Inversions can hit small investors with a big tax bill

Nancy Marshall-Genzer Aug 25, 2014

Inversions can hit small investors with a big tax bill

Nancy Marshall-Genzer Aug 25, 2014

Ninety-five-year old Lois Powers of Okoboji, Iowa, owns about $40,000 worth of Medtronic stock.

“I’ve been buying it all through the years,” she says.

Now, Medtronic is considering an inversion. Currently, it’s a pharmaceutical and medical device company.

It plans to buy Covidien, a surgical supply firm based in Dublin. Ireland has a lower corporate tax rate than the U.S., meaning Medtronic’s taxes would go down, but Lois Powers’s would spike up.

“It’ll be thousands,” she says.

That’s because Powers will get stock in the new company created by Medtronic’s merger with Covidien. To the IRS, it’ll look like Powers sold her old Medtronic stock. 

She’ll have to pay capital gains taxes on the difference between what she originally paid for the stock, and on what it’s worth at the time of the merger.

But the profit’s all on paper. She didn’t make a bundle of cash.

Steven Davidoff Solomon is a professor of law at University of California, Berkeley. 

He says, for example, “Let’s say you bought the stock at $10 a share and now it’s at $40 a share. The IRS will look at that as $30 in profit and they’re going to tax that at the capital gains rate.”

Depending on your tax bracket, that rate can reach nearly 24 percent. 

Why is the IRS doing this to shareholders? Believe it or not, it’s part of a 1994 law intended to discourage inversions. 

Robert Willens is an independent tax adviser in New York.  

He says the thinking was: “You know, no one will ever want to invert if we create this penalty, but it just hasn’t worked out that way.” 

That’s partly because corporations reimburse executives for any capital gains taxes they pay. Little guy investors aren’t reimbursed, of course. But they don’t protest. 

Willens says many don’t realize they’re paying higher taxes in inversions because they hold mutual funds, which tally up your capital gains for the year without breaking it out stock by stock. 

And individual investors may be thinking the stock price will eventually go up because of the inversion.

“Once it’s all said and  done, we’ll be happy that we bore this short term penalty for the greater payoff that comes later,” Willens says.

But Lois Powers, our 95-year-old  Medtronic shareholder, is skeptical.

“I don’t know that exactly,” she says. “And furthermore, I probably don’t have that much time.”

Powers says she planned to pass the Medtronic stock on to her heirs so she wouldn’t have to pay tax on it.

“This is money that I have put away for my elder years and for my estate when it’s passed onto my children,” she says.

Now, Powers says, that money will take a hit. 








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