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New corporate mergers may generate incentives for your clients to make charitable gifts

August 11th, 2014


"Inversion" deals - like the one currently in the works with Medtronic (MDT) - will likely generate capital gains (and result in capital gains taxes), for which shareholders could be sheltered by strategic charitable giving.

Medtronic (MDT) is pursuing a deal to buy another company and "move abroad" for U.S. tax purposes to save taxes. However, the company's shareholders will be the ones left with a big tax bill as a result. An "inversion" deal involves the merger of a U.S. corporation with a foreign corporation, usually in a country with lower corporate tax rates than the U.S. rate of 35%. As a result of the merger, the new company will be able to shelter future profits from U.S. taxes.

U.S. shareholders in inversion deals typically receive stock in the new company in a cashless exchange. The Internal Revenue Service will treat the acquisition as if Medtronic shareholders sold their shares. Since the exchange is a taxable event for the Medtronic shareholders, there can be significant taxes owed. And unlike other taxable mergers, the shareholders usually do not receive any cash proceeds to help pay those taxes.

Shareholders who have owned their stock for more than one year could owe significant capital gains taxes (for example, if a shareholder bought shares for $10 and receives the new stock valued at $40 a share, he or she would owe taxes on the $30 difference).  

Shareholders who have owned their shares for less than one year will typically owe taxes at ordinary income tax rates.

Three possible strategies to minimize the tax impact of inversions include:

  1.  Offsetting gains with losses
  2.  Gifting the stock to individuals in a lower tax bracket
  3.  Donating the stock to a charity

By donating the stock, your client may deduct the full fair market value of the stock (subject to the usual charitable limitations).  A donor-advised fund at the Community Foundation of Greater Memphis is particularly useful in helping your client gain the maximum available tax advantage today while supporting their favorite causes and organizations now and in the future.

Possible inversion deals include Medtronic (MDT), AbbVie (ABBV), Pfizer (PFE), Chiquita Brands International (CQB), Applied Materials (AMAT), Salix Pharmaceuticals (SLXP), Mylan (MYL) and Auxilium Pharmaceuticals (AUXL). Walgreen (WAG) just announced that they will not pursue an inversion deal.  Many of your clients may own shares in these companies, especially Medtronic.

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