Fischer case decided

[Kram BergGold]

Fischer won. The Court said basis in a demutualization is lower of stock value on day issued or the premiums taxpayer paid into the policy before demutualization.
My one client with a 2004 return that was on extension sold Prudential Stock. I checked and found Prudential stock first listed on 12/14/01 at $29.90. If anyone is farmiliar with Prudential, does this seems like the correct start date?

[KBTS]

I saw a discussion on this at another board. Some posters said Klipinger reported that the IRS will not acquiesce to the decision and will hold any refund claims.

[Roland Slugg]

I'm glad Fischer won in court, and not especially surprised. Fischer had a legitimate, well-reasoned argument to support his position, whereas the IRS ... in its typical, high-handed fashion ... had none. In fact in my opinion the IRS's argument, that there should be no basis allocated to the shares, was downright silly.

Back in the late 1990's and the early 2000's I had several clients who received proceeds from various demutualizations, and I could not get a single one of them to agree to file a protective claim. Now those clients and oodles of other taxpayers will never realize a benefit from this decision, so in essence the IRS and the US Government are the real winners after all.

I haven't read the decision yet, but perhaps not all is lost. Taxpayers who received stock and haven't sold it yet, or who sold it within the past three years, should still be able to allocate basis to those shares, thus reducing their gain. If such shares were sold in 2005, 2006 or 2007, it should be possible to prepare and file an amended return, claiming a refund.

[jimmcg]

Fisher

I saw a discussion on this at another board. Some posters said Klipinger reported that the IRS will not acquiesce to the decision and will hold any refund claims.

Heard same thing. Service said they will "continue the appeals process." Get out the protective refund claims if you have not already.

[les grans]

My financial adviser talked me into surrendering my whole life insurance policies for their cash surrender value about a year before the insurance company went through their demutualization. The stock that I *would have* received in the demutualization would have been about ten times more valuable than the cash surrender value I received for giving up my policy. Should I sue the financial adviser for my loss? He totally screwed me out of tens of thousands of dollars.
Whaddya think?

[Burke]

My one client with a 2004 return that was on extension sold Prudential Stock. I checked and found Prudential stock first listed on 12/14/01 at $29.90. If anyone is farmiliar with Prudential, does this seems like the correct start date?

My records indicate the IPO price was $27.50 on the prospectus and that the date "underwriters expected to deliver the shares against payment in NY" was 12/18/01 to Goldman, Sachs, and others, which was the date the conversion from mutual to stock company occured. I am not sure it could be traded before that date. Outside of this offering, shares were offered to policyowners in January, 2002, but they could not sell for 30 days. Since PRU did not expect them to have any basis, this information was not offered, but my handwritten note says "12/18/01 = $33.15," which was probably the closing price that day. Employees/retirees received additional shares on April 30, 2002 credited to retirement accounts, and based on benefit plans. So it depends on how those shares were obtained.

[Burke]

My financial adviser talked me into surrendering my whole life insurance policies for their cash surrender value about a year before the insurance company went through their demutualization. The stock that I *would have* received in the demutualization would have been about ten times more valuable than the cash surrender value I received for giving up my policy. Should I sue the financial adviser for my loss? He totally screwed me out of tens of thousands of dollars.
Whaddya think?

You can always sue. But I don't think it will fly just because the stock was issued and has had appreciable gains. Would you sue if the stock had tanked? Convincing you to cash in the policy might have been grounds if you could prove that he did not disclose all the ramifications, like the fact you could have taken a loan for exactly the same amt of $$$ and kept the insurance coverage. And if that policy was replaced with another on which he got commissions, maybe. Many an agent and their insurance company got busted for that. But it's a little late now, IMO.

[JohnH]

My financial adviser talked me into surrendering my whole life insurance policies for their cash surrender value about a year before the insurance company went through their demutualization. The stock that I *would have* received in the demutualization would have been about ten times more valuable than the cash surrender value I received for giving up my policy. Should I sue the financial adviser for my loss? He totally screwed me out of tens of thousands of dollars.
Whaddya think?

I think the agent who initailly did you wrong was the one who talked you into buying the whole life policies to begin with. Too bad you can't sue HIM...

[Burke]

I'm glad Fischer won in court, and not especially surprised. Fischer had a legitimate, well-reasoned argument to support his position, whereas the IRS ... in its typical, high-handed fashion ... had none. In fact in my opinion the IRS's argument, that there should be no basis allocated to the shares, was downright silly.

In all fairness, I believe the IRS has a basis for their argument. (1) Pru was a mutual company (as were Equitable, Met, etc), and all excess premiums not needed to pay for the insurance were returned to the policyowner via "dividends" that weren't really dividends. Remember those? We never put them on Sche B, as they were not taxable. The IRS ruling was that they were a return of premium only. (2) When the stock was issued to policyowners, no one's guaranteed contract values as stated in their policy was reduced. So where did the stockholder's basis come from?

[Kram BergGold]

Thanks Burke

The Court Case says the value of the shares on the date of demutualization. So I am goin gwith the first listed stock value $29.90. Thanks for confirming that I am more or less right on here.

[JON]

Maybe

If you read the case this was a policy taken out in 1990. It was expensive and the numbers ended up with premiums paid $185,000 and a CSV of $180,000. The proceeds on demutual. were $34,000 and the court said basis was $34,000. They keep the policy. I will be suprised if this does not change something. The Cpa in Baxter, MN, not mentioned on the court case, has a website where he offers you to download a 1040X and fill it out with his name and social security on it. He would like 1/3 of the refund saying this has caused him an enorous amount of time.

File those protective claims.

Good luck.

[OtisMozzetti]

The Court said basis in a demutualization is lower of stock value on day issued or the premiums taxpayer paid into the policy before demutualization.

It seems to me that the policyholder still had a policy which pays certain specified benefits, such as say $5000 death benefit on a life insurance policy. So I don't understand why ALL of the premiums paid before then should go into the amount invested (basis) in the stock that was issued.

[Burke]

The Court Case says the value of the shares on the date of demutualization. So I am goin gwith the first listed stock value $29.90. Thanks for confirming that I am more or less right on here.

Median between opening and closing price for 12/18/01 would be $29.67. Probably immaterial if you are rounding.

[Barb]

MetLife cost basis?

Am I correct in using the intial price of $14.25/share as a cost basis to amend these tax returns.

[les grans]

OMozzetti says "So I don't understand why ALL of the premiums paid before then should go into the amount invested (basis) in the stock that was issued."
That's what the court fight was about, and the taxpayer's argument, that ALL the premiums [net of "return of premium" dividends] was accepted by the judge.
Read the case?