Today 10-09-09 the Court of Appeals for the Federal Circuit affirmed [agreed with] the Court of Federal Claims that the IRS position that the cost basis of stock received in demutualization is ZERO is incorrect.
In Eugene Fisher v US [Aug 2008] the Court of Federal Claims ruled that Fisher was entitled to a refund of taxes paid on sale of the shares.
So where are we now. The courts said that the basis is not zero, but some value greater than zero.
In my opinion the basis is at least the value of each of the shares on the date of the stock distribution 10/01/2002 closing at $27.82
However there is room for further additional consideration, since the estimated value assumed in the demutualization proposal ranged from $47.71 to $36.86. The actual value was to be calculated based upon the 15 day average of the shares price prior to the distribution date.
An arguement can also be made that there is no tax due on any proceeds at sale of the stock, but this may "repeat MAY" be a weak position.
PAY Attention to this issue at tax time 2009 filing. If you sold prior to the buyout you should have your tax preparer consider filing an amended return for a refund of any Cap Gains Tax paid if you have used the then IRS position that the tax basis was zero...