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Craig Ulrich's Lawsuit with the IRS
Demutualization of Mutual Life Insurance Companies
A practice called demutualization started at the end of the 1990s. This was a period of time in which mutual life insurance firms started to become publicly traded. Demutualization is the process of changing the structure of the company to another entity, usually a corporation or a limited liability. When this process occurs, a private company becomes publicly traded and this results in the company having to provide compensation to all previous owners of mutual funds at the time the demutualization occurs. The compensation is supposed to take the place of any lost interest. This situation affected Ulrich when he owned mutual funds that were demutualized. The result was that he was taxed on the shares' total value in addition to the profits that were made on the unloading of any of the shares.
IRS' Argument for the Demutualization of a Mutual Life Insurance Companies
The IRS' point of view was that the taxes were legitimate since the life insurance policy owners never paid any money for the shares. When these owners obtained money for losing the holding in a particular company, in this case, the holding on the mutual life insurance company, the owners should be taxed on the total value of the shares and any profits that were made from sales of the shares.
Ulrich's Argument for the Demutualization of a Mutual Life Insurance Companies
Ulrich did not agree with these imposed taxes and battled the IRS stating that policy holders did pay for rights of ownership when the life insurance was purchased. Ulrich argued that the benefits of ownership that were earned should not have been taxed. Many people may have been taxed on the wrong amount if they were ever in this type of situation. Based ON The standpoint of the IRS, policy holders should be taxed on shares as well as the gains. Ulrich argued that people should only be taxed on the gains that were earned from selling shares, and not on the total value of all shares owned. The reason for his argument was that the premiums that were paid on the policy covered the value of the shares. Only gains should be taxed.
Example of Demutualizing and the Taxes Owed on Shares
To make this all easier to understand, let's look at an example involving a company that distributed shares worth $77. If the owner sells those shares for $83, they should only be taxed on the $6 profit of the sale. The IRS wanted to tax people on the entire amount of $83 which includes the profits or gains as well as the initial cost of the share itself. Ulrich argued this and ended up winning the case.
The courts agreed with Ulrich's argument and the final judgment has had an effect on many people. Every person should check their files to determine if they have been overtaxed by the IRS. Keep in mind that there is a three year statute of limitations that applies, starting from the date of the filing.
About the Ultra Trust®:
- Part 1 - Estate Street Partners
- Part 2 - What is the Ultra Trust®?
- Part 3 - What is a Trust?
- Part 4 - Asset Protection Plan
- Part 5 - Asset Protection Eligible Assets
- Part 7 - What is Probate?
- Part 8 - What is Estate Tax?
- Part 9 - Medicaid Spend Down Rules
- Part 10 - What is the Ultra Trust®?
- Part 11 - Irrevocable Trust Benefits
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