The Internal Revenue Service inappropriately requires policyholders who receive stock in a mutual-to-stock conversion to pay taxes on the proceeds when the stock is sold, a federal Court of Claims judge has ruled.
The decision has far-reaching implications, potentially impacting more than 40 conversions dating from 1986 with proceeds to shareholders exceeding $200 billion, says a Minnesota CPA who advised his Rockville, Md.-based client to sue.
The plaintiff is Eugene Fisher, trustee for the Seymour Nagan irrevocable trust.
A spokesman for the Department of Justice, which litigated the case on behalf of the IRS, said no determination has been made as yet as to what the government will do next. But, one Washington, D.C. lawyer familiar with the long-running issue cautioned against reading too much into the decision.
The lawyer, who asked not to be named because he has clients on both sides of the issue, said, “This decision should be taken with caution. I don’t think taxpayers should run to the bank just yet.”
In Fisher v. U.S., No. 04-1726T, filed Aug. 6, Judge Francis Allegra of the U.S. Court of Claims, said mutual-to-stock conversions of insurance companies are similar to an “open transaction,” in which the court cannot distinguish between the value of the life insurance policy to the policyholder and the value of the policyholder’s interest in the insurer.
The lawyer noted that this is a very important case, one of “first impression;” that is, the first time a U.S. court has ruled on the issue.
He predicted that the government, through the Department of Justice, is going to appeal the case to the Court of Appeals for the Federal Circuit. “And, if they lose, they could likely go to the Supreme Court,” the lawyer said. “Otherwise, all taxpayers could go to this court and there could be a substantial effect on government revenues.”
The lawyer said this decision only applies to a mutual insurance company that distributes stock to its policyholders in a conversion.
In the decision, the lawyer said, the court said “it can’t determine the basis of the ownership interest the policyholder had in the mutual company.”