Another Tax Skirmish for Campbell's Soup Heirs

John T. Dorrance,  inventor of Campbell's condensed soup, died in 1930. As every student of estate planning learns, Dorrance had maintained a home in New Jersey and another in a classier Pennsylvania neighborhood. At his death, both New Jersey and Pennsylvania claimed him as a resident and levied tax. The U.S. Supreme Court declined to intervene.

Vintage Campbell's Soup ad

In 1995 a grandson, John "Ippy" Dorrance, made news by renouncing his citizenship for tax reasons and moving to Ireland before selling a large chunk of Campbell's stock.

Another grandson sought to  tame the estate-tax dragon with life insurance. In 1966 Bennett and Jacquelyn Dorrance bought policies from five companies with a face value of almost $88 million.

At that time the insurance companies were "mutuals." Policyholders had membership rights. When the insurers became stock companies, the Dorrances and other policyholders received shares.

When the Dorrances later sold their shares, how should they have calculated their capital gain? Were the entire sales proceeds  capital gain?  Or did they have a "cost basis," even though they had merely paid premiums, not purchased stock?

Reversing a District Court decision, the Ninth Circuit U.S. Court of Appeals says the Dorrances' cost basis is zero.

Video clip of Appeals Court panel here.