Corporate inversions are all the rage these days as U.S. businesses merge with foreign firms and then restructure the combined businesses as foreign-based corporations. That yields tax benefits and may boost their after-tax profits, but it can also leave their stockholders with unwanted capital gains and big tax bills.
As Howard Gleckman explained in TaxVox back in June, a corporate inversion leaves the U.S. business in place with a foreign firm as the new owner. That restructuring, combined with income shifts it makes possible, can cut or even eliminate the taxes the U.S. business owes the American government. No workers or production activities have to move; only legal ownership leaves for foreign shores.
But not everyone saves on taxes. As Laura Saunders discussed in the Wall Street Journal (pay wall) a couple of weeks back, an inversion that cuts the corporation’s tax bill can increase income taxes for the firm’s stockholders. An inversion, in effect, is the sale of a U.S. firm to a foreign company. Stockholders in the U.S. firm are deemed to have sold their shares in the U.S. firm in exchange for shares in the new foreign-based entity. They get no cash, just a stake in the new company.
Unfortunately for those investors, those shares often do poorly. A new study by Reuters found that the stocks of more than a third of the 52 inversions accomplished over the last three decades underperformed the S&P 500. Of course, many firms do well: another third beat the market average.
In any case, an inversion’s “sale” of U.S. shares is a taxable transaction as far as the IRS and states are concerned. If the sales value of the stock exceeds its basis, the stockowner owes tax on the capital gain. Those gains will likely be largest for long-time stockholders who purchased shares at low prices. Recent buyers of the firm’s stock tend to have smaller gains and hence smaller tax bills.
As Howard Gleckman explained in TaxVox back in June, a corporate inversion leaves the U.S. business in place with a foreign firm as the new owner. That restructuring, combined with income shifts it makes possible, can cut or even eliminate the taxes the U.S. business owes the American government. No workers or production activities have to move; only legal ownership leaves for foreign shores.
But not everyone saves on taxes. As Laura Saunders discussed in the Wall Street Journal (pay wall) a couple of weeks back, an inversion that cuts the corporation’s tax bill can increase income taxes for the firm’s stockholders. An inversion, in effect, is the sale of a U.S. firm to a foreign company. Stockholders in the U.S. firm are deemed to have sold their shares in the U.S. firm in exchange for shares in the new foreign-based entity. They get no cash, just a stake in the new company.
Unfortunately for those investors, those shares often do poorly. A new study by Reuters found that the stocks of more than a third of the 52 inversions accomplished over the last three decades underperformed the S&P 500. Of course, many firms do well: another third beat the market average.
In any case, an inversion’s “sale” of U.S. shares is a taxable transaction as far as the IRS and states are concerned. If the sales value of the stock exceeds its basis, the stockowner owes tax on the capital gain. Those gains will likely be largest for long-time stockholders who purchased shares at low prices. Recent buyers of the firm’s stock tend to have smaller gains and hence smaller tax bills.