Transcripts

Kevin McCormally's Tax Tips-Federal Court Support

SUSIE GHARIB: Just two days away from April 15. If you haven't started thinking about your Federal income taxes, now's the time to start. To help you, we'll bring you tax tips every day right up to Wednesday's filing deadline. Tonight a look at a Federal court ruling in favor of taxpayers. Here's Kevin McCormally, editorial director at Kiplinger's Personal Finance.

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Tonight I want to talk about an issue that doesn't affect a lot of taxpayers, but is very important to those who it does affect. I'm talking about investors who received shares of life insurance companies when the firms demutualized. That's what it's called when a mutual company, owned by policy holders, becomes a stock company owned by shareholders. When that happens, policyholders are given shares of the new company. They're also given a tax headache because the IRS says they have no basis in the newly acquired shares. So when they sell, the IRS says the entire amount received is taxable income. Now critics have long argued that that's just plain silly and last year, a Federal court agreed that the IRS had it wrong. The IRS is appealing, so the matter isn't settled yet. But experts following the case say investors who sold these insurance shares in 2008 should claim a tax basis and thereby reduce the tax bill on the sale. A widespread view is that your basis in the demutualized shares is the value of the stock at the time you received it. You only owe tax if the stock price went up since that time. There's another issue here, too. If you sold such shares prior to 2008 and paid tax using the IRS' zero-basis rule, you may deserve a refund thanks to the court ruling. So if you sold shares in 2005, 2006 or 2007 -- the only tax years that are still open to change -- you may want to talk with a tax pro to see if the IRS owes you money. Good luck. I'm Kevin McCormally.