Demutualization

[Dave T]

Been doing some research and seem to be getting conflicting opinions on this.

Client sold shares in Manulife which I believe had acquired john Hancock Life insurance in the past.  John Hancock was demutualized in 1999. Client had been a long time policy holder.

The question has to do with basis.  IRS has taken position of zero basis but I have also seen cases where court  overturned that position.  Transaction has fairly substantial impact for client when I use zero basis so am not sure how to proceed.

Thanks is advance.

Dave T

 

 

 

[scottmcfly]

I thought that it was a fairly settled issue that the shares have a zero basis.  But I have not researched it in a while.  I have used zero basis on my clients in the past but they had basically inconsequential amounts of stock.

 

[DANRVAN]

Have researched for clients in the past and basis is zero.

[Yardley CPA]

I've also used zero as the basis.  With that said, here is an article that offers the basis as the IPO value:

http://www.costbasis.com/stocks/demutualizationshares.html

[Dave T]

Thanks Yardley.  I had seen this article as well which helped lead to my confusion as to zero basis or something else..

In my particular case, the IPO amount as basis has a significant impact on the return.

Thanks again

 

 

[DANRVAN]

That article did not mention the case of Reuben v US  and over looked the end result of the Dorrance  case in which a zero basis was determined. 

In Reuben, the 9th cir relied on Dorrance in determining that the taxpayer had no cost basis.  

In both the Dorrance and Reuben cases, the courts were critical of the Fisher case in which the "Open Transaction Doctrine"  was applied in determining a cost basis.  In fact, the court in Fisher referred to it as a rare and extraordinary situation in applying the "Open Transaction Doctrine". 

The IRS indicates it will continue to litigate this issue and has 2 out of 3 cases in it's favor; and one weak case against it.