Insurance company demutualizations became popular in the late 1990s. Facilitated by revised state laws, mutual insurance companies were attracted to conversion to stock companies for the same reasons that companies have long sought to be publicly held - greater access to capital. The policyholders of mutual insurance companies were generally granted cash or stock in return for their interest in the mutual insurance company.
The Internal Revenue Service took the position that policyholders have a zero basis in the cash or stock received in demutualization, and a carryover basis from their time as a policyholder. This has meant that policyholders receiving cash were subject to tax on the cash received in the year of the demutualization. Policyholders receiving stock were not subject to tax until the stock was sold.
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