Protected Claim

[L.S.]

Has anyone filed a 1040X Protective Claim - Do Not Process Form concerning Insurance Company Demutualization? In 2006 client received a 1099-B from Amerus Group Co. We filed return showing proceeds with no basis because it was a demutualization of insurance company. The U.S. Court of Federal Claims has ruled against the IRS position of assigning zero basis to insurance company demutualizations. So we are thinking of filing a 1040X return showing a basis with a refund. My question is ok we file this, then what? Will the IRS appeal this? When does this change to a "process" 1040X. Do we have to keep track, does the IRS keep track and issue a refund?

Thanks.

[Slappy Tax]

This is so new that I think it'll be awhile before whatever is going to happen even begins to happen.

I've gone through my databases since TY2005 and found a smattering of clients (seven, I think) that will be affected by this. Luckily, I found only one from TY2005 so I'm thinking of using that one as my test case. I contacted that client (who was a one-time client who had me straighten out her botched self-prepared return). I explained everything pertaining to the demutualization issue and the Fisher ruling. As you can imagine, it's a lengthy explanation with a whole lot of "nobody knows yet." I'm trying to keep from having to repeat that long phonecall with the remaining six clients.

Anyway, to come to the point, I explained that I would amend her return for $70, but that I could not offer any guarantee that the IRS would pay the refund ($400 in her case). Of course, her enthusiasm for the whole process quite understandably flagged somewhat at that proposal. I made it clear that she could amend her own return for free, and I even pointed her towards the demutualization.org website for her to do her own research. My main point to her is that if she plans to do anything, she must do it by 04/15/2009 when the sun will set on her window for amending her TY2005 return.

I'm now thinking of calling her back and offering to amend her return at no charge to use as a test case so that I'll have something to tell the remaining clients. (The deadlines for amending the remaining returns are at least 20 months off.) Or I might just sit tight for the time being to see if anything transpires on this issue before jumping into it since we do have the luxury of time at this point.

My only conditions for amending this client's return for free would be (1) she pledges to let me know the outcome once the IRS responds to her 1040-X, and (2) she agrees that I incur no further obligation to see things through to the end if this thing takes on a life of its own.

If anyone has better ideas, please post. Otherwise, I'll just follow my general rule of thumb: When in doubt, procrastinate.

As an aside, six of the seven clients would realize amended refunds of $400-$500. The seventh would realize an amended refund of $1,434, assuming of course that the IRS acquiesces to the Fisher decision, which is not at all clear at this stage. So while these are nice tidy little sums, they're not exactly life-changing bonanzas.

[TAXBILLY]

I would wait for now to see which way the IRS wind blows.

taxbilly

[Burke]

That may take quite a while since they said they were going to appeal. And the deadline for amending might run out. However, I just read an article about a tax case (and I cannot find it now but will keep looking) about no deadline for filing an amended return on a TIMELY filed tax return, where "no new information was given to the IRS" to consider the amendment. In the case cited, IRS disallowed all dependent exemptions and certain deductions. (TP may have paid the adjusted tax, I cannot remember.) Anyway, an amended return was filed claiming certain of those dependent exemptions, and IRS disallowed that due to 3-year filing deadline had passed for 1040X. An opinion was requested, and Chief Counsel Advice ruled 1040X could be honored since it did not provide any new information for IRS that it did not already have to consider the amendment. Have you ever heard of this, and could it apply here back more years than the last 3? These demutualizations happened to many companies in the 1990's. Many people sold the stock as soon as they got it. Other tax professionals are saying file those protective claims immediately.