Corporate inversions can mean capital gains

Written by: Dan Kuksa on Monday, September 29, 2014

It’s now impossible to escape the financial media’s coverage of corporate inversions. The subject has everybody arguing corporate tax loopholes vs. over-taxed corporations. Unfortunately, despite rampant flag waving on both sides, very few companies are talking about the impact of a corporate inversion on their shareholders.

Wait a minute. What?

When a U.S. company is sold to a foreign company and is no longer based in the U.S., shares of its stock are effectively “sold” to the overseas company. Though no money goes to the shareholders, they become de facto investors in the foreign company. And yes, there is an impact. It’s called capital gains.

Here’s how it works. (US1 is the American company; OS1 is the overseas buyer.)

You can see why the debates are getting pretty heated and will surely rage on for some time. You want to know about your exposure, right? You notice that I said you could owe tax on capital gains. There are some strategies that can mitigate these taxes for investors.You own 2000 shares of US1. US1 is acquired by OS1. In the transaction, OS1 buys all US1 stock. Even though you receive no proceeds from the sale, you could owe capital gains tax on your now sold 2000 shares of US1. Okay, I bet you’re not happy.

For example, if you have been carrying unused losses forward from the sale of previous assets, you could use them to offset the stock gains shown on paper. You could also dump some sinking stocks and take the losses in the same year.

Another way is to get rid of the stock without selling it.

By donating to a tax-exempt charity, you can deduct the full market value of publicly traded stock up to thirty percent of your adjusted gross income. Or you might want to give the stock to a family member who’s in a lower tax bracket. However, if you choose either of these methods, you must give the gift before the inversion is complete to reap the benefit.

There are other considerations too, but I don’t want to blog you to death. If you are a shareholder in a publicly held company that’s going through an inversion, meet with your CPA or tax advisor. By planning ahead you will save both money and grief at tax time.

Dan Kuksa

1860 W. Winchester Road , Suite 103, Libertyville, IL 60048