November 2004  Email this  Print this
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TAXES
Fighting The IRS
by Mary Beth Franklin Most of us go out of our way to avoid rousing the IRS. Charles Ulrich, on the other hand, is trying to pick a fight with the tax agency -- a fight he thinks he can win and, in the process, save taxpayers millions of dollars. The Minnesota certified public accountant thinks the IRS is dead wrong in the way it treats the stock that insurers give policyholders when switching from member-owned mutual firms to publicly traded entities. Over the past five years, 15 million policyholders of more than a dozen major companies, including John Hancock, MetLife and Prudential, received stock or cash when the insurers made the transformation, a process known by the endearing term demutualization.
If you were one of them, the IRS says you owe tax on any cash received and that your tax basis in the stock is zero. So when you sell your shares, the proceeds are considered a taxable capital gain.
Ulrich argues that the shares and cash are not a gift, but rather a return of premiums in exchange for giving up ownership rights. Therefore, he says, the cash is tax-free, like other returns of premiums, and that the basis of the shares is their value at the time of the distribution. Only appreciation after that point should be taxed, he argues. Ulrich calls the IRS's position "totally incorrect and unsupportable." He says there's no specific law or regulation to back up the IRS's stance. "I don't think we should be taxing 15 million taxpayers without the law," says Ulrich. "I think we should be having a Boston Tea Party over this."
Some respected insurance and legal experts agree. But it remains to be seen whether Ulrich's struggle will ultimately resemble Don Quixote's fantasies of defending the helpless or David's victory over Goliath.
At your service
Ulrich's battle goes beyond talk. For anyone who has paid tax on cash or shares received in a demutualization, Ulrich will file an amended return, backing up the demand for a refund with 16 pages of legal arguments. If you get your money back, he takes 25% as his fee. If you don't, he'll appeal the denial. His goal is to get the issue into court in hopes of reversing the IRS's position.
Unfortunately, it's already too late for policyholders who paid tax on cash received or shares sold in 2000 -- when insurance giants John Hancock and MetLife went public -- or earlier. The three-year period for filing amended returns has already run out. The window for amending 2001 returns closes April 15, 2005. (If you still hold shares received in a demutualization, the tax issue doesn't arise until you sell them.)
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