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Revisiting Allocation of Basis Issues
The courts have taken varying approaches to determining the basis of stock that is received by an insurance policyholder in exchange for the policyholder's surrender of membership rights in a mutual insurance company, in a “demutualization” transaction. While this may seem to be a narrow and abstruse question, the approaches taken by the courts may have application in other areas of the tax law affecting analogous transactions.
Most recently, the U.S. Court of Appeals for the Ninth Circuit, in Dorrance v. United States, Docket Nos. 13-16548, 13-16635 (Dec. 9, 2015), reversing Dorrance v. United States, 111 AFTR 2d 2013-1280 (D. Ct. Arizona), reversed the district court decisions in that case, agreed with the government position that the policyholder's basis in the stock did not include any part of the premiums paid by the policyholder for insurance, and concluded that the entire proceeds from the subsequent sale of the stock by the policyholder constituted gain. (The decisions of the district court in Dorrance in 2012 and 2013 were discussed by the authors in an earlier article in this newsletter's ALM sibling, New York Law Journal. See, E. Pisem and D. Kahen, “Diverse Approaches to Allocation of Basis in Demutualizations,” N.Y.L.J., April 18, 2013.
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