Transcripts

"Kevin McCormally's Tax Tips"- "Demutualization"

SUSIE GHARIB: Just over a week to go now until your Federal income tax return is due back in the hands of the IRS. So every night this week, we'll bring you another last-minute tax tip that can help make filing easier. Tonight, a look at one specific issue that could make a big difference down the road and help you protect your right to a refund. Once again, here's our tax expert, Kevin McCormally, editorial director of "Kiplinger's Personal Finance."

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": There's an interesting case making its way through the courts that could result in millions of dollars of refunds for taxpayers who in recent years sold stock they received when a life insurance company converted from a mutual company to a stock company. This transformation goes by the endearing term "demutualization." The IRS says that if you get stock in such a deal, your tax basis is a big, fat zero. So when you sell, every dime is taxed.

Some taxpayers say that's baloney. They say the basis of the stock is the value when they got it; others have other methods. But the key is this: if the stock has a basis, you owe less tax when you sell. Last year, the IRS asked a Federal court to reject that reasoning, but the court refused to throw out the case. That gives taxpayers hope. Now so far the court hasn't decided if they really have a basis and, if so, what it is. But as the legal wheels turn, an important deadline is coming up for anyone who sold life insurance stock in 2003. April 17 is the last day they can file an amended return to reclaim tax they overpaid by using the IRS zero basis method.

If you're in this boat, you need to file what's called a "protective refund claim" by April 17. Basically, it's an amended return asking for your money back, but telling the IRS to hold off until the court decides the case. The point is to prevent the statute of limitations from slamming the door closed on your chance for a refund. Ask your tax advisor for help or shoot me an e-mail from the NBR web site, and I'll reply with more information. I'm Kevin McCormally.

Editor's Note: Please check the Tax Tips Q&A for 2006, for answers to hundreds of tax questions posed by viewers like you. You can also get more information from Kevin on how to file a "protective refund claim" here.