Background: My brother and I are co-beneficiaries of a trust that held an insurance policy with The Principal Financial Group, which Demutualized on October 26, 2001. At which time the trust was issued shares of the company. In 2019 we sold those shares and are now trying to file a tax return for the trust.

In the materials provided at the time of demutualization include the following which seems pretty clear:

Eligible Policyholders Receiving Common Stock

You will not be taxed on the receipt of Common Stock in our Demutualization. Your tax cost or ""basis'' for any shares you receive will be zero. As a result, if you later sell or otherwise dispose of your Common Stock, you will generally be taxed on the full amount of the proceeds of that sale or other disposition. The proceeds will generally be taxed as a long-term capital gain.

However, I am seeing articles online about a court dispute in 2008 where people in similar situations challenged the zero-cost basis, and insisting that the cost basis should be the value of the shares as of the day they were issued.

Question: Can anyone tell me what the current IRS position is on calculating the cost basis for stock received when an insurance company demutualizes? Also, assuming it is a capital gain. Is it safe to treat this as a long term gain?

  • Certainly any gains from selling shares obtained in 2001 should be long-term gain. I have no clue what the cost basis would be; I suspect you need expert advice for this one.
    – keshlam
    Mar 18 at 6:06
  • The shares weren't sold in 2001 they received back then. There were sold recently.
    – JohnFx
    Mar 20 at 2:30
  • That's what I said. You have held the shares more than a year -- much more -- so any realized gain from selling them is long-term gain. The problem is determining the cost basis.
    – keshlam
    Mar 20 at 19:36


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