IRS Sued Over Taxation Of Demutualization Payouts

IRS Sued Over Taxation Of Demutualization Payouts

Washington

A lawsuit has been filed against the Internal Revenue Service in Federal Claims Court in Washington, D.C., seeking a refund for taxes paid on stock and cash distributions received when mutual insurers converted to stock companies.

The suit is the latest step in a controversy between the IRS and a group of CPAs and lawyers on the issue of whether a policyholder has a claim to more than the value of his policy when an insurer converts from mutual to stock status.

According to C.D. Ulrich, a Baxter, Minn., CPA, if the suit is successful, policyholders who received the distributions as far back as 1986 would not have to pay taxes when they sold the stock. But the suit only cites taxes paid for the year 2000 and beyond because a statute of limitations applies. Ulrich did say he was suggesting to potential class members that they should file for a refund if they had sold the stock recently to protect their position. The suit cites distributions to policyholders of 22 mutual insurers that converted to stock status, starting with Unum in 1986.

The suit was filed on behalf of an irrevocable trust created by a Rockville, Md., man. The plaintiff seeks a refund of the $5,725 in federal income taxes paid for the year ended Dec. 31, 2000. The tax was the result of the sale of stock distributed by Sun Life Assurance Company of Canada, when it demutualized in 2000.

But the plaintiff also seeks class-action status for the lawsuit. “The potential members of the class number is in the millions,” the suit said, adding that “the names of most of the class members are unknown to the identified plaintiff, but are known to, or ascertainable by, defendant, since the claims involved have all been filed with defendant [the IRS].”