TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, January 20, 2013

WSJ: Corporate Inversions Yield Big Shareholder Tax Bills

Wall Street Journal:  How to Owe Capital-Gains Taxes Without Even Trying:

The byzantine U.S. tax code doesn't merely defy logic and comprehension. It also keeps producing ways to trip up investors. ...

In "corporate inversions," ... a U.S. company creates a new parent incorporated in a foreign country. The old shares in the U.S.-based company are then exchanged for stock in the foreign parent—a swap that the IRS regards as a taxable transaction. There were six such deals in 2011 and 2012, says Omri Marian, a tax expert at the University of Florida's Levin College of Law. More could be in the works, say tax analysts. ... 

But the question remains: How can shareholders be put into the bizarre position of owing taxes upfront on shares they never sold?

After six companies in the S&P 500 moved offshore between 1999 and 2003 to benefit from lower corporate tax rates, Congress and the IRS cracked down. Complex regulations made it harder for U.S. firms to expatriate. Under those rules, shareholders who purchased the U.S. stock at lower prices incur capital gains when it converts to a foreign company.

While fewer firms have moved abroad, the U.S. tax code remains unfair in the eyes of many corporate executives and analysts—since American and foreign companies often aren't taxed at the same rates. "We should not be harder on our own children than we are on the children of others," says Bret Wells, a tax-law expert at the University of Houston.

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So when companies try to dodge taxes by setting up complicated schemes to transfer capital out of the country it is the "tax code" that is blamed? It is Byzantine? If it is, you can blame all of the corporate lawyers who keep looking for loopholes and inventing schemes the sole purpose of which is to dodge their tax obligations.

Posted by: George | Jan 21, 2013 8:05:25 AM