Although corporate stock inversions have come under fire lately, U.S. based multinational companies continue to announce inversion plans. In an inversion transaction, the shareholders of the U.S. Corporation must exchange their shares for shares of the foreign parent corporation. Although the stock inversion transaction qualifies as a tax-free reorganization that imposes no tax on the U.S. Corporation, this exchange is a taxable event for shareholders.
For long-term shareholders holding significant stock positions in a U.S. corporation engaging in an inversion transaction, the tax on the gain may be significant. Inversions are especially unwelcome for long-term investors who plan to hold their shares until death so that their beneficiaries would get a step-up in basis, allowing appreciation during the investor’s lifetime to be tax free to beneficiaries.
For individuals who hold shares and keep them outside of a qualified account — an IRA or a 401(k) — the tax hit can be steep. Because of the American Taxpayer Relief Act of 2012, capital gains taxes can pack a punch of 20%, plus a 3.8% net investment income tax for taxpayers with a modified adjusted-gross income over $200,000 for singles and $250,000 for married-filing-jointly.
Donate to Charity or a Charitable Remainder Trust
Philanthropically inclined shareholders who must pay substantial taxes in an inversion transaction can contribute their shares of a U.S corporation to charity or, where they desire an income stream, to a charitable remainder trust (CRT) to avoid recognized taxable gain. In addition to avoiding gain recognition, a charitable income tax deduction based on the full fair market value of the contributed shares may also be available.
Caution: Timing the contribution is important. It is imperative that the shares of stock subject to a corporate inversion are donated to charity prior to the inversion being effectively completed. Transfer the stock before the shareholders vote to approve the inversion, and retain evidence of the date that vote took place as proof in the event of an IRS audit. Contributing the stock when the inversion transaction is too far along will trigger the anticipatory assignment of income rule, resulting in the shareholder being subject to the very tax that he or she is attempting to avoid by contributing the shares to charity.
Greg Hammond, CFP®, CPA and Ron Ware, J.D. are wealth impact strategists and personal legacy advisors who help individuals, families, and business owners enhance their financial standing while discovering a greater capacity to provide for their loved ones and support cherished charities. For a wealth impact assessment or philanthropic planning, contact Greg or Ron here.