Zero Cost Basis Stock

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Zero Cost Basis Stock

Postby terpfan71 » Fri Feb 18, 2011 2:18 pm

I acquired approx 5000 shares of MFC via demutualization. According to current rules, my cost basis is zero. I had planned to leave it to my heirs (hopefully 25-30 years from now) so that the cost basis would be normalized then. I have been rethinking this and considering biting the bullet and selling it and paying the LTCG, which would be significant even at 15%. This would allow me to reinvest the proceeds in less risky investments. Would the risk of holding a single investment for 20-30 years outweigh the tax consequences now and a chance for safer investments going forward?
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Postby HueyLD » Fri Feb 18, 2011 2:31 pm

The risk of a single stock is that it could become "worthless" or "worth much less" in 20 - 30 years. And your heir could inherit the stock at the then much lower value. Remember, inheritance value is "marked to market" and the market can go either directions.

I continue to be amazed that many people place tax consideration ahead of investment merits. You can sell the zero basis stock over the next two years while the cost of doing so is relatively modest. Then redirect the proceeds to a well diversified porfolio of investments that can better serve yours and your heir's future financial needs.
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Re: Zero Cost Basis Stock

Postby TedSwippet » Fri Feb 18, 2011 2:39 pm

terpfan71 wrote:...According to current rules, my cost basis is zero.


The "current rules" might be wrong.

http://www.kiplinger.com/columns/taxquestions/archives/finding-a-basis-for-demutualized-stock.html
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Re: Zero Cost Basis Stock

Postby terpfan71 » Fri Feb 18, 2011 2:57 pm

TedSwippet wrote:
terpfan71 wrote:...According to current rules, my cost basis is zero.


The "current rules" might be wrong.

My understanding is that the IRS has appealed the Fisher ruling, and that appeal has not been settled. I agree that the only risk is having to pay the additional taxes and interest, probably not a penalty. The stock is up 200% over the IPO price, so even using the IPO as the basis, there is a large LTCG.
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Re: Zero Cost Basis Stock

Postby phositadc » Fri Feb 18, 2011 3:02 pm

terpfan71 wrote:I acquired approx 5000 shares of MFC via demutualization. According to current rules, my cost basis is zero. I had planned to leave it to my heirs (hopefully 25-30 years from now) so that the cost basis would be normalized then. I have been rethinking this and considering biting the bullet and selling it and paying the LTCG, which would be significant even at 15%. This would allow me to reinvest the proceeds in less risky investments. Would the risk of holding a single investment for 20-30 years outweigh the tax consequences now and a chance for safer investments going forward?


Personally, I would (and did) sell individual stocks for the reasons given above.

The one caveat is to consider the alternative minimum tax. Try to structure the sale (i.e., the timing of it...) so that you truly do only incur the 15% LTCG rate. When I did it, I incurred about $36,000 of LTCG... plus an additional of $8,500 due to the alternative minimum tax that was triggered by the LTCG. So in some ways, I was paying far more than 15% on those gains!
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Postby mas » Fri Feb 18, 2011 3:40 pm

Do you make charitable donations?
If so, consider donating these shares rather than cash.

Donate as many shares as you wish to a donor advised fund for dispersal over the remainder of your lifetime. Then come up with a plan for the remainder of the shares :)
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Re: Zero Cost Basis Stock

Postby dratkinson » Fri Feb 18, 2011 5:47 pm

terpfan71 wrote:I acquired approx 5000 shares of MFC via demutualization. According to current rules, my cost basis is zero. I had planned to leave it to my heirs (hopefully 25-30 years from now) so that the cost basis would be normalized then. I have been rethinking this and considering biting the bullet and selling it and paying the LTCG, which would be significant even at 15%. This would allow me to reinvest the proceeds in less risky investments. Would the risk of holding a single investment for 20-30 years outweigh the tax consequences now and a chance for safer investments going forward?


I acquired some share of MetLife by demutualization. When I called to ask about selling my shares, I was told my cost basis was the amount of premiums I'd paid prior to receiving the shares.

Don't believe both answers can be correct.

Never researched it further and I don't know the correct answer. Decided I didn't want to sell the shares as, either way, uncle sugar got his taste.
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Postby HueyLD » Fri Feb 18, 2011 6:55 pm

I was not aware of demutualization drama until after I posted to this thread. I went to MetLife site directly and found this updated information (dated 2/25/2010) and it looks like the IRS' position may not be supported by the court.
Sale of Shares.
You will generally realize gain or loss upon the sale of shares through the Purchase and Sale Program. The amount of gain realized will be equal to the difference between the amount realized on the sale of shares and the tax basis of the shares. The IRS position is that shares that were issued in the demutualization to the Trust for the benefit of a Trust Beneficiary will have a zero basis. You may refer to the IRS website at www.irs.gov/taxtopics/tc430.html for more information. (In this regard, the conversion of Metropolitan Life Insurance Company from a mutual life insurance company to a stock life insurance company was a tax-free reorganization under Section 368(a)(1) of the Internal Revenue Code. The stock of Metropolitan Life Insurance Company was treated as having been transferred to MetLife, Inc. in a tax-free transfer under Section 351(a) of the Internal Revenue Code.) But also see Fisher v. US, 82 Fed. Cl. 780 (2008) (affirmed in an unpublished per curiam order of the U. S. Court of Appeals for the Federal Circuit), in which the U.S. Court of Federal Claims rejected the IRS position. Assuming that the shares sold are held as a capital asset, any realized gain will be capital gain or loss and will be long-term capital gain or loss if the holding period for the shares is longer than one year.

http://phx.corporate-ir.net/External.Fi ... BlPTM=&t=1
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Postby nydad » Sat Feb 19, 2011 12:13 am

I sold some this year as well.

take a look at this if you want a professional to handle your past returns:
http://www.demutualization.biz/

Also, I spoke with Manulife investor services, they said they demutualized on Sep 24, 1999, with a closing market price of $12.16/share. With a split, this gives a basis per share of 6.08/share, which is what I used.
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Postby dratkinson » Sat Feb 19, 2011 8:55 am

Don't know this to be correct, but, for what it is worth....

You all got me curious about this again, and reading above website... it appears it is devoted to filing protective claims and recovering overtaxed sale proceeds. For those of us who have not yet sold our shares, we still have time to research the cost basis argument.

In my case, searching google for "metlife demutualization cost basis" (w/o the quote marks) returned several interesting sites. The most interesting (for me) being...

www.costbasis.com , "Received in Demutualization of an Insurance Co.": http://www.costbasis.com/stocks/demutua ... hares.html

This case was pursued by a Minnesota accountant, Charles Ulrich, CPA, in the spirit of public service. He just thought the IRS position was unjust to taxpayers.

For instance, if the decision stands, for MetLife stock received in the demutualization process back in the year 2000, the probable basis per share will be the lesser of $14.25 (the initial IPO price) or the cumulative net premiums (after dividends) that the policyholder paid divided by the number of shares received. Watch this space for further developments. Detailed information can be found at the following website:

www.demutualization.org

Also watch the Investor Relations website of demutualized insurance companies for further developments:

MetLife: http://investor.metlife.com/phoenix.zht ... rol-irhome
Prudential: http://www.investor.prudential.com/phoe ... rol-irhome
Indianapolis Life: http://www.amerus.com/taxinfo.pdf
AmerUs Life: http://www.amerus.com/taxinfo.pdf

The IPO (initial public offering) prices, which will most likely be your cost basis per share, for various demutualized companies were as follows:

AmerUs Life (received Amerus Group Co shares, bought by Aviva).....................$26.00
Anthem Insurance Companies........................................................................$36.00
John Hancock (later acquired by Manulife).....................................................$17.00 MetLife......................................................................................................$14.25
Phoenix Home Life Mutual Insurance............................................................ $17.50 Prudential..................................................................................................$27.50
Indianapolis Life (received Amerus Group Co shares, bought by Aviva)..............$35.63
State Mutual Life Assurance Co (received Allmerica Financial Corp shares)...... $21.00

Your holding period (date of purchase) for the shares would be the date you originally started paying insurance premiums to the company.

A resource which explains how to file a protective refund claim for refund of capital gain taxes (if you already sold the shares and declared a tax basis of zero) can be found at:
www.kiplinger.com/letterlinks/demutualization

If you need assistance filing a refund claim, the following resource may be helpful:
www.demutualization.biz


The suggestion is to watch the insurance company website---under investor relations. That will be next for me. Then I will compute my cost basis and stick it in a folder for the time when I do sell my shares.

Thanks to all for reminding me of this outstanding task.



(Update) Searched and found current information on MelLife website. Same gobbledygook... IRS says $zero, some court says otherwise... nothing definitive. But, of course, it's only been 10 years since MetLife's demutualization. :!:

Maybe donating appreciated shares is the cleanest answer to thwarting uncle sugar's sticky fingers. :)
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