IRS Hungry To Tax Demutualization Payouts
The Internal Revenue Service is currently locked in a dispute with a Minnesota accountant who believes the IRS is wrong in contending that payments, whether cash or stock, made available by mutual insurance companies to policyholders when the insurer converts to stock status are totally taxable when the cash is received or the stock is sold.
The dispute at this time only involves so-called “mom and pop” policyholders who receive a small amount of cash or a distribution of stock when a mutual insurer converts.
But, according to Walker Johnson and Arthur Bailey, partners at Steptoe & Johnson in Washington, D.C., the stakes could be much higher if corporations receive such distributions because they are the owners of life insurance.
Among major companies that have demutualized are Prudential, MetLife, Principal, John Hancock, Sun Life, Manulife, Clarica, Canada Life, AmerUs, Provident Mutual and Phoenix Home Life.
The accountant, C.D. Ulrich of Baxter, Minn., agrees. “We are having difficulty contacting the shareholders involved but think that there are 15 million policyholders who have been affected or will be affected,” Ulrich says.
The IRS did not respond to requests for comment.
The scope of the potential litigation, and Ulrich does believe he will have to go to Tax Court to get relief for policyholders, is enormous. “We know that in terms of cash or market value of stock that has been distributed beginning with 1999, there are 15 companies who have distributed in excess of $100 billion in cash or stock to policyholders.”
Ulrich says, “Its a huge issue and it is unbelievable that something like this could occur.”
Bailey says, “It is pretty evident that the result favors the IRS and allows it to maximize the taxes paid on mutual-to-stock conversions.”