Tax Ruling May Trigger Refund Claims

WASHINGTON -- A federal court decision could pave the way for a surge in tax-refund claims by holders of insurance policies who sold shares in insurance companies that went public, the Wall Street Journal reported. The ruling also could benefit people who still hold shares.

The issue stems from the wave of mutually owned insurance companies that have converted to publicly traded companies, many in the last decade, the Journal reported. They include giants such as MetLife Inc. and Prudential Financial Inc., which made the switch in 2000 and 2001, respectively. As part of that process, the companies go from being owned by their policyholders to being owned by stockholders. People who hold policies at the time also can receive shares in the newly public company.

The court ruled that a taxpayer who sold such shares didn't have to pay capital gains on the proceeds, according to the Journal.

The IRS has maintained that owners of stock from converted insurers owe capital-gains taxes on the full amount of the cash received, the Journal reported. So if a policyholder receives shares worth $10, and eventually sells them for $30, they owe taxes on the entire $30.

But a tax attorney filed a case on behalf of a trustee in Baltimore who oversaw a trust that held a Sun Life insurance policy, the Journal reported. He argued that a portion of the premiums paid by the policyholder counted toward the trust's so-called cost basis in the newly issued stock.

A U.S. Court of Federal Claims judge on Wednesday ruled that the amount the trust received when the shares were sold was less than its cost basis in the policy, according to the Journal. Therefore it didn't receive any taxable income from the proceeds and owed no tax.

A spokesman for the Justice Department, which represented the IRS in the court case, said the agency hasn't yet decided whether to appeal, the Journal reported.

-- NYSSCPA.org News Staff

Posted on 8/11/08