keep investment income under the EIC limit. The son should have been reporting the dividends all along.
(PS: Someone had to sign a form to sell the stock and it would have been the son's name.)

The IRS is not accepting claims that there is basis in these stocks.

[ddoshan]

If necessary, you can file that claim (sorry can't recall the terminology) that will hold the year open in case that in some future year the IRS does rule that there is a basis for these shares.

[Koss]

Basis

ddoshan is talking about a protective claim. And that's certainly an option. But it doesn't address the immediate issue.

Burke has a good point. I've thought about this, and if the stock was owned by the son, a nominee distribution is a bit a stretch. In the eyes of an IRS agent, it could be even construed as EIC fraud.

I don't think your client is lying to you. But you're not getting all the relevant facts. I'll buy into the idea that the son didn't know he owned the stock. That's entirely plausible, since he wasn't the original policyholder. But assuming that he did in fact own it, how was the stock sold without his knowledge or authorization? It strains credibility.

Someone may have committed an act of fraud by performing that sales transaction. And I'm sure your client doesn't want to go there, because it was probably his mom or his dad.

Or it might have gone down like this: Someone put a form in front of him, and said, "Here, Mike, you need to sign this. We're selling the stock you got from that insurance policy we bought for you twenty years ago. You get to split the money with your dad." And of course, he signed it without reading it, and without asking any questions.

If everyone involved in this drama is a competent adult, they have only themselves to blame.

As Burke pointed out, if someone had asked the right questions before selling the stock, this could have been avoided.

The son could have transferred half the stock to his father as a gift.

But Dad was in the middle of a divorce. Who cares about that kind of bu****it? Just sell it! We need the money! We'll figure out who pays tax on it later...

They blew it. Big time.

BMK

[Bonnie]

Company name on 1099B is Wellpoint. Son is 34. He even asked me last time we met how did his dad cash this in without his knowledge? My only thought was I guess he signed your name. Other thought was maybe secretary in office just said sign this and son signed without questioning it. He said he had no idea about the stock until the secretary said you have a check after it had been cashed in. I feel he was an adult at time insurance was purchased, but not totally sure about that. The divorce wasn't parents but dad and step-mom. Dad felt half money in stock belonged to him because he paid the premiums. Stock was totally in son's name. 1099B issued to son with his SS. To keep peace son just told dad take half, but I can tell he has not been happy about that. Now he is even more unhappy. He had no say in when or how stock got cashed in as he didn't even know he owned it. Guess when it all happened, paperwork was sent to office of company dad owned and secretary just handled it. Still unclear to the son and to me exactly how all this even happened.

[Burke]

Wellpoint is the new name of Anthem/Blue Cross-Blue Shield and Trigon, and it was health insurance. They demutualized in November 2001. I have a bunch of these clients since it is an employer here. It did not pay dividends, so on several occasions upon the death of a client, no one knew they even had shares until long after they died because there was nothing on the tax returns. I am having executors check with Wellpoint now if the deceased ever had BC/BS health ins so they can surrender this stock while the estates are still open. You said "Dad paid premiums as part of his compensation when he worked for him." Policy may have been taken out when he came to work, but he would have had to sign paperwork to get it, and paperwork to sell the shares. If he wants to call them, I am sure they can send him copies of the signed papers.
To be fair, I am sure his father had no idea how this was all going to play out.

[JJ EA]

basis = dividends received

Just a thought:

If client has been paying taxes on the dividends received AND the dividends were reinvested, then he has basis = to those dividends that purchased additional shares.

I have clients who have been reinvesting dividends in these stocks for years. I use a 0 basis for the original shares and keep a spreadsheet going adding the dividends reinvested each year to track basis.

[Koss]

Demutualization: Basis in Shares

Bonnie--

Your client may in fact have some basis in the shares that were sold. And even if the basis is very low, it may be enough to bring the net capital gain below the threshold for EIC.

The Tax Book published an update on this issue on April 10.

The update describes the decision in a recent court case that addresses this issue.

Here's the link:

http://www.thetaxbook.com/updates/TheTaxBook/Updates/2013-04-10_Demutualization_of_Life_Insurance_Companies.pdf

BMK

[Burke]

The most recent information I read is that of the Arizona case; and although the judge ruled that there should be basis, it was left to a later date as to how that basis would be calculated. And we can't just arbitrarily put an amount down picked out of the thin air. So best bet is to file as is, amend later; file a protective claim; or file an extension and hope it is resolved by 10/15/13. Based on the TTB article update, you would need certain information from the insurance company to determine this figure. And you can probably bet that the IRS will still try to stall this. It may be valid only in that court's district. Note that this involved a case in 2003, and it has taken 10 years.

[Burke]

Just a thought:

If client has been paying taxes on the dividends received AND the dividends were reinvested, then he has basis = to those dividends that purchased additional shares.
I have clients who have been reinvesting dividends in these stocks for years. I use a 0 basis for the original shares and keep a spreadsheet going adding the dividends reinvested each year to track basis.

True. In this case, Wellpoint did not pay dividends. In fact, I haven't seen any of these demutualized situations where div reinvestment is allowed on these particular shares, although I suppose there may be some out there.

[Bonnie]

I did file an extension so have some extra time. In past years there were no dividends but for 2012 there was 14 dollars on a 1099DIV. If I used that 14 as basis it would be enough to get below the 3200. I was wondering why the 1099DIV showed up this year but none in the past

[Koss]

Dividends

I did file an extension so have some extra time. In past years there were no dividends but for 2012 there was 14 dollars on a 1099DIV. If I used that 14 as basis it would be enough to get below the 3200. I was wondering why the 1099DIV showed up this year but none in the past

Dividends would only create a basis in the stock if they were reinvested.

As to why you have not seen a Form 1099-DIV in previous years...

There are many possible explanations. Your client didn't even know he owned the stock. The reporting agent may not have had a current address for him.

The most compelling explanation is this:

The dividend history for Wellpoint that is available from Yahoo! Finance indicates that the company didn't pay any dividends until March, 2011. Assuming this is correct, there were no dividends prior to 2011.

Here's a link:

http://tinyurl.com/wlpdiv77321

The dividend paid in 2012 was 28.8 cents per share per quarter, or about $1.15 per share for the entire year.

For your client, that worked out to be $14.00 for 2012.

In 2011, it was less. In 2011, the dividend was 25 cents per share, per quarter, or $1.00 per share for the whole year.

Your client probably received dividend payments in 2011. But the total was probably under ten dollars for the entire year. So the reporting agent may not have been required to issue Form 1099-DIV.

Were the dividends reinvested?

Maybe. It's definitely worth looking into. As JJ EA noted, reinvested dividends would create a small basis in the shares purchased, regardless of what basis, if any, there might be in the original shares.

Who issued the 1099-DIV and the 1099-B?

Was is Computershare? Computershare is Wellpoint's transfer agent. Computershare appears to offer a dividend reinvestment plan for Wellpoint shareholders.

Here's a link:

http://tinyurl.com/wlpcipdrip449

Keep your fingers crossed. Your client might have been automatically enrolled in this plan if the dollar amount of the dividends was below a certain threshold...

I also found this on Wellpoint's website for shareholders:

http://tinyurl.com/wlptaxfaq2218

But be careful with this. It is a five year old document, and much of it may not be applicable to your client. It looks like there were three or four different companies involved in a merger. There is a section at the very bottom that addresses the basis of stock received in the demutualization. It says the basis is zero, but then acknowledges that this is based on a legal opinion provided to Wellpoint before the 2008 decision in Fisher. And this whole thing was written back in 2008, long before the decision in the Arizona case, which is described in the update from The Tax Book.

The first thing you need to do is find out if the dividends were reinvested.

BMK

[Koss]

Weird Math?

So, according to Yahoo! Finance, Wellpoint paid a dividend of $.288 per share per quarter during 2012.

That's equal to about $1.15 per share.

Bonnie--

Your client received only $14.00 in dividends during 2012?

How many shares did he own?

The Form 1099-B should show the number of shares sold. That may or may not be equal to the number of shares that he owned.

Here's what I don't understand:

If he only received $14.00 in dividends during 2012, and the dividends were $1.15 per share...

Then that implies that he owned about 12 shares.

But the price range of the stock during 2012 was from $55 per share to about $73 per share.

It doesn't add up.

How did he get $3189 in sales proceeds from only 12 shares of stock??

BMK