TaxProf Blog

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

Saturday, August 2, 2014

WSJ: Inversions Cut Corporation's Taxes, Raise Shareholders' Taxes

Wall Street Journal Tax Report:  An 'Inversion' Deal Could Raise Your Taxes: Shareholders Are Likely to Owe Capital-Gains Tax, by Laura Saunders:

U.S. companies are busy buying overseas firms in deals that reduce their tax payments. Ironically, though, these mergers could saddle shareholders with higher tax bills.

In an "inversion," a U.S. firm merges with a foreign one, and shifts much of its income abroad. For corporations, the goal is simple: to exchange the U.S.'s steep corporate tax rate, which runs as high as 35%, for a much lower one elsewhere. Take AbbVie, a U.S. pharmaceutical firm that plans to merge with Irish drug firm Shire this year. Once the deal is consummated, the combined company will be taxed as a U.K. corporation with an estimated rate of about 13% by 2016. Other U.S. companies that have considered or are pursuing inversions are Pfizer, Medtronic, Walgreen, Chiquita Brands International, Applied Materials, Salix Pharmaceuticals, Mylan and Auxilium Pharmaceuticals.

Shareholders in companies pursuing inversions are likely to owe capital-gains tax if the deals occur, but, unlike with other taxable mergers, they won't receive any cash payment to help cover it.  The deals are taxable because the U.S. company, although it will ultimately control the foreign firm, is technically the one that's being acquired, says Robert Willens, an independent tax adviser in New York. The U.S. firm's shareholders will receive new shares to replace their old ones. That exchange is considered taxable by the IRS. ...


Here are three tax-minimizing strategies for investors coping with inversions.

  • Offset gains with losses
  • Give the stock to someone in a lower tax bracket
  • Donate the stock

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A recognition event doesn't "raise shareholder's taxes," it just changes the timing of the tax on the built-in gain in the shareholder's appreciated stock value. They will have the same tax liability regardless of whether they recognize part of the gain incident to the inversion and acquire a tax basis or if they recognize the entire gain upon the disposition of the stock. The only difference is the time value of money, not the amount of tax liability.

Posted by: Ben | Aug 2, 2014 2:00:11 PM

It would be interesting to see whether an inversion has any impact on stock prices. My guess is that it doesn't. The stock market is so disconnected from reality (see Alibaba) that no one seems to care about tax issues anymore.

Posted by: Dale Spradling | Aug 3, 2014 8:59:02 AM

Mr. Spradling – those of us who advise or work for public corporations can testify to the constant pressure to reduce the effective tax rate. CFOs and CEOs think that an ETR above industry standards hurts the stock price. I think those “C” folks with the large stock options may be on to something

Posted by: air65cav | Aug 5, 2014 8:39:41 AM

Regarding Ben's comments on the effect of an inversion on shareholders' taxes: A shareholder may have a different tax liability due to an inversion than she would have based on a sale at a time of her choosing. The value of the shares at a later date is unlikely to be the exact same value as at inversion; the capital gains tax rate may change; the holder may have offsetting losses available at one time but not another.

Also, I heartily agree with air65cav's comment--although different corporations may have different degrees of risk aversion when it comes to taking more or less aggressive positions, it is true that many publicly-held corporations think of the ETR as just another cost that should be manageable according to the needs of the business to meet earnings targets.

Posted by: Michael | Aug 5, 2014 11:59:36 AM