Don’t agree with the IRS? Sue them. That’s just what an accountant and one of clients did [1]. For years, the accountant has been protesting a tax law, and they have finally had a court rule in their favor.
The exciting part, is that the ruling also affects 30 million other people! You could be one of them if you were the policyholder of an insurance company that demutualized.
What is Demutualization?
A mutual insurance company is owned by the policy holders. When the company decides to go public, and issue shares to the policy holders, the process of converting is called demutualization. It’s similar to the bank IPOs mutual to stock conversion process [2] that I’ve been a part of.
Examples of popular insurance companies that demutualized in the last ten years are: John Hancock, Met Life, Prudential, and Principal.
Who is Eligible for a Refund?
There is a three year statue of limitations to amend your tax return. Taxes paid in 2005 have until April 15, 2009 to file an amendment. Therefore, policyholders who received cash or stock after January 1, 2005 are eligible for the refund.
In addition, if you received stock prior to 2005, but didn’t sell it until 2005 or after, you are also eligible. The accountant made a list of insurance companies that demutualized [3].
Unfortunately, many policyholders will be out of luck if they sold their stock right away, as many of the companies demutualized before 2005.
How Much is the Refund?
The ruling determined that only the gain of the stock is taxable. Previously the law stated that the entire value of the stock was taxable. Here’s an example:
Insurance company “A” demutualized. You receive 10 shares of stock valued at $45 each. You sell the stocks at $55 each and receive $550. Let’s say your tax bracket is 25%. You pay $137.50 in tax. Under the new ruling, only the gain ($100) is taxable. Your tax is only $25, so you are entitled to a refund of $112.50.
The amount of your refund will depend on the insurance company where you were a policyholder, how many shares you received, how much the value of the stock increased, and your tax bracket.
How to Claim Your Refund
You will need to amend your tax return using Form 1040X [4]. For more information, or to follow the process, see the website of the accountant: Charles Ulrich.
Spread the Word
Even if you didn’t receive a distribution, you may want to pass on the message. 30 million people is a whopping 10% of the current U.S. Population [5], so you probably have someone close to you who received cash or stock during a demutualization. Here’s hoping that they held their stock for awhile so they won’t be excluded by the statue of limitations.
Action Plan
I remember my husband’s grandma telling me she received some shares from their insurance company awhile back. I think it might have been John Hancock. I’ll have my husband give her a call today to find out when she sold the stock!
This article included in Carnival of Personal Finance #168 [6].