The action is due to a number of mutually owned insurance companies, such as MetLife Inc. and Prudential Financial Inc., which converted to publicly traded companies in the last 10 years or so. Those companies went from mutual to publicly traded in 2000 and 2001, respectively.
In so doing, ownership of the companies changes from policyholders to stockholders. Those who hold policies at the time of the conversion may also receive shares in the newly public company.
In the court’s decision, taxpayers who sold such shares didn't have to pay capital gains on the proceeds.
Says Robert Willens, a former Wall Street tax analyst who runs his own corporate-tax advisory firm in New York,"It's a big deal, because there are literally tens of thousands of people affected by this ruling, maybe even more. It certainly could be in the millions."
According to the Internal Revenue Service, owners of stock from converted insurers owe capital-gains taxes on the full amount of the cash received. However, a tax attorney filed a case on behalf of a trustee with oversight of a trust in which an insurance policy from Sun Life was held.
The attorney argued that a portion of the premiums paid by the policyholder counted toward the trust's cost basis in the newly issued stock, thereby reducing the amount owed.
The judge ruled that the amount the trust received when the shares were sold was less than its cost basis in the policy. Therefore it didn't receive any taxable income from the proceeds and owed no tax.
A spokesperson for the IRS says it has not yet decided whether to appeal.