Pfizer Holders Could Face Tax Hit in a Deal for AstraZeneca
Pfizer Inc. could cut its tax bill by hundreds of millions of dollars if it buys rival AstraZeneca PLC, but thousands of Pfizer shareholders could face a tax hit if the deal goes through.
The hit would stem from a little-known provision of U.S. tax rules that is triggered when a U.S. company buys a firm overseas and relocates there to reduce its taxes. Under the rules, Pfizer shareholders with stock in taxable accounts would owe capital-gains tax on the appreciation in their shares when they are converted into stock in the combined company, said Robert Willens, an independent tax expert based in New York.
Shareholders who hold stock in tax-deferred accounts such as IRAs and 401(k) plans wouldn't owe tax as a result of a deal, he said.
Pfizer has proposed to buy AstraZeneca for $106 billion in cash and stock, but AstraZeneca, based in London, rejected the offer, saying it substantially undervalued the company. There is no certainty a deal will be reached. This week Pfizer said it is reviewing its options, which could include walking away.
A Pfizer spokeswoman said the company was aware of the potential for the tax, which is why it mentioned that it expected Pfizer shareholders would face a "taxable event" in an April 28 news release confirming discussions with AstraZeneca on a deal.
There are more than 6.38 billion common shares outstanding of Pfizer, according to the company's annual report, which was released in February. Some 27% of those shares appear to be held directly by individuals rather than institutions, according to FactSet, a financial data provider.
Longtime Pfizer shareholders have seen the stock rise considerably over the years. Since Ian Read took over as Pfizer chief executive in December 2010, the company's stock has climbed 74%. In midafternoon trading Thursday, it was at $29.12, Since late 1984, each Pfizer share has been split into 24 shares and has gained 1,647%, not including dividends.
A merger could leave some investors short of cash to pay their tax bill, since they would realize no cash when the shares are exchanged, as they would after selling shares.
Traci Medford-Rosow, former chief intellectual property counsel at Pfizer, who worked at the company for more than 30 years, said she holds more than 1,000 of its shares. She said she wasn't aware of a potential tax hit and would probably have to "scramble around to get the money" to pay the tax.
"That would be very difficult for people if they had a paper gain but no real gain, and they were hit for a tax they don't have in their pocket," said Ms. Medford-Rosow, 58 years old, now an intellectual property lawyer at law firm Richardson & Rosow in New York.
Among the hardest-hit could be investors who have owned Pfizer shares for many years, especially those who planned to continue holding until their death. Because of a provision known as the "step up in basis," estates of taxpayers who own assets at death don't owe capital-gains tax on their appreciated value.
For example, if an investor bought a share of stock at $5 that is now worth $100, a sale would trigger capital-gains taxes on $95. But if the investor died owning the share, no capital-gains tax would be due. Instead, it would become part of the person's estate at full market value.