Exchange of Policyholder Interest for Stock

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

A mutual insurance company is owned by its policyholders and has no stock. When an insurance company demutualizes, a policyholder's ownership interest in the mutual company may be exchanged for shares in a stock life insurance company and/or cash. The exchange does not cause the policies to change, except for the name. The policyholder's basis in the policy stays the same.

The treatment of the demutualization depends on whether it is a tax-free reorganization under section 368(a)(1) of the Internal Revenue Code. Information on whether the reorganization qualifies under section 368 (a) (1) may be obtained from the (former) mutual company.

If the demutualization qualifies as a tax-free reorganization and you elected to receive stock, you will not have any gain or loss on the exchange.Note: You may be taxed on the gain or loss from stock when you sell or otherwise dispose of it at a later date. When you sell or otherwise dispose of the stock your basis in it is generally zero (unless you paid some amount for your mutual ownership interest, in which case that amount is your basis) and your holding period is treated as beginning on the date you purchased the insurance policy.

If you elected to receive cash instead of stock in the tax-free reorganization, you are deemed to have received shares and then to have sold them back to the corporation (i.e., redeemed your shares). Generally this results in capital gain or loss reportable on Form 1040, Schedule D (PDF), Capital Gains and Losses. If you owned the policy for more than one year as of the date of the demutualization, the gain or loss is treated as long-term capital gain or loss. If you owned the policy for a year or less, the gain or loss is short-term capital gain or loss. Refer to section 1223 (1) of the Internal Revenue Code.

Refer to Revenue Ruling 71-233 regarding the Federal income tax consequence of a demutualization qualifying as a reorganization under section 368 (a) (1).

If the demutualization does not qualify as a tax-free reorganization, you must recognize a capital gain or loss on the receipt of either cash or stock. If you elected to receive stock, your gain or loss is the difference between your basis in your mutual ownership interest (which is generally zero) and the fair market value of the stock, when you receive it. Your basis in the stock is the fair market value when you receive it. Your holding period for the stock begins when you receive it and does not include the period you owned your policy.

For more information, refer to Publication 550, Investment Income and Expenses.

Copies of Revenue Rulings are available in one of the local Federal Depositary Libraries in your community. To find the library nearest to you, visit the Governmental Printing Office Locate Federal Depository Libraries website at: www.gpoaccess.gov/libraries.html.

Source: IRS.gov

Personal tools