Friday, June 3, 2011

Can the conversion of a stock insurance holding company into a mutual insurance holding company qualify as an E reorganization?

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In PLR 201112004, the IRS, citing Rev. Rul. 2003-48, 2003-19 I.R.B. 863, ruled that a conversion of a stock insurance holding company into a mutual insurance holding company qualified as an E reorganization. Although Rev. Rul. 2003-48 involved a demutualization, it was cited in the PLR which involved a stock-to-mutual conversion.

In Rev. Rul. 2003-48, the IRS ruled that the conversion of a mutual bank to a stock bank incorporated in the same state would qualify as an E reorganization where state law treated the stock bank as a continuation of the mutual bank. The stock bank (formerly the mutual bank) emerged from the conversion as a wholly owned subsidiary of a stock holding company.

In the PLR, a stock insurance holding company (Parent), with a capital structure designed to mirror that of a mutual insurance holding company because of regulatory reasons, wholly owned a stock insurance company (Company) that converted to a mutual insurance company in order to form a new parent mutual insurance holding company (New Parent). Company converted back into a stock company and became the wholly owned subsidiary of New Parent, while Parent merged into New Parent immediately after New Parent’s formation. What these rulings have in common is that: (1) an entity's conversion from stock to mutual or mutual to stock was considered a "continuation" of the existing entity under state law and, therefore, eligible for E reorganization treatment; and (2) the transitory existence of a mutual company as a stock company or vice versa was necessitated by law and beyond the parties' control.

-- Vara Barnes

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