To report the sale of demutualization shares on your Form 1040 Schedule D Capital Gains and Losses, just report the net amount of sales proceeds as your cost basis and declare a capital gain of zero. (This assumes that you paid more in insurance premiums than the total IPO value of the demutualized shares.) Your new cost basis in the insurance policy is the cumulative premiums you paid less any dividends received less the return of capital in the amount of the net sales proceeds for the demutualization shares.
This case was originally pursued by a Minnesota accountant, Charles Ulrich, CPA, in the spirit of public service. He just thought the IRS position was unjust to taxpayers.
The Investor Relations websites of some of the demutualized insurance companies may provide further information. Some are relying on the IRS position and providing guidance that the cost basis is zero. The IRS instructions now specifically state that demutualized shares have a cost basis of zero. However, at the time this page was updated, the issue is still up in the air as far as the Courts are concerned. To be on the safe side, you could pay the long-term capital gain tax using a cost basis of zero and then immediately file a protective refund claim for the amount of tax paid.
The IPO (initial public offering) prices for various demutualized companies were as follows:
AmerUs Life (received Amerus Group Co shares, bought by Aviva)...............$26.00
Anthem Insurance Companies..................................................................$36.00
John Hancock (later acquired by Manulife)...............................................$17.00
Manulife Financial Corp.............................................C$18.00 equiv to US$12.20
MetLife................................................................................................$14.25
Phoenix Home Life Mutual Insurance...................................................... $17.50
Prudential............................................................................................$27.50
Indianapolis Life (received Amerus Group Co shares, bought by Aviva)........$35.63
State Mutual Life Assurance Co (received Allmerica Financial Corp shares). $21.00
Your holding period (date of purchase) for the shares would be the date you originally started paying insurance premiums to the company.
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