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 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. 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.

"It's a big deal, because there are literally tens of thousands of people affected by this ruling, maybe even more," said Robert Willens, a former Wall Street tax analyst who runs his own corporate-tax advisory firm in New York. "It certainly could be in the millions."

IRS's View

The Internal Revenue Service has maintained that owners of stock from converted insurers owe capital-gains taxes on the full amount of the cash received. 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. 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. 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.

It wasn't entirely clear from the judge's opinion how other courts or the IRS would determine the cost basis and tax obligation for others in the same situation.

Burgess Raby, the attorney who brought the case, surmises that the fair market value of the stock at the time of its issuance should count as the owners' cost basis. So if the stock was issued at $10 and then rose to $30 before being sold, the owner should only owe taxes on the $20 appreciation, he said.

"That's our opinion of how this will be applied," said Mr. Raby.

Taxpayers could also argue that their cost basis is determined by their total premiums paid, said Mr. Willens, the tax adviser.

Who May Qualify

The statute of limitations for filing a tax-refund case is three years after filing a tax return. So the decision is likely too late for anyone who sold shares in 2004 or earlier, assuming they filed their return in April.

If they filed their return in August, they or anyone who sold shares in 2005 or later could be eligible to seek a refund.

Tax experts said the likelihood of getting a refund could depend on the ultimate outcome of the case, if it is appealed. In the meantime, however, taxpayers should immediately file for refunds.

In bringing the case, Mr. Raby was inspired by a Minnesota accountant, C.D. Ulrich, who has argued for years against the current tax treatment of these transactions.

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By JESSE DRUCKER and LIAM PLEVEN

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