The courts have taken varying approaches to determining the basis of stock that is received by an insurance policyholder in exchange for the policyholder’s surrender of membership rights in a mutual insurance company, in a “demutualization” transaction. While this may seem to be a narrow and abstruse question, the approaches taken by the courts may have application in other areas of the tax law affecting analogous transactions.
Most recently, the U.S. Court of Appeals for the Ninth Circuit, in Dorrance v. United States,1 reversed the district court decisions in that case,2 agreed with the government position that the policyholder’s basis in the stock did not include any part of the premiums paid by the policyholder for insurance, and concluded that the entire proceeds from the subsequent sale of the stock by the policyholder constituted gain.
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