Demutualization - this year's taxes

It seems that you would owe the additional tax but not any interest or penalties. But I'm being expansive in my reading of 6404. Abatements (f), namely expanding "written advice for the Internal Revenue Service" below to mean "written advice by the courts". It seems reasonable that in view of the courts ruling, the IRS would change their statutes to reflect the new rule, but if they appeal and win, then you can always say you were relying on the written advice of their published statutes (wonder where they are), so interest and penalties should be waived.

(f) Abatement of any penalty or addition to tax attributable to erroneous written advice by the Internal Revenue Service (1) In general The Secretary shall abate any portion of any penalty or addition to tax attributable to erroneous advice furnished to the taxpayer in writing by an officer or employee of the Internal Revenue Service, acting in such officer?s or employee?s official capacity.

I do hope that the IRS does not appeal, or if it does then it loses.

Also, if income is under-reported by more than 25%, then the statute of limitations is 6 years, not 3. So if these mutual fund shares would result in your tax increasing by more than 25% if you use the cost basis as zero, and the IRS wins its appeal, then they have 6 years to assess tax.

I believe the opening price was $37.50?

More on IRS' loss in court on taxing sales of demutualization insurers' stock

You should file a protective refund claim if you haven't done so already and the three year statute of limitations hasn't run for the year you sold the stock.If you sold the stock in 2004, you're shut out unless you filed for a extension to October 17, 2005. All subsequent tax years remain open.

File Form 1040-X with the IRS and write "Protective Refund Claim Do- Not-Process" on top of the form. The Service should hold the claim in abeyance until the upcoming appeal is decided.

The Court didn't establish the basis for the stock that policyholders got. It said only that folks who immediately sold shares received in the demutualization didn't have any gain because the proceeds didn't exceed their tax basis in the policy.

Tax pros say it's safe to use the stock's value on the date of distribution as the basis. And they say you can rely on the decision to report sales on 1040s filed in the future.

Seems to me you should use the $27.50 per share or your basis in the contract, whichever was less, at the time of the deumutualization. That's what the court case concluded, best I can tell. No, maybe not... Q: Is [was] there a taxable gain from the demutualization if your basis in the contract at that time was less than $27.50 per share?

"Tax pros say it's safe to use the stock's value on the date of distribution as the basis. And they say you can rely on the decision to report sales on 1040s filed in the future."

I'm pretty sure that not all tax pros would say this; frinstance, I'm a tax pro, and I don't think you would automatically get to use the stock value on the date of distribution -- especially, and specifically, if your tax basis in the insurance policy/contract is less than that amount !!!

Is the jurisdiction of this court nationwide?

United States Court of Federal Claims. A national court that is only bound to follow decisions of the Court of Appeals for the Federal Circuit (this is where appeals would go). The IRS has not announced whether they intend to appeal.