Fisher Demutualization Case

[Koss]

I read with interest the earlier thread on this topic...

The Cliff's Notes version, for those not familiar with it:

Insurance company converts from mutual insurance company to stock insurance company, and policyholders receive stock that represents the ownership interest that they held in the mutual insurance company. IRS position is that the policyholder's basis in the stock is zero;, therefore the entire amount is taxable gain. Fisher argues that the policyholder has a basis in the stock. Case is pending before the US Court of Claims. Motions for summary judgment were denied. The court has ruled that the question of basis is a material issue of fact that must be decided at a trial. A ruling favorable to Fisher could have a significant impact to many taxpayers that have received such distributions in any open year. Fisher has asserted that the basis may be equal to FMV on the date of the distribution. If this is the case, then none of it would be taxable.

Question:

To what extent does the core issue in the Fisher case apply to a credit union that converts to, or merges with, a bank, and makes a cash distribution to its depositors that reflects the ownership interest in the credit union that the depositors held up until the point in time that the credit union effectively ceased to exist?

Seems like it is almost the same question...

[DaveO]

Good question Koss

Some credit unions require you to purchase some stock usually a small amount to open an account. I posted a question about such a payment one of my clients received in the last week or so. If no consideration was paid for the stock then I would think no basis. The main advantage of the CU is the easier credit policy which is offset somewhat by the lower interest rates.

In the case of the insurance demutualization payments I would think the basis would be the amount paid for coverage which was not premium and not cash value. Thanks for the post on this I'm very interested in the outcome.

[Burke]

[QUOTE=DaveO;57520In the case of the insurance demutualization payments I would think the basis would be the amount paid for coverage which was not premium and not cash value. Thanks for the post on this I'm very interested in the outcome.[/QUOTE]

I agree.
I do not see where Fisher has a case. Two reasons: (1) Mutual companies returned excess premiums not required for insurance to the policyholder every year -- remember that these "dividends" were never reportable on the tax return or taxable income? If you left them with the company and received interest, then that interest was taxable, but not the dividend. The IRS ruled that they were simply a return of premium. (2) Cash values in a whole life contract are contractual, and guaranteed. They were NOT reduced by the FMV of the stock when it was issued on demutualization, so the taxpayer still has the same basis in the policy he always had.