Dorrance Decision

[Burke]

I guess everyone has seen the news regarding Dorrance in which the Court sided with the IRS, and found that shares received by policyholders in the demutualization of insurance companies have no basis when sold? Complete opposite of Fischer.

[Nashville]

What did it cost them?

Had not heard Burke - thanks for letting us know.

I don't usually like to side with the IRS, but I have always failed to see why the policyholders had any cost in these converted shares to begin with. In the old mutual companies they were entitled to receive so-called dividends, but they weren't taxable, so how could this result in basis? If they were deemed to be a reduction in premium (the reason they weren't taxed to begin with) this only reduced the purchase cost of an expense which was non-deductible. The reduction, according to the IRS position, had the effect of making the premiums competitive with non-mutual companies.

Have such shareholders ever been subjected to a taxable event during the proceedings of the demutualization? If so, I'm not aware of it. If cash values were used to convert to stock, the policyholders were still not ever taxed on the increase in cash value.

[Burke]

I agree with you completely and have always stated that. There was no taxable event for policyholders at the time the stock was granted. This decision was in the 9th Circuit Court of Appeals on 12/9/15, so I guess it only applies there, but it was a reversal of a previous District Court decision in 2013 in Arizona. See TaxBook Updates dated 12/21/15.

[DaveO]

I read the Dorrance decision. Very well written and the points were made with clarity. I had hoped for the other outcome.