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Hi everyone,

Today I read a very interesting tax article from Kiplinger regarding the cost basis of demutualized stock. Since I am currently holding some demutualized shares of Prudential (PRU) I thought I would share this info with my fellow Fools so they may adjust their cost basis accordingly. Also, this may possibly (though I doubt it) be new info for our TMF tax pros and I welcome their thoughts.

Sale of demutualized stock: Taxpayers won an important court battle with the IRS in 2009 over the issue of demutualized stock. That's stock that a life insurance policyholder receives when the insurer switches from being a mutual company owned by policyholders to a stock company owned by stockholders. The IRS' long-standing position was that such stock had no tax basis, so that when the shares were sold, the taxpayer owed tax on 100% of the proceeds of the sale. But after a long legal struggle, a federal court ruled that the IRS was wrong. The court didn't say what the basis of the stock should be, but many experts think it's whatever the shares were worth when they were distributed to policyholders. If you sold stock in 2009 that you received in a demutualization, be sure to claim a basis to hold down your tax bill.

Best Regards,

Rich
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I never understood the IRS position. I do own some shares but I inherited them so the market value on date of death applies.
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So, how does this affect my transactions of tax year 2002? I sold my shares and claimed a $0 basis for a cap gain of @ $3800. I believe it's too late to amend this return but the court has ruled on this and it does have a material effect on my taxes for that year.

Any suggestions?

MZ4
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Hi MZ4

I am not a tax pro but unfortunately I don't think you have any recourse. IIRC you can only amend your return for up to 3 years.
So it seems to me that the IRS pocketed some taxes for 2002 it was not entitled to. I hope that you were in a low marginal tax bracket.

Rich
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