My client sold $34,000 of stock in 2005, that he received in a demutualization of an insurance co in 2002. Two years ago Bees Knees posted some info about a CPA, C D Ulrich who contended the basis was not zero in contrast to the IRS' position that basis in this situation is zero. Has this been settled in a court and if not and my client wants to claim an amount higher than zero what do I have to attach to the return to take this position? Would I claim basis as 34k, or what it was worth when he got it, or something else?
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Zero Basis
GoldKram, I don't know what kind of elaborate argument this CPA can make, but I can't possibly see how the basis can be anything BUT zero.
The old "mutual" kind of life insurance policy was sold under the ridiculous sham that the policyholder was a shareholder of the insurance company itself. Salesmen would lead the insured into believing that because he was a shareholder, he would receive a dividend from the profits generated by the pool of all policyholders' premiums.
The IRS for years correctly ruled that this distorted concept of "dividends" was a joke. Whereas there WAS in fact a calculation of excess premiums to be returned to the policyholders, this should be treated as exactly that: a return of excess premiums over and above what was necessary to insure the individual. None of the true characteristics of a real dividend was present - no stock, no ownership, no distribution of corporate earnings, etc.
So the interpretation of the insured's premium is split into two portions - the "necessary" cost of providing insurance, and the "excess" which comes back anyway. The entire crux of the zero basis, it would appear, is the exemption of this "excess" and nonrecognition of taxable income. The only other cost spent by the taxpayer is the amount necessary to provide insurance, clearly not a deduction. -
Basis makes sense
I have always thought Mr. Ulrich's arguments were both logical and persuasive. Unfortunately, there do not appear to be any recent rulings about this either from courts or the IRS itself.
Anyone wishing to read more may do so here: http://www.demutualization.org/ The discussion of the tax aspects starts about six screens down.Roland Slugg
"I do what I can."Comment
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