Democrats seem to favor immediate action that will not only stop tax motivated inversions in the future but also be retroactive to May when legislation was first introduced. Republicans on the other hand seem to favor addressing this issue with an overhaul of the entire tax code. However, both parties agree it is an issue that must be addressed as the bipartisan Joint Committee on taxation recently projected that such inversions could cost about $19.5 billion in lost tax revenue over the course of the next ten years.

One result of these inversions that seems to get lost in the political storm is the impact they have on the individual shareholders of the corporations that use this tactic. Thus, a taxable event is often created for shareholders at the individual level resulting from the way the transaction must be structured to receive the tax benefits at the corporate level. When the inversion takes place the U.S. firm is technically being acquired by the foreign entity and shareholders are granted new shares in the foreign/new company. Therefore if the acquisition price at the time of the merger exceeds a stockholder’s basis a capital gain must be recognized and tax paid despite the fact that no cash was received. This is where tax planning becomes essential as there may be ways to offset your gains and prevent the myriad of taxes that can come with reaching certain thresholds.

Please contact your Dopkins tax advisor or Robert Pollock at rpollock@dopkins.com to discuss your specific tax plan.