Capital Gains from "Demutualization"

[HadEnuff]

The last 10 or 15 years that I practiced dentistry I purchased my malpractice insurance through a "mutual" insurance company. Two years after I retired the company was purchased by Berkshire Hathaway. Even though I hadn't paid premiums for a couple of years, I was entitled to some of the proceeds by virtue of some the last years I was a premium paying policy holder.

So out of the blue comes a check for 8K, and another 2K withheld, for a total "gain" of about 10K...

I got a 1099-B, and the space for "basis" is left blank. From what I can gather from the internet search, my basis for such a payout is "zero"...

Not a huge deal since it will be considered a LT Cap. Gain ( I think) since I haven't given them any money for over 2 years, and I'm keeping my taxable income under 75K this year. It will have an effect on my ACA subsidy, I'm sure.

All of the searches I located referred to "life insurance mutual companies", but I can't see why it would be different for a malpractice mutual company.

The formula for the amount of the check was 1.9X the premiums paid for the qualifying period, so I had hoped to argue that my basis would be the premiums. Any experts out there with any advice?

 

[pb4uski]

I had the same thing when Prudential demutualized many years ago... I was given stock but because Prudential was a client of the firm I had to sell it right away... basis was $0.

https://www.thetaxadviser.com/issues/2016/feb/stock-received-in-demutualization-has-no-basis.html

I could see if something like that happened late in the year that it could blow up someone's careful ACA subsidy planning.

 

[HadEnuff]

I had the same thing when Prudential demutualized many years ago... I was given stock but because Prudential was a client of the firm I had to sell it right away... basis was $0.

https://www.thetaxadviser.com/issues/2016/feb/stock-received-in-demutualization-has-no-basis.html

thanks, PB...as a matter of fact that's the same article I had read...as my dear old uncle would have said..."screwed again"...

 

[pb4uski]

I dunno... if someone dropped $10k in my lap out of nowhere and told me it was taxable I think I could get over paying the $1.5k in tax pretty quickly.

 

[HadEnuff]

I dunno... if someone dropped $10k in my lap out of nowhere and told me it was taxable I think I could get over paying the $1.5k in tax pretty quickly.

I'm not complaining. Just trying to figure it out.

 

[SecondCor521]

I had a similar thing a long time ago when a life insurance company demutualized. Following advice at the time from people I trusted, I paid LTCG with a basis of zero. I found a few articles online later that argued that the premiums paid represented basis, but it didn't sound all that certain so I let it go.

 

[HadEnuff]

I had a similar thing a long time ago when a life insurance company demutualized. Following advice at the time from people I trusted, I paid LTCG with a basis of zero. I found a few articles online later that argued that the premiums paid represented basis, but it didn't sound all that certain so I let it go.

My argument would have been exactly that, but the article that PB4USKI linked detailed how that argument was at first held up in a court, but later shot down in a subsequent court.

The thinking, I guess, which makes some sense, is that the premiums were paid to buy a product i.e. insurance coverage, and were made with no expectation that there would be some sort of return on investment later. Which in my case is exactly true.

 

[RunningBum]

If it also cost you $9000 in subsidies (very possible) it would not be so good.

At least this came early enough in the year to either make adjustments, or abandon the subsidy this year and better position for future years.

 

[HadEnuff]

From everything I've managed to scour up, looks like it's Short Term, zero basis...

Luckily though it didn't push me into the bracket where I have to pay taxes on my SS. I do take a hit, although not a catastrophic one, on the ACA subsidy.

Since the company that made the distribution, and issued the 1099 withheld some taxes, it feels like more of "win" than if I'd have had to write a check.
They left a lot of important boxes on the 1099 blank, so I had to do some digging to find the appropriate treatment, which made the process a bit more stressful than it needed to be IMO.
I don't think I'd have been completely unjustified to try it the more favorable way, LT, with my basis calculated on my premiums, but from what I read I would likely get audited, and almost certainly lose my argument. And frankly, not enough money at stake to be worth the hassle. I just hope I did it correctly.

 

[pb4uski]

Does this help?

If you elected to receive cash instead of stock in the tax-free reorganization, you're deemed to have received the shares of stock and then to have sold them back to the corporation (i.e., redeemed your shares). This may result in capital gain reportable on Form 1040, Schedule D.pdf, Capital Gains and Losses and on Form 8949.pdf, Sales and Other Dispositions of Capital Assets. If you owned the policy for more than one year as of the date of the demutualization, the gain is treated as long-term capital gain. If you owned the policy for a year or less, the gain is short-term capital gain. Refer to Internal Revenue Code section 1223(1).

https://www.irs.gov/taxtopics/tc430

While you didn't "elect" to receive cash instead of stock, you received cash instead of stock because the transaction was sponsored demutualization and the demutalized company stock was not publicly traded so you had no choice.

 

[Clone]

The ones that bother me are the 1099-PATR distributions.



You get to pay taxes the first year on the amount of the distribution, but they send you checks that dribble in over the next 20 years.

 

[HadEnuff]

Does this help?



https://www.irs.gov/taxtopics/tc430

While you didn't "elect" to receive cash instead of stock, you received cash instead of stock because the transaction was sponsored demutualization and the demutalized company stock was not publicly traded so you had no choice.

Exactly. That's the way I interpret it as well.

thanks.

 

[pb4uski]

I'm confused then... in post #9 you said short-term capital gain.... the info I posted and that you agreed with says long-term capital gain. It should be long-term capital gain... right?

 

[HadEnuff]

I'm confused then... in post #9 you said short-term capital gain.... the info I posted and that you agreed with says long-term capital gain. It should be long-term capital gain... right?

The way I interpret it is that on the day the stock was issued, I would have had to keep the stock for one year before selling it for it to be a LT capital gain. I was unable to do that. The stock was immediately sold for cash, and distributed to me, hence STCG.

As you stated, I didn't have a choice.

 

[pb4uski]

No, it was a long-term gain as long as you owned the policy for a year or more prior to demutualization date.

...If you owned the policy for more than one year as of the date of the demutualization, the gain is treated as long-term capital gain. ...

 

[HadEnuff]

No, it was a long-term gain as long as you owned the policy for a year or more prior to demutualization date.

..If you owned the policy for more than one year as of the date of the demutualization, the gain is treated as long-term capital gain. ...

Oh...I think that's awkwardly stated, but yeah...I think you got it right and I got it wrong...

thanks again

 

[38Chevy454]

Maybe I am more risk taking than some, but my opinion with the IRS is to interpret things in your favor when you can make a reasonable argument to support your filing. In the case you have, pb4uski has made a valid point for it being treated as LTCG. I agree with his analysis and evaluation of the situation you are facing.



Worse case if the IRS disagrees, you will be able to support your filing and would only be responsible for the difference plus interest. No penalty since you were not deceiving and trying to skirt the law.

 

[DAYDREAMER]

Worse case if the IRS disagrees, you will be able to support your filing and would only be responsible for the difference plus interest. No penalty since you were not deceiving and trying to skirt the law.

Hate to be Debbie downer, but, IRS does not care about good intentions. By law, penalties are assed to any taxes not paid on time.

 

[pb4uski]

Hate to be Debbie downer, but, IRS does not care about good intentions. By law, penalties are assed to any taxes not paid on time.

But the issue at hand is more whether the OP's gain is LTCG or STCG... not reporting the gain. There is IRS guidance that clearly says it is LTCG so the discussion is moot.

But I agree with Chevy, if whether the gain was LTCG or STCG was unclear and there was a reasonable basis for claiming LTCG, I would chose LTCG. The gain was reported so there is no failure to report concerns. If challenged and lost the taxpayer would be responsible for the additional tax and interest but I doubt they would try to get any penalties for misreporting STCG as LTCG if it wasn't claer that it was STCG.

 

[gwraigty]

Hate to be Debbie downer, but, IRS does not care about good intentions. By law, penalties are assed to any taxes not paid on time.

Absolutely!

 

[DAYDREAMER]

Absolutely!

Lol, oops, Oh well! I stand by my spelling