Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_09-cv-01284/USCOURTS-azd-2_09-cv-01284-0/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7422 IRS: Refund Taxes

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

Bennett and Jacquelynn Dorrance,

Plaintiffs, 

v. 

United States of America, 

Defendant. 

No. CV-09-1284-PHX-GMS

ORDER 

 Pending before the Court are cross-motions for summary judgment. (Docs. 64, 

67). For the reasons stated below, both motions are denied.1

BACKGROUND

 In 1995, Plaintiffs formed the Dorrance 1995 Legacy Trust (the “Trust”), which in 

turn purchased five life insurance policies in 1996. (Doc. 67-1 ¶¶ 16, 17). The policies 

were purchased with The Prudential Insurance Company of America (“Prudential”), Sun 

Life Assurance Company of Canada (“SunLife”), Phoenix Home Life Mutual Insurance 

Company (“Phoenix”), Principal Life Insurance Company (“Principal”), and 

Metropolitan Life Insurance Company (“MetLife”). (Doc. 65 ¶ 1). In the aggregate, the 

policies provided $87,775,000.00 in coverage. (Doc. 67-1 ¶¶ 19–23). The Trust 

 1

 Both parties have requested oral argument. The requests are denied because the 

parties have had an adequate opportunity to discuss the law and evidence and oral 

argument will not aid the Court’s decision. See Lake at Las Vegas Investors Group, Inc. 

v. Pac. Malibu Dev., 933 F.2d 724, 729 (9th Cir. 1991).

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purchased the policies in the anticipation that the benefits would provide liquidity to pay 

Plaintiffs’ estate taxes upon their death, so that Plaintiffs’ heirs would not need to 

liquidate the family stock portfolio to pay such taxes. (Doc. 67-1 ¶ 17). 

All of the policies were purchased with mutual insurance companies. In a mutual 

insurance company, the policyholders have an interest in the company itself in addition to 

holding a policy. This interest provides the policyholder with certain rights, including the 

right to vote on corporate decisions and the right to receive the mutual company’s surplus 

should the company liquidate. (Doc. 65 ¶ 7; Doc. 67-1 ¶ 6).2

 Plaintiffs describe these 

rights as “ownership” rights, while Defendant describes them as “membership” rights. 

(Doc. 64 at 2; Doc. 67 at 2). At this stage in the litigation, the Court will refer to these 

rights as “mutual rights.”3

 Policyholders cannot sell the mutual rights separately from 

their underlying policies. (Doc. 65 ¶ 9). If a life insurance policy held with a mutual 

insurance company is terminated, the mutual rights are extinguished as well. (Doc. 65 ¶ 

10). 

The five mutual life insurance companies demutualized through processes that 

began in 1998, 1999, and 2000, and culminated in 2000 or 2001. (Doc. 65 ¶¶ 32–38). In 

the process of demutualization, a mutual company changes its corporate structure into 

that of a stock company, often through a procedure governed by state statute. (Doc. 67-1 

¶ 39; Doc. 65 ¶ 24). Policyholders must vote to approve a demutualization before the 

 

2

 The parties dispute the degree to which the mutual rights provided dividends. Insurance policyholders receive dividends, and as the mutual insurance companies demutualized, the companies set aside funds to ensure that these dividends continued. 

Plaintiffs do not deny that they continued to receive dividends after demutualization, and 

Defendant does not deny that the dividends come from money set aside into blocks from 

the companies’ surplus, which in some circumstances (such as liquidation) is associated with the mutual right. (Doc 65 ¶ 23; Doc. 79-1 ¶ 23). 

3

 The Court notes that another district court, considering whether a policyholder was deprived of property when a mutual company demutualized and did not provide the policyholders any compensation for these rights, found that policyholders’ interest in a mutual life insurance company “did not rise to the level of a property interest such as to render policy holders ‘owners’ of the corporation.” Tancredi v. Metropolitan Life Ins. 

Co., 149 F. Supp. 2d 80, 86–87 (S.D.N.Y. 2001). The decision is not binding on this Court. 

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process can proceed. (Doc. 67-1 ¶ 40).4 Prior to seeking policyholder approval, at least 

one of the companies promised policyholders that if they voted for demutualization, 

premiums would not increase, and in fact none of the premiums Plaintiffs paid increased 

after demutualization. (Doc. 65 ¶ 39; Doc. 79-1 ¶ 39). 

When the companies demutualized, policyholders (including Plaintiffs) therefore 

retained their policies and continued to pay the same premiums. They no longer, 

however, held mutual rights, and therefore could not vote on corporate decisions and had 

no interest in the surpluses of the new companies. (Doc. 65 ¶ 18). In exchange for the lost 

mutual rights, the companies provided policyholders with the option of receiving stock in 

the new companies or receiving a cash payment in lieu of stock. (Doc. 67-1 ¶ 55). When 

determining how much stock to give policyholders, the companies calculated a “fixed” 

component to correspond to policyholders’ loss of voting rights, and a “variable” 

component designed to measure “the policyholders’ contribution to the surplus of the 

company.” (Doc. 67-1 ¶ 55). Although the companies used slightly different methods to 

measure their policyholders’ contribution to the company’s surplus, all obtained 

independent actuarial opinions that the methods were “fair and equitable.” (Doc. 67-1 ¶ 

56). The stock the Trust received during the demutualizations had a total value of 

$1,794,771.00. (Doc. 67-1 ¶¶ 60–65). The Trust sold all the stock on June 23, 2003, for 

an aggregate price of $2,248,806.00. (Doc. 67-1 ¶ 65). 

When the Trust received its IRS Form 1099-B, the form listed the basis in the 

Trust’s stock as zero, consistent with IRS policy that policyholders have no basis in stock 

received by a policyholder during demutualization of a life insurance company. (Doc. 67-

1 ¶ 66). Plaintiffs paid the taxes thereby owed, and subsequently filed this claim for 

relief. 

 

4

 For example, Arizona, state regulations require that demutualization plans be approved by the state Director of Insurance, permit companies to limit the right to vote on demutualization to policyholders whose policies are worth over $1,000 and have been 

held more than a year, and provide that policyholders receive equity through “a fair formula approved by the director” that reflects the insurance company’s entire surplus. A.R.S. § 20-730. 

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Defendant has filed a motion for summary judgment, arguing that no part of 

Plaintiffs’ periodic payments for their original insurance policies was paid to acquire the 

mutual rights under the policy, and that all of the premium was paid to purchase the 

policy. As a result, under this theory, Plaintiffs would have had no basis in the stock that 

was provided in exchange for those rights. (Doc. 64). 

Plaintiffs likewise have filed a motion for summary judgment, arguing that the 

demutualization should be governed by the open transaction doctrine, which is employed 

in circumstances where the basis in property that is split cannot be allocated to the 

resulting assets. Under this theory, all of the proceeds from Plaintiffs’ sale of stock would 

be considered return of capital from their premiums, and they would thereby owe no tax. 

(Doc. 67). 

DISCUSSION 

I. Legal Standard 

Summary judgment is appropriate if the evidence, viewed in the light most 

favorable to the nonmoving party, shows “that there is no genuine issue as to any material 

fact and that the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(c). 

Only disputes over facts that might affect the outcome of the suit will preclude the entry 

of summary judgment, and the disputed evidence must be “such that a reasonable jury 

could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 

U.S. 242, 248 (1986). “[A] party seeking summary judgment always bears the initial 

responsibility of informing the district court of the basis for its motion, and identifying 

those portions of [the record] which it believes demonstrate the absence of a genuine 

issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

II. Analysis 

Defendant claims that Plaintiff has not met its burden of establishing that it paid 

anything for the mutual rights at all. (Doc. 64). Plaintiffs have alleged that the rarely-used 

open transaction doctrine governs this case. (Doc. 67). In 2008, the United States Court 

of Federal Claims ruled (in a decision after a bench trial) that demutualization of a mutual 

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insurance company is one of the “rare and extraordinary” circumstances in which the 

open transaction doctrine should apply. Fisher v. United States, 82 Fed. Cl. 780, 795 

(Fed. Cl. 2008) (aff’d without opinion by Fisher v. United States, 333 Fed. App’x. 572 

(2009)). Both arguments will be considered before the Court discusses the regulatory 

framework regarding allocating basis in divided property. 

A. The Burden of Proving Basis in Property 

Under the Internal Revenue Code, gross income includes “[g]ains derived from 

dealings in property.” 26 U.S.C. § 61(a)(3) (2006). The gains derived from property are 

defined as “the excess of the amount realized therefrom over the adjusted basis.” 26 

U.S.C. § 1001(a). The basis of property is defined by regulation as “the cost of such 

property.” 26 U.S.C. § 1012(a). The burden of establishing a basis in property “rest[s] on 

the taxpayer.” Coloman v. C.I.R., 540 F.2d 427, 429 (9th Cir. 1976). 

When a taxpayer offers only an “unverified statement that he had contributed 

property . . . to the partnership,” he has not met his burden of showing he invested in the 

underlying asset. Coloman, 540 F.2d at 427. On the other hand, when a taxpayer has 

shown that he made some investment into property, but cannot establish the value of that 

investment, his basis should not be declared zero “on the ground that it [is] impossible to 

tell how much he had in fact spent.” Cohan v. Comm’r of Internal Revenue, 39 F.2d 540, 

543 (2d Cir. 1930) (Hand, L., J.). In such cases, the government “should make as close an 

approximation as it can” to the actual basis, “bearing heavily if it chooses upon the 

taxpayer whose inexactitude is of his own making.” Id. at 544. More recent decisions of 

the Ninth Circuit have continued to rely on Cohan, noting that if “it is clear that the 

taxpayer is entitled to some deduction, but he cannot establish the full amount claimed, it 

is improper to deny the deduction in its entirety.” United States v. Marabelles, 724 F.2d 

1374, 1383 (9th Cir. 1984). 

Plaintiffs have met their burden of showing they paid something for the mutual 

rights by proving that they paid premiums for policies that included the policy rights and 

the mutual rights. Defendant’s motion for summary judgment is therefore denied. The 

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question at issue is how that basis ought to be allocated between the two assets that were 

created when the companies de-mutualized. 

B. The Open Transaction Doctrine 

 1. Background 

The open transaction doctrine allows a taxpayer to apply gains received from the 

sale of a portion of a piece of property to the entire original basis without apportioning 

the basis between the property that was sold and the property that was retained; the 

doctrine is available only in “rare and exceptional” circumstances. Fisher, 82 Fed. Cl. at 

795. The doctrine was announced by the Supreme Court in Burnet v. Logan, 283 U.S. 

404 (1931), and although subsequent regulations have narrowed its scope, Logan remains 

the core authority for the open transactions doctrine. See, e.g., Ebert v. United States, 66 

Fed. Cl. 287, 292 (Fed. Cl. 2005) (“[Logan] addressed the question of whether a 

transaction whose value was contingent on future events could, in effect, be treated as a 

closed transaction.”); Inaja Land Co., Ltd. v. C.I.R., 9 T.C. 727 (1947) (citing Logan

when holding that “no portion of the payment in question should be considered as 

income, but the full amount must be treated as a return of capital and applied in reduction 

of petitioner’s cost basis”). 

The taxpayer in Logan owned a share of an iron company which in turn owned 

12% of an ore company. Logan, 283 U.S. at 409. The ore company apportioned the value 

of the ore it extracted to its shareholders, including the iron company in which the 

taxpayer held an interest. Id. In 1916, the iron company was sold to Youngstown Sheet 

and Tube Company; Youngstown paid the shareholders $2,200,000 in cash and agreed to 

pay 60 cents for every ton of ore extracted by the ore company. Id. Thus, the taxpayer 

received, in exchange for the shares she owned, both a lump sum and an income stream 

that depended on the continued success of the ore company. The Commissioner 

originally discounted the income stream to an estimated present value, and then 

apportioned the taxpayer’s original basis in the fixed portion of the asset and the income 

stream according to the same ratio that they had to each other at the time of distribution. 

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Id. at 411. The Supreme Court ruled that the taxpayer had not received two assets in 

exchange for her stock; instead she had received cash and “the promise of future money 

payments wholly contingent upon facts and circumstances not possible to foretell with 

anything like fair certainty.” Id. at 413. It held that the value of the income stream could 

not be estimated, because it “had no ascertainable fair market value.” Id. It therefore 

allowed the taxpayer to apply the entire basis of the original stock purchase to the cash 

portion of the transaction; as a result she realized no gain at the time, but would only do 

so were the ore payments to exceed her remaining capital investment. Id.

At its core, the Logan Court held that the basis in the stock could not be allocated 

between the income stream and the cash payment because the value of the income stream 

was too uncertain. Id. at 413. Had the Court accepted the Commissioner’s allocation and 

the ore company subsequently seen better-than-expected production, or had it sputtered, 

the original basis allocation would have been incorrect. The Court did not address 

whether the relative cost of the income stream and the cash portion of the stock could 

have been determined when the stock was originally purchased; its focus was solely on 

the value of the separate portions of the asset at the time they were split. Id.

The open transaction doctrine has periodically been invoked by both the 

Government and taxpayers. The Government successfully urged application of the 

doctrine in Pierce v. United States, 49 F. Supp. 324 (Ct. Cl. 1943). There, a bank had 

created a security company in which its shareholders were given an interest based on 

their interest in the original company, without paying anything mord. After a federal law 

mandated dissolution of the security company, a taxpayer claimed that his original basis 

in the stock should be allocated between his remaining bank stock and the dissolution 

proceeds, which he claimed represented a loss. Id. at 329–30. The Court found that 

apportionment was inappropriate because “the exact answer to the question of profit or 

loss may be obtained by waiting till the bank stock is sold.” Id. at 330. 

A taxpayer successfully invoked the doctrine in Inaja Land Co., Ltd. v. C.I.R., 9 

T.C. 727 (Tax. Ct. 1947). There, a company purchased land by the Owens River, near 

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Los Angeles, for $61,000 to start a fishing club and to rent some of the property for 

livestock grazing. The City of Los Angeles, acting without “any right to divert, release, or 

suffer the release of waters into the Owens River in such a manner that such waters 

would flow through or over petitioner’s lands,” constructed massive concrete tunnels 

upstream from the landowner and dumped the resultant pollutants into the river, “which 

injured and killed fish and interfered with the fishing on petitioner’s lands.” Id. at 730. 

The landowner sued, and received a $50,000 settlement in exchange for releasing any 

claim relating to discharging foreign water from the tunnels into the Owens River. Id.

The question for the court was what portion of the initial purchase price could be 

allocated as a basis against which to apply the settlement money. The court read the 

settlement as the purchase of an easement over the company’s land, but agreed with the 

landowner that “it would be impracticable and impossible to apportion a definite basis to 

the easements here involved, since they could not be described by metes and bounds; that 

the flow of the water has changed and will change the course of the river; that the extent 

of the flood was not and is not predictable; and that to this date the city has not released 

the full measure of water to which it is entitled.” Id. at 736 (emphasis added). 

In all of these cases, the basis a taxpayer had in the original asset could not be 

allocated when the asset was split because the value of the asset that the taxholder kept 

was “impossible to determine with fair certainty.” Logan, 283 U.S. at 412. Because of 

this uncertainty, it was not clear whether the taxpayer had, or would eventually 

experience, a gain or a loss on the transaction as a whole, and it was determined that a 

taxpayer should not “be charged with gain on pure conjecture unsupported by any 

foundation in ascertainable fact.” Inaja Land, 9 T.C. at 736. Regulations have replaced at 

least part of the open transactions doctrine, in particular with regards to contingent 

payments; there are now regulations allocating basis in any transaction that “provides for 

one or more payments due more than 1 year after the date of the sale or exchange.” 26 

C.F.R. § 1.483-1(a)(1). 

In 2008, the Court of Federal Claims applied the open transaction doctrine in a 

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case where a taxpayer had received a cash payment in exchange for his mutual rights 

during the demutalization of a life insurance company. Fisher v. United States, 82 Fed. 

Cl. 780, 795 (Fed. Cl. 2008). After taking what it described as a “tour d’horizon” of the 

relevant caselaw, statutes, and regulations, the Fisher court noted that the open 

transaction doctrine remained “a viable, albeit limited, exception to the general rule 

enunciated” by 26 C.F.R. § 1.61-6(a). Fisher, 82 Fed. Cl. at 791. Writing after a trial in 

which the Government had argued that the mutual rights were worth nothing while the 

taxpayer had asserted that valuing the rights was impossible, the Court sided with the 

taxpayer, noting that “the ownership rights were, at the outset, inextricably tied to the 

underlying insurance policy and were not separately sellable.” Id. at 795. It thus applied 

the open transaction doctrine, allowing the taxpayer to treat all of the premium payments 

he had made during the course of the policy as capital investment, and deferring any 

payment on the proceeds that the taxpayer had received in exchange for his rights. Id. at 

799. The Federal Circuit affirmed without opinion. Fisher v. United States, 333 Fed. 

Appx. 572 (2009). 

Other courts have not yet had the opportunity to consider whether application of 

the open transactions doctrine was appropriate in Fisher. See, e.g., Cadrecha v. United 

States, ___ Fed. Cl. ___, 2012 WL 1095359 (Fed. Cl. Apr. 2, 2012) (declining to apply 

Fisher when the taxpayer’s claim was untimely). Practitioners, however, quickly noted 

significant factual distinctions between historical open transaction cases and those 

involving demutualization of life insurance companies. In particular, one noted, “the 

assets usually involved in the open transaction doctrine will eventually be disposed of; 

conversely, life insurance policies are generally held until the death of the insured, at 

which time the basis is no longer needed.” Stephen J. Olsen, Chuck v. Goliath: Basis of 

Stock Received in Demutualization of Mutual Insurance Companies, 9 Hous. Bus. & Tax 

L.J. 360, 382–83 (2009). As a result, when a taxpayer is allowed to use the open 

transaction doctrine in the context of stock received during demutualization, he “is 

getting a windfall, because all of the basis may be allocated to the assets that will be sold, 

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while the asset that does not require basis has had its basis reduced.” Id.; see 26 U.S.C. § 

101(a)(1) (excluding payment under a life insurance contract from gross income), 26 

U.S.C. § 72(e)(6) (defining the basis in a life insurance contract that has been surrendered 

for cash as the aggregate of premiums paid less the amount received under the contract). 

Another commenter pointed out that the arguments advanced by the parties in 

Fisher may have made it appear more difficult to allocate basis under the regulations than 

it actually was. The government had only put forward expert witnesses stating that the 

taxpayer had paid nothing for the rights, while the taxpayer had put forward only experts 

claiming that calculating the cost of the rights was impossible—neither party addressed 

“how use of the doctrine could be avoided altogether by applying reasonable alternative 

basis apportionment methods.” Paul Galindo, Revisiting the “Open Transaction” 

Doctrine: Exploring Gain Potential and the Importance of Categorizing Amounts 

Realized, 63 Tax Lawyer 221, 234 (2009). Noting that the value of the stock and the 

value of the policy on the secondary market were both ascertainable at the time of 

demutualization, and a ratio from which to apportion basis could be calculated, the 

commenter wrote that apportionment “through the use of current and readily 

ascertainable relative fair market value data seems reasonable.” Id. at 244. 

2. Application 

Plaintiffs have failed to show that allocating basis between the mutual rights and 

the stock is so difficult that this case requires applying the open transactions doctrine. 

Despite disagreement as to what Plaintiffs may have paid for their mutual rights, there is 

no question that at the time of demutualization, both the value of the stock and the market 

value of the policy itself could be calculated. The open transactions doctrine prevents the 

government from forcing a taxpayer to apportion basis in transactions where only through 

waiting can “the exact answer to the question of profit or loss” be found. Pierce, 49 F. 

Supp. at 330. In Inaja Land, the rights ceded to Los Angeles were so uncertain that there 

remained a genuine question as to whether the land retained any value at all, because, 

depending on how much the city continued to pollute the river, the easement may have 

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rendered the land worthless, and the company may have in fact sold its investment at a 

loss. Inaja Land, 9 T.C. at 736. 

Since the value of both the mutual rights and the policy itself at the time of 

demutualization can be determined, there is no concern here that the taxpayer will be 

forced to pay tax on a transaction that is later proven to show a loss. The Ninth Circuit 

has confirmed that “taxation of an ‘open’ transaction is deferred only to the extent that 

consideration received by the seller consists of property having no ascertainable fair 

market value in the year of sale.” In re Steen, 509 F.2d 1398, 1404–05 (9th Cir. 1975) 

(emphasis added). Here, Plaintiffs received stock, and retained a marketable life 

insurance policy; it is practical and possible in such circumstances to ascertain the value 

of these assets in the year of the sale. 

The Court does not lightly disagree with another federal district court, and relies in 

some degree on arguments that do not appear to have been made before the Fisher court. 

But given the limited arguments at trial, it is not surprising that the Fisher court found 

that it was limited to deciding only whether “none of the basis of the originally-acquired 

property is allocable to the part disposed of or that all of it is allocable thereto until 

exhausted?” Id. at 784 (double emphasis in original). At summary judgment, this Court is 

not so limited, and finds neither argument convincing. See Celotex, 477 U.S. at 323–24 

(noting that a purpose of summary judgment is “to isolate and dispose of factually 

unsupported claims” before trial). 

The facts particular to this case show that applying the open transaction doctrine 

would be inequitable here. In Fisher, the plaintiff opted for the “cash election” upon 

demutualization, and thereby received an immediate payment in exchange for his mutual 

rights. Fisher, 82 Fed. Cl. at 783. Here, Plaintiffs received stock, held it for years, and 

sold it for $454,035 more than its market value at the time of demutualization. (Doc. 67-1 

¶ 65). The open transactions doctrine would therefore allow Plaintiffs to apply this gain 

to basis accrued through policy payments made before mutualization, even though the 

increase in value took place entirely after the rights were split. At the same time, since the 

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open transaction doctrine would not recognize any separate bases in the policy and the 

stock, policy payments made after the companies demutualized would increase the total 

basis towards which the stock sale would be applied, even though these payments were 

not made to obtain the mutual rights or the stock. 

The First Circuit conducted a sophisticated analysis of the treatment of 

distributions after a demutualization from the perspective of the insurer in UNUM Corp. 

v. United States, 130 F.3d 501 (1st Cir. 1997). There, the insurance company claimed that 

the distributions to policyholders should be interpreted as a “policyholder dividend,” and 

therefore should be deductible for the insurance company. Id. at 517; see 26 U.S.C. § 

808(a). The court found that although UNUM had made a colorable argument based on 

the language of the statute, the court had an obligation to consider the statutory language 

in the context of the “basic policies and structure of the Code,” and that “when the 

language is read against the background of the statutory structure, it becomes untenable.” 

UNUM, 130 F.3d at 517 (quoting Colonial American Life Ins. Co. v. C.I.R., 491 U.S. 

244, 257 (1989)). So here, while the difficulty in pricing the mutual rights at the time the 

policies were purchased bears some surface resemblance to similar difficulties in open 

transaction cases, applying a doctrine that would permit Plaintiffs to realize untaxed gain 

of nearly a half a million dollars that post-dated demutualization, and to avoid taxation 

entirely should they hold their insurance policy until their death, does not comport with 

the background and basic policies of the tax code. Colonial American, 491 U.S. at 257. 

This Court need not opine on the continued viability of the open transaction 

doctrine, or speculate on what circumstances may trigger its application. Given the 

undisputed facts of this case, it need only note that the doctrine does not apply here. 

Summary judgment is denied to Plaintiffs. 

C. Calculating Basis in Divided Property 

When a taxpayer sells only one part of a piece of property, the entire cost of the 

property “shall be equitably apportioned among the several parts.” 26 C.F.R. § 1.61-6(a). 

There is no single accepted method for apportioning basis equitably. The Ninth Circuit 

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has suggested that one method for apportioning the basis to a certain property right that a 

taxpayer had sold while maintaining other rights would be to compare the price of the 

property, at the time it was originally purchased, to the market prices of similar properties 

without the right in question. Gladden v. C.I.R., 262 F.3d 851, 856 (9th Cir. 2001) 

(returning the case to the district court and suggesting that “it may be possible to 

determine the premium price paid for the potential water rights by comparing the price of 

the land purchased by the partnership to prices of similar land without” such potential 

rights). Other circuits have suggested that basis can be equitably apportioned by 

comparing the fair market value of the two pieces of property at the time of division, and 

applying that ratio to the original cost. See Byram v. C.I.R., 555 F.2d 1234, 1236 (5th Cir. 

1977) (“What appellants should have shown, and never did, was the fair market value of 

the tract.”); see also Urbanek v. United States, 731 F.2d 870, 873 (Fed. Cir. 1984) 

(holding that allocating basis “in proportion to fair market value of the interests sold and 

retained” is “in accord with correct accounting practice”). 

Defendant argues that Plaintiffs did not pay a “premium” for the mutual rights by 

noting that Plaintiffs did not pay higher premiums after demutualization and that the 

mutual companies did not consider the mutual rights when calculating the prices of the 

policies. As noted above, at least one of the companies promised the policyholders that 

premiums would not rise under demutualization, perhaps to secure the votes of its 

policyholders. The comparison between the price of the policies pre- and postmutualization would therefore not necessarily capture any actual premium paid by 

Plaintiffs for their policies relative to other polices available without mutual rights when 

Plaintiffs first acquired their polices. 

In Gladden, the taxpayer had purchased a piece of property in which rights were 

anticipated but had not vested; the question for the court was how to assign basis to the 

potential rights when the land was purchased. 262 F.3d at 854. The Ninth Circuit 

suggested that the district court may calculate the premium paid for such rights by 

comparing the price of land with such potential rights to the price of comparable land 

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without such expectations. Id. at 856. Under this method, the proper comparison here 

would be between the periodic premiums that Plaintiffs paid in order to purchase and 

retain their policies and the premiums that would have been required for equivalent 

polices offered over the same period that did not offer mutual rights. 

True, the Gladden court was dealing with land that had the potential to gain rights, 

not land on which rights already existed. It did find, however, that the regulation on 

allocating property by its value “would be easy to apply . . . if the water rights had 

already been vested when the partnership had purchased the land.” Id. at 853.5

 Nothing in 

the opinion suggests that comparing the price of comparable purchases with and without 

such rights would inappropriate when the rights were actual rather than potential. Id.

Such a comparison is not possible from the current record. Defendant has only 

compared the cost of Plaintiff’s policy before and after demutualization; it has not 

provided any evidence comparing the cost of Plaintiff’s policy at the time it was 

purchased to similar policies lacking mutual rights. See Douglas P. Faucette & Timothy 

S. Farber, National Insurance Act of 2007 & Demutualization of Insurers: The Devil is in 

the Details, FDCC Quarterly 109, 123 n.44 (“[A] sophisticated policyholder might have 

been willing to pay more for his policy, after incorporating the small probability that his 

mutual would liquidate or convert, and thereby owe him a portion of its otherwisewithheld surplus.”). Moreover, parties have not had the opportunity to argue that using 

the method suggested by Gladden would be more equitable than comparing the value of 

the rights and the policy at the time of demutualization. 

Neither party has yet presented evidence from which the Court could equitably 

apportion the premiums paid before demutualization as basis in the mutual rights and 

basis in the policies themselves. The Court has noted that previous Ninth Circuit caselaw 

 

5

 The Gladden court noted that in this “easy case” the facts would have resembled 

Inaja Land, and Plaintiffs urge the court to therefore apply the open transactions doctrine. 

The Gladden court did not suggest that in cases where the rights had vested the open transaction doctrine always applied, and neither Gladden nor this case present the uncertainty regarding present value that governed Inaja Land. 

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suggests that the best method for such apportionment would be to compare the cost of 

Plaintiffs’ policies to the cost of comparable policies issued by non-mutual insurance 

companies at the time of issuance. Gladden, 262 F.3d at 856. On the other hand, 

commenters writing specifically about the issue of applying basis to mutual rights have 

suggested that comparing the market value of the policy and the stock at the time of 

demutualization, and applying that ratio to the premium payments, would be more 

appropriate. 

The Court need not address, at summary judgment, which method of 

apportionment is appropriate. Plaintiffs have shown that they may have paid something 

for the mutual rights. The open transactions doctrine does not apply because the facts 

here do not present “elements of value so speculative in character as to prohibit any 

reasonably based projection of worth.” Campbell v. United States, 661 F.2d 209, 215 (Ct. 

Cl. 1981), The regulation requires basis to be apportioned equitably. 26 C.F.R. § 1.61-

6(a). The Court reminds the parties that, as in Fisher, the trial will be to the bench. See 

Galloway v. United States, 319 U.S. 372, 388 (1943) (holding that the Seventh 

Amendment right to a jury trial does not apply in suits against the United States because 

it “hardly can be maintained that under the common law in 1791 jury trial was a matter of 

right for persons asserting claims against the sovereign”). Parties will not bring forward 

arguments that have been rejected in this order, but are free to argue that either method, 

or some other equitable method of allocating basis, is appropriate. 

IT IS THEREFORE ORDERED: 

1. Defendant’s Motion for Summary Judgment (Doc. 64) is denied. 

2. Plaintiffs’ Motion for Summary Judgment (Doc. 67) is denied. 

/ / / 

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3. The Court has determined that Plaintiffs have demonstrated that they may 

have had some basis in the mutual rights, and that the open transaction doctrine does not 

apply in this case. The basis in the life insurance policies “shall be equitably apportioned 

among the several parts.” 26 C.F.R. § 1.61-6(a). 

 Dated this 9th day of July, 2012. 

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