Court Backs Mutual Policyholders Who Get Stock In Conversions

Therefore, “it is an ‘open transaction’ that doesn’t require the policyholder to pay any tax when he sells his stock.”

The basis, the lawyer said, “can only be determined after the insurance policy terminates, through death, cancellation, etc.”

The Department of Justice, defending an IRS regulation dating to 1971, argued in court papers and in oral arguments that, “When the policy was purchased, the Trust had no realistic anticipation of receiving anything of value in exchange for those rights, and none of the policy premium was paid for those rights.”

Under these circumstances, DOJ lawyers argued, no basis can be allocated to those rights, even though at a later date the Trust received something of value for them,” citing a 2001 decision in the 9th Circuit U.S. Court of Appeals.

In a brief, DOJ lawyers also argued that, “The evidence at trial will establish that the financial services stock represented a windfall to the Trust and bore no relationship to the premiums the Trust paid.”

In his decision, Allegra said the record “supports the opinion rendered by plaintiff’s valuation expert that the value of the ownership rights was not discernible, leading the court to conclude that plaintiff has borne its burden of proof in this case.”

Don Alexander, a lawyer at Akin, Gump and a former IRS commissioner, voiced support for the decision.

“I think Judge Allegra has come to the right conclusion,” Alexander said. “He doesn’t establish a tax basis at all. He doesn’t have to. Because as he points out, whatever the number is, the number is sufficient to eliminate any taxable gains on the transaction. As a result, the basis exceeds the amount he gains.”

Charles Ulrich, a Baxter, Minn., CPA who advised his client, Eugene Fisher to appeal the decision to the Claims Court, voiced deep concern that, even though Allegra ruled in November 2006 that the 1971 interpretation and other revenue rulings by the IRS “are not applicable to this case, the IRS and insurance companies, in responding to insured’s inquiries, continue to cite the zero basis position of the IRS.”

As a result, he said “policyholders who followed the zero basis direction of the IRS have therefore been damaged by compliance with IRS instructions by losing refund rights due to the statute of limitations.”