Dorrance v. United States, No. 13-16548 (9th Cir. 2015)Annotate this Case
Taxpayers received and then sold stock derived from the demutualization of five mutual life insurance companies from which they had purchased policies. At issue was whether a life insurance policyholder has any basis in a mutual life insurance company’s membership rights. The court held that taxpayers who sold stock obtained through demutualization cannot claim a basis in that stock for tax purposes because they had a zero basis in the mutual rights that were extinguished during the demutualization. The district court skipped a critical step by examining the value of the mutual rights without evidence of whether the taxpayers paid anything to first acquire them. The district court also erred when it estimated basis by using the stock price at the time of demutualization rather than calculating basis at the time the policies were acquired. Consequently, the court concluded that the IRS properly rejected taxpayers' refund claim in this case where they offered nothing to show payment for their stake in the membership rights, as opposed to premium payments for the underlying insurance coverage. Accordingly, the court reversed the district court's denial of the government's motion for summary judgment.
The court issued a subsequent related opinion or order on December 30, 2015.