Demutualization shares from Prudential, zero tax basis or?

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Demutualization shares from Prudential, zero tax basis or?

Postby theac » Sun Apr 25, 2010 5:51 am

I received 16 shares of PRU in about 2000 at about $27.50 each thru demutualization. I'm thinking of selling them and I think I will have a cost basis of the approx $27.50 each right? Anyone have any info or experience with this?

PRU was up to about $100 in 2007, but at about $66 now.

P.S. I'm thinking of selling them this year since I'm in the 15% tax bracket and won't have to pay any Capital Gains.

Just found this current info from 2009, but want to hear it for sure from anyone who has sold any of these shares:


Insurance Policy Holders and Demutualization = IRS Tax Refund.

Millions of people and entities own insurance policies in one form or another. And if you owned a policy in the late 1990s or the early 2000s, your ownership may entitle you to a tax refund. In the not so distant past, many insurance companies were owned by the policy holders who were entitled to receive company dividends and vote. These were called “mutual insurance companies.” USAA, for example, retains this current corporate structure. But many of these mutual insurance companies restructured themselves from policy holder owned to stockholder owned in the late 1990s and the early 2000s.

As part of the restructuring, individuals who owned policies were distributed new stock in the insurance companies when it transformed to a publically owned company. This transformation from policy holder owned into publically owned is called “demutualization.” In the past, the IRS required that taxpayers, who received stock as part of a demutualization, pay capital gains tax on the 100% of the value of the stock when it was sold.

But a recent court decision shot down the IRS’s position and, if fact, said that the taxpayer owed no tax at all. This decision has widespread ramifications for individuals, professional associations and business entities that owned insurance policies. Some of the largest insurance companies in America demutualized in the last decade, including MetLife Inc. and Prudential Financial Inc. Between MetLife and Prudential alone, there were approximately 22 million policyholders at the time of their demutualizations that occurred in 2000 and 2001, respectively. Indeed, when I raised this tax treatment issue with a South Carolina accountant, he advised that the one of the largest malpractice coverage providers in South Carolina for accountants was Prudential.

No doubt, millions of individuals and entities received stock in insurance companies as a result of demutualization. More importantly, if the stock was sold, these individuals and entities paid tax on the sale. As it turns out, it appears that no tax was owed. - 2 -
In August 2008, the Court of Federal Claims issued a decision in Fisher v. United States.

The court held that tax is only owed on the sale of the demutualization stock to the extent that the sale proceeds exceed the cost basis in the taxpayer’s policy. Because the stock was sold for $31,759, and the taxpayer had paid over $194,000 in premiums, the cost basis in the policy far exceeded the proceeds from the sale of the stock. As such, NO TAXABLE event occurred, and NO TAX was owed.

If you are one of those millions that received stock in an insurance company through the demutualization process and sold the stock, you should determine if you are entitled to a tax refund. No need to make unintended gifts to the IRS.

By Lindsey W. Cooper Jr., The Law Offices of L.W. Cooper Jr., LLC, 36 Broad Street, Charleston, South Carolina.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby YDNAL » Sun Apr 25, 2010 8:02 am

theac wrote:I received 16 shares of PRU in about 2002 at about $60 each thru demutualization. I'm thinking of selling them and I think I will have a cost basis of the approx $60 each right? Anyone have any info or experience with this?

PRU was up to about $100 in 2007, but at about $66 now.

P.S. If the cost basis is zero I will sell them this year since I'm in the 15% tax bracket and won't have to pay any Capital Gains.

Just found this current info from 2009 so I guess I'll owe not tax regardless of when I sell, but want to hear it for sure from anyone who has sold these shares:


Insurance Policy Holders and Demutualization = IRS Tax Refund.

Millions of people....

Theac, thanks for posting.

I sold demutualization shares in 2007 and declared $0 basis and paid taxes. I'm looking more into this and will amend our return if necessary.

Perhaps some of the tax gurus will chime-in.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby sscritic » Sun Apr 25, 2010 8:20 am

theac wrote:I received 16 shares of PRU in about 2000 at about $27.50 each thru demutualization. I'm thinking of selling them and I think I will have a cost basis of the approx $27.50 each right?
Wrong
The court held that tax is only owed on the sale of the demutualization stock to the extent that the sale proceeds exceed the cost basis in the taxpayer’s policy. Because the stock was sold for $31,759, and the taxpayer had paid over $194,000 in premiums, the cost basis in the policy far exceeded the proceeds from the sale of the stock. As such, NO TAXABLE event occurred, and NO TAX was owed.

As I read the passage, you have to find your basis in the policy. This has nothing to do with the price that the stock sold for when the demutualization occurred. Your basis is related to what you "paid" for your policy through premiums.

I don't know all the details, so you should do some research and read the details for yourself about what happens when you cash in a whole life policy. When that happens, you get cash back, but you only pay tax on the amount by which the cash value you received exceeds your basis, what you paid in premiums.
Your basis is the amount of premiums you have paid into the policy, minus any prior dividends paid or previous withdrawals. You already paid income tax on those dollars once, so they won't be taxed again when you withdraw them from the policy.

I hope you keep good records so you can establish how much you paid in premiums on your policy.
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Postby Chip » Sun Apr 25, 2010 8:55 am

I gave my shares away to charity because of the zero basis position of the IRS.

I just finished reading the judge's opinion in the case. IANAL, but it appears that he pretty thoroughly gutted the IRS position.

I am not sure, but I think there have been instances where the IRS refused to abide by court decisions against them. So I don't think this case makes it a slam dunk that your Schedule D will avoid an audit and subsequent demand for taxes.
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PRU Shares

Postby tomd37 » Sun Apr 25, 2010 10:15 am

sscritic,

How does the source of the 16 shares play into this, if at all? If the shares were inherited as the result of the death of the original policy holder, would not the value of the shares on the date of death be the cost basis for the poster?
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Re: PRU Shares

Postby sscritic » Sun Apr 25, 2010 10:52 am

tomd37 wrote:sscritic,

How does the source of the 16 shares play into this, if at all? If the shares were inherited as the result of the death of the original policy holder, would not the value of the shares on the date of death be the cost basis for the poster?

I didn't read anything about a death in the OP.
I received 16 shares of PRU in about 2000 at about $27.50 each thru demutualization

If someone else received the shares through demutualization, then her basis was based on the premiums she paid. If she then died and left the shares to you, then it would be no different than if she had bought the shares in the open market and then died, leaving them to you. As far as I know (not a tax expert) in this situation (inherited shares), the step-up in basis would apply.
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Postby Grt2bOutdoors » Sun Apr 25, 2010 11:02 am

Thanks for posting that - I own PRU shares received through the demutualization process - if that holds true, then I also owe no tax.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby Doc » Sun Apr 25, 2010 12:07 pm

theac wrote:
The court held that tax is only owed on the sale of the demutualization stock to the extent that the sale proceeds exceed the cost basis in the taxpayer’s policy. Because the stock was sold for $31,759, and the taxpayer had paid over $194,000 in premiums, the cost basis in the policy far exceeded the proceeds from the sale of the stock. As such, NO TAXABLE event occurred, and NO TAX was owed.

IIRC "dividends" from mutual insurance companies are not taxable to the extent that they do not exceed the premiums paid. So the basis in the policy should be total premiums paid less dividends received. This is not what the quoted reference says.

In any case it seem to me that the cost basis can be no greater than the value of the shares when they were received. Any accumulation after that should be capital gains.

It is not clear from the quote whether or not the shares were sold immediately upon receipt or or sometimes later when they had appreciated.

Bah humbug.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby sscritic » Sun Apr 25, 2010 12:20 pm

Doc wrote:IIRC "dividends" from mutual insurance companies are not taxable to the extent that they do not exceed the premiums paid. So the basis in the policy should be total premiums paid less dividends received. This is not what the quoted reference says.

In any case it seem to me that the cost basis can be no greater than the value of the shares when they were received. Any accumulation after that should be capital gains.

Doc:

How is this not like a conversion, where the basis follows you? For example, you own a Vanguard mutual fund and convert to a corresponding EFT. Your basis in the ETF is the basis you had in the mutual fund before the conversion. I would think (seem to me) that the basis in the new shares after demutualization would be the same as the basis in the policy before the demutualization.

I am just thinking out loud.

P.S. I am not implying that you can take a loss on your tax returns if you sell for less than your basis. You can't take a loss if you cash out of your policy for less than the basis, so I doubt you could do so here.
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Postby btenny » Sun Apr 25, 2010 12:50 pm

I own 176 shares of MET the same way. I got them through the demutalization process. When we received these shares the initial price was around $28ish from my memory. But I paid premiums to them for years (still paying in fact) for a life insurance policy going back to the 1970s. Same for my wife but hers is no longer in effect. I always thought my basis was zero or near zero. From this article my basis my be much more.

How do I figure by basis in this stock?

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Postby theac » Sun Apr 25, 2010 1:02 pm

Well here's what I'm gonna do:

Since I am in the 15% tax bracket I'm going to sell before year end, and will file cost basis ($27.50 x 16)= $440 at demutualization on 12-15-00.

These shares came from a policy my mother carried on me for many years as I grew up, so I'm sure a lot more than $440 went into the premiums over all those years.

And if for some reason the IRS adjusts my cost basis to some other amount, it doesn't matter (in my case) since whatever the Capital Gains bill comes to, in the end it will amount to zero since I'm in 15% bracket anyway.

But even if I was in a 25% or higher bracket, I would still use the $440 basis, and deal with it if and when the IRS notified me otherwise (which I suspect wouldn't happen from what I've been reading).

Took this quote from the end of the first link below:

"Prudential Life - On December 15, 2000, Prudential’s Board of Directors unanimously adopted a Plan of Reorganization to convert from a mutual life insurance company to a stock company. The conversion occurred on November 16, 2001, after regulatory and policyholder approvals - 36% of eligible policyholders voted. Most eligible policyholders (including private employers - both for profit and not-for-profit, labor organizations, trusts, employee benefit plans, governments- federal, state, and local, schools, churches and associations) received 110 million shares of stock worth - $3.025 billion - in the new company, Prudential Financial, in exchange for their ownership interest. Other eligible policyholders received cash or policy credits. Prudential was unable to locate 1.2 million policyholders entitled to receive compensation. Compensation consisted of a fixed component of 10 Prudential Financial common shares, as well as a variable component based on policy value. Lost policyholders received cash compensation of $28.44 per share entitlement. The shares were offered to the public at $27.50. In the first year after the initial public offering, the price of a Prudential common share increased 16%."

Apparently my policy had six shares more "equity" in it than the minimum 10 shares starting point?

http://www.calt.iastate.edu/briefs/CALTLegal%20Brief-IRS%20Argument%20in%20Insurance%20Demutualization%20Case.pdf

http://www.demutualization.biz/article.htm
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Postby theac » Sun Apr 25, 2010 1:10 pm

btenny wrote:I own 176 shares of MET the same way. I got them through the demutalization process. When we received these shares the initial price was around $28ish from my memory. But I paid premiums to them for years (still paying in fact) for a life insurance policy going back to the 1970s. Same for my wife but hers is no longer in effect. I always thought my basis was zero or near zero. From this article my basis my be much more.

How do I figure by basis in this stock?

Bill

If you go to the first link I posted above, at the end of that document it gives the info for MetLife (and many others). May have the info you need.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby Doc » Sun Apr 25, 2010 1:32 pm

sscritic wrote:
Doc wrote:IIRC "dividends" from mutual insurance companies are not taxable to the extent that they do not exceed the premiums paid. So the basis in the policy should be total premiums paid less dividends received. This is not what the quoted reference says.

In any case it seem to me that the cost basis can be no greater than the value of the shares when they were received. Any accumulation after that should be capital gains.

Doc:

How is this not like a conversion, where the basis follows you? For example, you own a Vanguard mutual fund and convert to a corresponding EFT. Your basis in the ETF is the basis you had in the mutual fund before the conversion. I would think (seem to me) that the basis in the new shares after demutualization would be the same as the basis in the policy before the demutualization.

I am just thinking out loud.

P.S. I am not implying that you can take a loss on your tax returns if you sell for less than your basis. You can't take a loss if you cash out of your policy for less than the basis, so I doubt you could do so here.


I don't think your ETF analogy is valid. The mutual insurance fund premium/discount is more like your buying a toaster and getting a cash rebate in the mail. As long as the rebate is less than the amount you paid this is a non-taxable event. If the rebate exceeds the price it is a taxable event (and I'm sure everyone reports it to the IRS). If you now took the toaster rebate and bought an ETF your basis in the ETF would be the amount of the rebate not the original price of the toaster. When you sell the ETF you own tax on the sale price less the amount of the rebate. :?: (And now you do report it to the IRS because your broker has already told them about the sale.)

(I was always amused that the "B" in Form 1099-B stood for "barter" not broker. Maybe we will start to get 1099-B's from Walmart. :evil: )
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Postby xerty24 » Mon Apr 26, 2010 4:54 am

If you followed this story, it was a great one about how a persistent accountant read the law, knew the IRS was taxing people 100% when they should be 0%, and finally won his day in court.

More reading in depth here.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby SurfCityBill » Thu Jul 19, 2012 9:37 pm

In reviving this two year old thread I'm wondering if anyone has any updated information or experience in regards to the IRS position / court rulings since 2010?

My understanding is that my tax liability is (sell price of PRU stock less any provable premiums paid).

-B
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Re: Demutualization shares from Prudential, zero tax basis o

Postby jared » Thu Jul 19, 2012 11:56 pm

SurfCityBill wrote:In reviving this two year old thread I'm wondering if anyone has any updated information or experience in regards to the IRS position / court rulings since 2010?

My understanding is that my tax liability is (sell price of PRU stock less any provable premiums paid).

-B

Roger McEowen's article has been updated twice (January 26, 2011 and July 11, 2012) since the last post on this topic. Here is the link again: http://www.calt.iastate.edu/briefs/CALT ... 20Case.pdf
On July 9, 2012, the court, on motion for summary judgment, disagreed with both the IRS position and the taxpayer’s position setting the stage for a trial on the issue of how basis is to be allocated between the premium and the stock.


Without a doubt, practitioners with clients having demutualization distributions over the past few years while the Fisher and Dorrance litigation was pending should have been filing protective claims for refunds. Protective claims are commonly filed when a taxpayer’s right to a refund is contingent on future events (such as pending litigation) that will not be resolved until after the statute of limitations expires. A timely and proper protective claim will preserve the taxpayer’s right to obtain a refund. That was the suggested strategy after the court’s denial of summary judgment for IRS in late 2006. If a protective claim is not in place, the client will be subject to the three-year statute of limitations applicable to open tax years when seeking a refund.

Here is a link to the most recent case (Bennett and Jacquelynn Dorrance, Plaintiffs v. United States of America, Defendant. U.S. District Court, D. Arizona; CV-09-1284-PHX-GMS, July 9, 2012.) : http://www.us.kpmg.com/microsite/taxnew ... -july9.pdf
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Re: Demutualization shares from Prudential, zero tax basis o

Postby mephistophles » Fri Jul 20, 2012 1:36 am

theac,
I owned shares obtained by demutualization from Prudential. The cost basis for these shares can best be obtained by contacting Prudential itself and let them direct you to the correct area. This will guarantee you do it right.
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Re: Demutualization shares from Prudential, zero tax basis o

Postby SurfCityBill » Fri Jul 20, 2012 12:56 pm

Mep,

Are you saying PRU can provide me with a record of all premiums paid which I need to establish basis?

-B
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Re: Demutualization shares from Prudential, zero tax basis o

Postby nisiprius » Fri Jul 20, 2012 6:10 pm

Should the poster be contacting Prudential, or the mysterious firm that handles the actual stock transactions... which I vaguely think might be Computershare Investor Services?
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Re: Demutualization shares from Prudential, zero tax basis o

Postby SurfCityBill » Fri Jul 20, 2012 8:32 pm

nisiprius wrote:Should the poster be contacting Prudential, or the mysterious firm that handles the actual stock transactions... which I vaguely think might be Computershare Investor Services?



You are correct in that Computershare is the "mysterious" firm that handles the stock transactions. The first time I received a dividend check from them on behalf of PRU I had no idea why or what it was for. However, for establishing basis based on premiums paid I think PRU would be the answer. I doubt Computershare would have any idea what transpired in that regard. I could be wrong but I don't think so.

-B
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Re: Demutualization shares from Prudential, zero tax basis o

Postby mephistophles » Fri Jul 20, 2012 11:30 pm

SurfCityBill wrote:Mep,

Are you saying PRU can provide me with a record of all premiums paid which I need to establish basis?

-B


I would recommend that you call Pru directly and they will provide you with how-to information to determine cost basis. I did this a long time ago and my instructions and information are packed away in a box in the attic. Contacting Pru directly is the quickest way. If you can't get results send me a PM and I will will search for the material.
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