Posts Tagged ‘Fisher’

Taxpayer gets basis of 60% of IPO price in demutualized shares in Arizona case

Thursday, March 21st, 2013 by Joe Kristan


VLUU L310 W  / Samsung L310 WLast year a Federal judge in Arizona dampened the hopes of recipients of stock in insurance company demutualizations by ruling that the “open transaction” rule didn’t apply.  That rule, first used in the Fisher case, would make all IPO gain go away for some taxpayers receiving stock when insurance companies go from “mutual” to “stock” format.

Cheer up, stockholders.  The same judge this week determined that mutual policyholders still get a much better result than the IRS “zero basis” rule.  The IRS rule gives shareholders no basis in their mutual shares, making all proceeds taxable.

The plaintiffs in this case sold the shares of a number of insurance companies, including Des Moines-based Principal Financial Group; apparently they were wonderful insurance policy customers.   The judge looked to how the insurance companies determined demutualization IPO values and applied their analysis to determine the basis of the shares issued.

When determining how many shares of stock to give policyholders, the Companies calculated (1) a fixed component for the loss of voting rights, since each policyholder was entitled to one vote, and (2) a variable component for the loss of other rights, measured by the policyholder’s past and projected future contributions to the company’s surplus. Of the variable component, 60% was an estimate of each policyholder’s past contributions to surplus as of the calculation date while the remaining 40% was an estimate of future contributions.

     The Companies allocated shares to Plaintiffs based on (1) the value of voting rights, (2) past contributions to surplus, and (3) projected future contributions to surplus. Effectively, Plaintiffs paid for shares of stock in the demutualized Companies by relinquishing voting rights and making contributions to surplus. However, projected future contributions to surplus are a portion of premiums which Plaintiffs had not actually paid before receiving shares and cannot be considered as a part of basis.

      Therefore, Plaintiffs’ basis is equal to the combination of the IPO value of shares allocated to Plaintiffs for (1) the fixed component representing compensation for relinquished voting rights (“fixed shares”) and (2) 60% of the variable component representing past contributions to surplus (“variable shares”).

In short, the shareholders got a little more than 60% of the IPO value as share basis.

While this is a defeat for the IRS, it is not as taxpayer-favorable as the Fisher case.  If this new case is upheld on appeal, there will be a conflict among the circuits as to which rule applies.  Whether the IRS will continue to litigate or will settle based on this case is anyone’s guess.  In the meantime, if you have demutualized shares, or sold them in an open year, be sure you have a refund claim in to preserve your refund rights.


Cite: Dorrance, DC-AZ No. 2:09-cv-01284 (3/19/2013)

Prior coverage:

Arizona court shoots down “open transaction” rule for demutualization gains




Tax Roundup, 1/23/2013: PTIN Paralysis! And: pay Iowa taxes with a cell phone?

Wednesday, January 23rd, 2013 by Joe Kristan

20130121-2The IRS has turned off its preparer registration initiative following the federal court decision enjoining the program.  The Service issued this statement yesterday:

As of Friday, Jan. 18, 2013, the United States District Court for the District of Columbia has enjoined the Internal Revenue Service from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.

The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly. Please continue to check this site as additional information becomes available.

The second paragraph is the most interesting. While the IRS doesn’t admit that it overreached, this is far short of a vow to fight to the last appeals brief.  One can only hope they will reconsider the whole misbegotten regulatory scheme.

Meanwhile, Accounting Today confirms reports the IRS has shut down the PTIN registration system and the Registered Tax Return Preparer testing program.  They report the PTIN system is expected to come online again after the RTRP registration system is removed from it.  Meanwhile, the Return Preparer Office has apparently turned off its phones.

All of this makes me believe that the IRS is not seeking any emergency stay of Friday’s decision and is planning to do without the RTRP rules for this season, anyway.


TaxGrrrl posts a great interview with the winning attorney in the preparer regulation decision, Dan Alban.  She encounters a new perspective on whether regulation actually does more good than harm (my emphasis?:

Finally, with all of the legal niceties out of the way, I asked Alban the really tough questions: What about all of those folks who say that regulation is a good thing? What does this ruling mean for taxpayers? And why would you embrace a scheme that wouldn’t require – at a very basic level – some semblance of regulation to ensure that preparers are competent?

Alban didn’t hesitate. Intent, he says, is key. The intent of any kind of licensing scheme should be to protect the consumer. But Alban, who focuses on a occupational licensing in his practice, noted that frequently, these kinds of laws instead protect established interests from competition. That is, he says, not in the best interest of the consumer.

And with that, I paused. You see, in all of the years that I’ve been writing this blog, I’ve only received a phone call from IRS complaining about a post once. And it was for this one. The IRS wanted to assure me that the exemptions had nothing to do with any special interests. None. Not a whit. Interestingly, many preparers at smaller firms thought differently. I received a number of supportive emails and “off the record” comments about how the new rules felt discriminatory.

Bingo. Regulation always favors the big.  It’s no big deal for H&R Block headquarters staff to deal with regulations for all of its franchises.   It’s a different story for small operators like Sabina Loving, the solo preparer in a low-income South Side Chicago neighborhood who was lead plaintiff in last week’s decision.

It would appear that attorneys benefited disproportionately from the regulations; as a point of context, the American Bar Association (ABA) has encouraged the regulation of “other” preparers for years. Why is that? Is there maybe something to Alban’s idea that these kinds of laws protect established interests from competition?

And then Alban said something else that struck me:  about fifty years ago, only 1 in 20 workers in the U.S. needed government permission (in the way of regulations) to earn a living. Today, that number is 1 in 3. That, he said, is troubling. We are increasingly relying on the government to decide who is qualified to perform services for us. Is that something we want? Does regulation really make someone competent? Or honest?

No, it just gives them one more way to control things.

Russ Fox: Alphabet Soup

Trish McIntire, Voluntary Licensing?


Paying taxes with cell phone money?  The Iowa Department of Revenue yesterday announced a venture with Dwolla to enable taxpayers to pay taxes with Dwolla’s mobile device online payment technology.  The Des Moines Register Reports:

 Dwolla is a cash-based payment network that provides real-time, low-cost, online and mobile payments, officials said. Instead of charging a floating percentage and fixed fee per transaction for goods and services or dealing with administrative issues of checks, Dwolla’s network costs a flat 25-cent fee on any payment over $10, and it’s free for transactions under $10.

Iowa Department of Revenue Director Courtney Decker said the state’s first use of Dwolla will allow businesses that already pay more than $100 million in cigarette stamp taxes the option of using the Dwolla network. She added, “This is just the tip of the iceberg” in terms of Dwolla’s potential in state government.

Dwolla’s service is cheaper and safer than mailing and processing a paper check, Decker said, and it will allow participating businesses to receive their tax stamps more quickly. She added that 89 percent of Iowa individual income taxes are  filed electronically, but the percentage of people paying taxes electronically to her department is far lower.

Paying online now requires a slow application process and analog mail delivery to receive permission to make electronic payments.  The Dwolla system will be a big improvement if the Department enables it for individual income taxes.


IRS wins another demutualization case.  The IRS continues to fight the to tax proceeds on the demutualization of insurance companies.  They famously lost the Fisherdecision, which held that taxpayers could treat their payments for insurance premiums as basis when they received shares of stock in an insurance company changing from mutual ownership to a stock company.  But earlier this month the IRS won a Federal District Court Decision in California rejecting the Fisher“open transaction” scheme.  If the IRS wins on appeal, this will likely end up settled by the Supreme Court.  This is the second IRS victory since the Fisher decision.

Cite:  Reuben, DC CACD, CV 11-09448


Roger McEowen, Two Important Tax  Developments:

On January 18, two key tax developments occurred.  First, a federal district court wiped out the  IRS preparer regulations.  Later, IRS  announced that farmers aren’t stuck with the March 1 deadline and can file  timely by April 15.


David Brunori, Jindal’s Bold Move (

Republican Louisiana Governor Bobby Jindal has made the most provocative tax reform recommendation in many years. Jindal said he was going to overhaul the tax law. If he has his way, he will revolutionize it.

Pay attention, Governor Branstad.


Donald Marron,  Five Key Facts about the House Debt Limit Bill (Tax Vox)

Howard Gleckman,  How Obama’s Inaugural Address Frames the Policy Debate for the Next Decade (TaxVox).  I don’t think so.

Kay Bell,  Tax Carnival #111: Countdown to Filing.  It’s Kay’s roundup of tax tax-related posts from all over.

Jack Townsend,  Steps in OVDI/P Processing and Opting Out.  Dealing with the IRS when you have an undisclosed offshore account.

Jason Dinesen,  Home Office Deduction: IRS Offers a Simplified Calculation Option, But the Qualifying Rules Haven’t Changed

Patrick Temple-West,  Private equity tax breaks in jeopardy, and more (Tax Break)

William McBride,  Phil Mickelson’s Tax Rate

Robert D. Flach is Buzzing!  He also has posted What to Give Your Tax Preparer at

Jim Maule, Tax Ignorance and Its Siblings.  “Tax ignorance, of course, is but one part of political ignorance, as I explored in When Tax Ignorance Meets Political Ignorance.”  Yet the good professor insists that 50% + 1 voting by ignorant voters works better than trusting individual decisions in the marketplace.


News you can use: Life After Big 4: What You May Miss and Won’t Miss At All (Going Concern).  I don’t miss it one tiny bit.


Arizona court shoots down “open transaction” rule for demutualization gains

Wednesday, July 11th, 2012 by Joe Kristan

The happy fun times may be ending for recipients of insurance company stock when mutual companies go public.  A U.S. district court in Arizona has ruled that the “open transaction” rule is not the right way to tax sale of stock received in  a demutualization transaction.  He instead said that the cost of insurance policies needs to be allocated between the stock and the insurance policy value, and he ordered a trial to be held on how that should be done.

When a mutual insurance company becomes a stock company — usually so it can go public — its policyholders receive shares of the company based on their policy and business history with the mutual company — which they own as mutual policyholders.  Des Moines’ Principal Financial Group, for example, demutualized in 2001.  The IRS has long argued that taxpayers should receive no basis in stock received when mutual insurance companies convert to stock companies.  That would require taxpayers receiving such stock to pay capital gain taxes on 100% of proceeds received when demutualization stock is sold. 

A Minnesota CPA has long argued against this treatment, and his position won out when the Court of Claims in Washington, D.C. ruled in Fisher that the “open transaction” rule applied to demutualizations.  This position was upheld on appeal by the Court of Appeals for the Federal Circuit.  Under this rule all policy premiums paid could be considered to apply to the stock, and the reported gain would normally be zero.   Because most life insurance proceeds are non-taxable, there would be no gain on the insurance policies either.

The Arizona court held that neither the IRS approach or the Open Transaction approach were proper in the case under consideration:

The Court does not lightly disagree with another federal district court, and relies in some degree on arguments that do not appear to have been made before the Fisher court. But given the limited arguments at trial, it is not surprising that the Fisher court found that it was limited to deciding only whether “none of the basis of the originally-acquired property is allocable to the part disposed of or that all of it is allocable thereto until exhausted?” Id. at 784 (double emphasis in original). At summary judgment, this Court is not so limited, and finds neither argument convincing.

The judge said that there is no good reason the amount paid over the years in policy premiums can’t be allocated between the policies and the shares:

Since the value of both the mutual rights and the policy itself at the time of demutualization can be determined, there is no concern here that the taxpayer will be forced to pay tax on a transaction that is later proven to show a loss. The Ninth Circuit has confirmed that “taxation of an ‘open’ transaction is deferred only to the extent that consideration received by the seller consists of property having no ascertainable fair market value in the year of sale.”

The court ruling was a “summary judgment” holding that the taxpayer cannot rely on the Open Transaction rule.  There will now be a trial to determine how the basis will be allocated:

Neither party has yet presented evidence from which the Court could equitably apportion the premiums paid before demutualization as basis in the mutual rights and basis in the policies themselves. The Court has noted that previous Ninth Circuit caselaw suggests that the best method for such apportionment would be to compare the cost of Plaintiffs’ policies to the cost of comparable policies issued by non-mutual insurance companies at the time of issuance. Gladden, 262 F.3d at 856. On the other hand, commenters writing specifically about the issue of applying basis to mutual rights have suggested that comparing the market value of the policy and the stock at the time of demutualization, and applying that ratio to the premium payments, would be more appropriate.

The Court need not address, at summary judgment, which method of apportionment is appropriate. Plaintiffs have shown that they may have paid something for the mutual rights. The open transactions doctrine does not apply because the facts here do not present “elements of value so speculative in character as to prohibit any reasonably based projection of worth.”

Whatever the district court decides can be appealed to the Ninth Circuit Court of Appeals.  If it upholds the ruling against Open Transaction treatment, the stage may be set for a Supreme Court resolution of a conflict between the D.C  Circuit and the Ninth Circuit.

What should taxpayers do?  Right now the Arizona ruling is only law in that district.  Taxpayers can continue to file based on the Fisher Open Transaction holding.  Because they are filing in opposition to a long-standing IRS position, they should disclose their position on Form 8275.  Meanwhile, taxpayers who filed refund claims based on the Open Transaction rule can expect a long wait now before they can hope to get any cash.

Cite: Order on Summary Judgement, 7/9/12: Bennett Dorrance et ux. v. United States; USDC-AZ No. 2:09-cv-01284

Prior coverage:

IRS fighting demutualization holding in another venue


Demutualization: what to do now?


Don’t tell anybody, but…

Monday, October 19th, 2009 by Joe Kristan

…the Federal Circuit Court of Appeals on October 9 apparently upheld the taxpayer victory in the Fisher demutualization case, without comment.
It seems to be a secret. I can’t find it in Tax Analysts, and the Thompson/RIA Citator shows nothing.
Very strange. Not long ago a panel of the Federal Circuit went rogue and threatened to hollow out the income tax before thinking better of it. Now they get a closely watched case affecting every policyholder of a mutual insurance company that has gone public, and they can’t rouse themselves to an opinion.
The case allows taxpayers to offset premiums paid on mutual insurance policies against the proceeds of stock sold in a demutualization transaction. It will be interesting to see how the IRS and Congress address the case, now that they have lost on appeal in a court with nationwide jurisdiction. It remains unclear whether you get your entire premium as basis, or the IPO price, or some other number (limited by your premiums paid, presumably). It will also be interesting to see how far creative tax advisors will take the Fisher “open transaction” approach in other areas.
(Hat tip: Frank Carroll)