Plaintiffs Ask For Conversion Distribution Tax Refunds

Burgess J.W. Raby, a Tempe, Ariz., lawyer, filed the suit on behalf of an irrevocable trust created by a Rockville, Md., man. The lead plaintiff seeks a refund of the $5,725 in federal income taxes paid for the year ended Dec. 31, 2000. The tax was the result of the sale of stock distributed by Sun Life Assurance Company of Canada when that company demutualized in 2000.

The suit also lists distributions to policyholders of 21 other mutual insurance companies that converted to stock status, and the lawyer who filed the suit is seeking class-action status. "The potential members of the class number is in the millions," the plaintiffs argue in their petition, adding that "the names of most of the class members are unknown to the identified plaintiff, but are known to, or ascertainable by, defendant, since the claims involved have all been filed with [the IRS]."

The plaintiffs argue that the "the prosecution of separate actions by individual class members not only would be prohibitively expensive for both the class members involved and the defendant but also would create the risk of inconsistent or varying adjudications and the resulting prolongation of the resolution of the technical tax issues involved in this matter."

The suit was filed in Federal Claims Court Dec. 1, 2004, and assigned to Judge George W. Miller. The IRS has 60 days from the date of filing to respond to the lawsuit.

The IRS claims the distributions are all taxable because, among other reasons, there is no way to determine the value of a policyholder's relationship to a mutual insurance company besides looking at the benefits he receives from his policy.

But representatives for the policyholders maintain that the tax basis is a portion of the total premiums that have been paid on the underlying life insurance policy. "The position of plaintiff and of the other class members is that part of that part of the cost of the life insurance policy from which the stock is derived becomes the tax basis of the stock," the plaintiffs argue in their petition.