Accountant Scores Rare IRS Win; Many Could Get Demutualization Refunds
For more than 20 years, the Internal Revenue Service has used the same method to tax shares and funds distributed by mutual life insurance firms to policyholders when they reorganize as public companies.
But it was the wrong method, a federal judge has held in a case based on the argument that a Minnesota accountant has been making for seven years, reports the Associated Press. Now, thanks to Charles Ulrich and the unusual victory that a client of his won against the federal agency, many taxpayers could be in a position to get substantial refunds.
“There’s a tremendous amount of money at stake,” says Robert Willens, a New York City tax analyst. “Tens of thousands of people could be in line for a refund.”
The IRS said that shareholders owed tax when they sold shares acquired through demutualization, on the entire price paid. But Ulrich contended—and the Court of Federal Claims in Washington, D.C., agreed in a written opinion (PDF) earlier this month—that policyholders had already paid for the shares through premiums. Hence, the only tax they owed was for the difference between the share price at the time when they were given the stock as the insurance company went public, and the subsequent sale price, assuming that it represented an increase, the news agency explains.
The federal court victory is sweet, especially since the IRS had for a time accused Ulrich, who has a website on the issue, of promoting abusive tax shelters. “Largely I was regarded as a lunatic,” he says, who “would never prevail against the IRS.”