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Decision On Demutualization Cost Basis Sought

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Lawyers for life insurance policyholders who received stock or cash as part of demutualizations are asking a federal court to establish a cost basis for tax purposes on the distributions that is far higher than insisted upon by the IRS.

Lawyers for the Seymour Nagan Irrevocable Trust said in a court filing March 10 with the U.S. Court of Federal Claims in Washington, D.C., that they would like to narrow the scope of a lawsuit filed with the court on Dec. 1, 2004, to defer certifying the suit as a class action until after the basic issue of the cost basis to policyholders from demutualizations is adjudicated.

“Disposition of this motion will expedite the disposition of this entire matter, since the only substantive tax disagreement between the parties is over the issue covered by this motion,” the filing says. “In the event that partial summary judgment is granted as requested, plaintiff would then contemplate filing a motion for class certification.” The suit was filed by the Raby Law Office of Tempe, Ariz. The case is being heard by Judge George W. Miller.

The lawyers for the trust contend in their lawsuit that little case law on the issue should lead the court to determine that the cost can be valued in two separate ways.

The lawyers for the Nagan trust contend that the value of the distributions for tax purposes should be either the lesser of the fair market value of the stock as of the date received or the net premiums paid on the life insurance policy giving rise to the stock distribution.

The IRS, in a response in February to the suit, and in a 1979 Notice, has been treating the distributions as having no cost basis; in other words, the tax basis when the distribution is in cash or when the stock is sold is the total amount of the distribution.

In the brief in the Nagan lawsuit, its lawyers contend that the advice provided policyholders based on the IRS policy “was based on IRS dicta and not based upon any specific statute, regulation or case law.”

To the contrary, the last brief by the Trusts trustee, Eugene A Fisher, says, “I realized that it was likely that the trusts tax basis in the Sun Financial Services shares was their fair market value when those shares were received.”

The court case is based on the belief of several lawyers and accountants who have made the project their lifes work that the IRS contention that the distributions have no cost basis for tax purposes is inappropriate.

One of the leaders of the group is C.D. Ulrich, a Baxter, Minn., CPA. Billions of dollars in distributions are involved, Ulrich contends, through the demutualizations over the past decade of 22 life insurance companies, by his estimate.

These include Unum, Equitable Life, Guarantee Mutual, State Mutual (First
American Financial Life), Farm Family, Mutual of New York, Standard
Insurance, Manulife, Mutual Life of Canada (Clarica), Canada Life, Industrial Alliance, John Hancock, Metropolitan Life, Sun Life of Canada, Central Life Assurance (AmerUs), Indianapolis Life, Phoenix Home
Life, Principal Mutual, Anthem Life, Provident Mutual, Prudential and General American Mutual Holding Company, which was sold to MetLife through its liquidation by the Missouri Department of Insurance.

Reproduced from National Underwriter Edition, March 25, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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