Charitable Contribution of Shares Issued in Demutualization

Over the past few years policyholders of insurance contracts underwritten by mutual insurance companies have received shares in these companies as a result of the "demutualization" of the companies. What has occurred from a tax standpoint is that these policyholders have exchanged their membership interests in the mutual company for the stock. Generally, no gain is recognized as a result of the exchange. The shareholder's basis in the shares is zero and their holding period begins with the date of their purchase of the policy from the insurer.

Because the basis in the issued shares is zero and the sale of the shares would be subject to taxation, taxpayers may wish to consider contributing the shares to a charitable organization. The contribution of the shares, if the holding period is more than twelve months, will result in a charitable contribution equal to the fair market value of the shares and no income tax on the transfer of the shares by the donor. Keep in mind the holding period begins with the purchase of the underlying policy, not the date the shares are issued. The holding period is critical since a contribution of property held twelve months or less is equal to the donor's cost basis in the property - in this case zero.

Please contact Feeley & Driscoll's Accountants and Consultants by Email or call 1 (888) 875-9770 to learn more.

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