When a mutual life insurance company (owned by its policyholders) converts to a stock company, the policyholders may retain their policy rights and also receive stock in the reorganized company. Two recent U.S. district court decisions have addressed how a policyholder should compute his tax basis in such stock.1 The decisions take varying approaches and reach conflicting results, although both courts did decline to follow the approach taken by the Court of Federal Claims several years ago in a similar case.2 This article contrasts the approaches taken in the three decisions, and explains how the resolution of this seemingly narrow issue may also be relevant in other circumstances in which a single "item" of property is divided into two or more parts before a disposition of one portion or the other.
Background
In all three cases, a life insurance policy had been obtained from a mutual insurance company. Because the issuer of the policy was a mutual insurance company, each policy holder also received, for no further consideration other than payment of the insurance premiums, certain other rights ("mutual rights"), including voting rights and rights to share in the surplus of the company under certain circumstances, such as liquidation.
