Selling Prudential stock

flip a coin:

The purchase date of the mutual fund is the purchase date of the stock it got converted to.

This is just wrong. There was no mutual fund and, if you read the link provided by Pico Rico, you would know that there is no definitive answer at this time.

Ira Smilovitz

Interesting, I thought there was a mutual fund and it git converted into a stock. This mutual form of ownership to a stock insurance corporation is a new concept for me.

Mutual insurance company means that the company is technically owned by its customers. Nothing is paid for ownership, and it only lasts as long as someone has a policy. If he stops having a policy, he gets the dividends (rebate) earned while he was a "member," but that's normally it.

So what is the basis? When is the acquisition date? It's hard to tell without a rule to go by.

The acquisition date is the date of demutualization, the cost basis is the value of the stock at that date per " the 11/15/06 order in Fisher v. U S No 04-1726T subsequently affirmed in an 8/08 decision of the US Court of Federal Claims which refers to stock received at the date of demutualization of the Prudential Insurance Company"

Somewhere I have a copy of the order but I can't find it - possibly buried in the garage with my 2005 tax return

In Fisher (82 Fed. Cl. 780) the court applied the open transaction doctrine, allowing the taxpayer to treat all premium payments as capital investment. The case was affirmed without opinion. Fisher v. United States, 333 Fed. Appx. 572 (2009).

Subsequent courts noted that in this kind of case the open transaction doctrine may be inappropriate. This is because insurance policies are often held until the death of the owner, at which time the basis becomes irrelevant if there has been no demutualization. So applying all premiums paid toward basis would result in little or no tax on the sale of the stock after demutualization, and it could not be made up when the death benefit is paid.

In Fisher the parties both argued that the basis could not be adequately determined. One commentator noted that the value of stock can be determined on demutualization, so applying the open transaction doctrine is inappropriate in this kind of situation. Paul Galindo, Revisiting the "Open Transaction" Doctrine: Exploring Gain Potential and the Importance of Categorizing Amounts Realized,

The point is, at this time there is no definitive rule on what the basis is, and when the holding period starts.

Perhaps one approach is to see what the premiums would have been if the company was a stock company from the start. As a mutual fund company perhaps the premiums are $50 a month, but as a stock company $60 a month, so the discount is $10 a month. They can do an average of all companies (for the same level of coverage/service). That $10 a month could be the cost basis, not the full premium of $50 a month. This gives a small non-zero cost basis, not as generous as the "open transaction" method.

This what Prudential itself had to say.

while I think the IRS position that the cost basis is zero makes no sense, the IPO raised $3B, so the argument is certainly not over chump change.

That's similar to the method one court suggested (but did not decide because it didn't need to in that case).

One approach might be to look at the premiums are higher for the mutual company than for stock companies, the difference paid over the past year could be basis.

So as a practical matter, what do we tell the OP? What does he put on his tax return when he sells the stock? If you were his tax preparer, what would you do?

Bob Sandler

I'm not a tax professional, but here's my two cents. There's two ways you can go:

1. The safe, expensive way: Use the ruling that says the basis is 0, and declare all the proceeds as capital gains. If a more favorable ruling comes out in the next 3 years, file amended returns to get back the excess tax.
2. The less expensive way: Use the more favorable ruling, minimizing the capital gains. If he gets audited, they'll probably say that he should have declared zero basis, and make him pay the additional tax and interest. You could probably make a case that he followed this ruling in good faith, so maybe they won't assess a penalty as well.

My personal approach would be to see if the policy he bought cost more than if he had gotten an identical policy from a non-mutual insurance company. If it was, then the difference (that was not returned to him as dividends in the past) would be his basis.

If the cost was the same, I'd take the basis as zero.

Ask the client if they have the stomach for getting into an argument with the IRS.

My understanding from when I went through the same thing right after the change, the company before the change was owned by the policy holders. WHen it was demutalized, the stock essentially was payment for my part of the mutual company. It would seem that the IPO price would be the basis, but I don't know how the fact it was life insurance and what the ramifications of that would be, is beyond my comprehension (grin).

Which brings up another question. I got rid of my shares pretty soon after demutalization in 2003 or so. Is it safe to assume that even if the courts decide the basis was wrong that I am WAY past the time I could do anything about it?

how in the world would someone do that, especially over a period of many years? Good in theory.

Here is my thinking:

A modified version of Barry's #1:

1. The safe, expensive way: Use the ruling that says the basis is 0, and declare all the proceeds as capital gains. If a more favorable ruling comes out in the next 3 years, file amended returns to get back the excess tax.

Modification: IMMEDIATELY file a protective claim for refund.

We really should be reading the link I provided, and its links to much more detailed information.

Yes.

Many years? A mutual company gives dividend rebates to its "members" each year. And if you don't renew your policy eacy year, you get nothing. So my thinking is that you only go back to the beginning of that one policy year.

That's certainly the safest, though you will likely be paying more tax than you actually owe.

How much of a refund do you ask for?

I read your link. But it provides no real information. You have to read all the relevant cases and see what each is based on before you can make a good decision on what to do in any individual case.

As I mentioned earlier, the Fisher case (which provided that the stock had a zero basis) shouldn't apply to most other situations. In that case the IRS argued for zero basis, and the taxpayer argued that all premiums paid in the past should go toward basis. The court had no evidence or legal arguments presented to make any other decision than one of those two, and the taxpayer's argument was determined to be incorrect, leaving only the IRS position.

If you use some other reasonable approach, at least one court has said that Fisher doesn't apply. And that makes sense, since a case should only have precedential value to a case based on similar facts and law.