Academic journal article Journal of Accountancy

Demutualization and Tax Deductions

Academic journal article Journal of Accountancy

Demutualization and Tax Deductions

Article excerpt

UNUM Corp. is the product of a demutualization--when a mutually owned institution converts to a stockholder-owned company. UNUM was set up to be the owner of the stock of a new company (UNUM Life Insurance Co.) formed as a result of a conversion by Union Mutual, a mutual insurance company owned by its policyholders. Eligible policyholders of Union Mutual transferred their ownership interests to UNUM in exchange for stock and cash. UNUM, in turn, exchanged that ownership interest for shares of the new stock insurer (UNUM Life Insurance Co.) and also sold shares to the public. UNUM sought to deduct over $650 million for the cash and stock distributed to eligible policyholders, arguing that it constituted policyholder dividends under IRC section 808. The IRS challenged the deduction and the case wound up in court.

UNUM argued that the term policyholder dividend includes any distribution that fits literally within the language of section 808 (b)(1). Indeed, UNUM's payout could be construed as "an amount paid or credited where the amount is not fixed in the contract but depends on the experience of the company or the discretion of management."

However, the First Circuit Court of Appeals rejected this literal interpretation and concluded that the intention of section 808(a) also must be satisfied. …

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