Consult Your Tax Advisor
I expect most of you have heard of Johnson Control’s plan to merge with Tyco, the fire and security company, in a process known as an Inversion, where it comes out the other end as a company headquartered in Ireland.
This is some very big news.
If you haven’t heard, or want to know more, I suggest you go to the company website to learn all about it. http://investors.johnsoncontrols.com
This article is to address the one small line in the press release and elsewhere that says “ The combination will be taxable to Johnson Controls shareholders”.
If you hold Johnson stock outside of a 401k or other pretax account (I expect a number of us retirees hold “well aged”, low basis shares) you will want to be aware of the tax implications of this event, if the merger/inversion occurs.
Update May 11, 2016: The recently published SEC Form S-4 from TYCO International plc, provides additional detail on the exchange of existing JCI shares for either cash or New JCI plc shares which differs from what is described in this article. A shareholders choice of exchanging each of their present shares for either cash or a share in the new JCI plc can be modified by the inversion proration process. The shareholder will receive some shares and some cash for their shares, such that the whole $3.86+ billion is distributed to present JCI shareholders.
The exchange is NOT one existing share for one New JCI plc share PLUS some cash. Please see Notes: Johnson Controls, Inc/Tyco Merger for a more detailed coverage of this proration.
Original Paragraph Corrected by Update May 11, 2016: For each share of Johnson Controls common stock a shareholder gets one of two options for its replacement. Either a fixed $34.88 per share in cash OR a single share of the new company (Johnson Controls PLC) plus a prorated amount of cash that will be between $0 – $6/share.
This is variable because it comes from a sum of cash ($3.9B) set aside to first, buy back shares from those choosing the $34.88/share cash out option. If any of it is left after buying back shares, it will be divided equally (prorated) among JCI shareholders who did not choose the cash out option. The math says this could be as high as $6 per share if nobody choses the cash option.
There is not the option of carrying your current basis/share to the “new company” JCI plc shares.
The shareholder will then have a capital gain tax liability equal to whichever value chosen above – minus his/her basis of what they paid for that share. For example: a cash out choice of $34.88 on a share bought for $5 long ago would result in a capital gain of $29.88 for each share.
Do the math for your personal situation and you may well come back to the recommendation used to title this article, Consult your Tax Advisor. Sooner would be better than later.
I suggest you do more research yourself on how this has affected shareholders of other companies already having done this (Eaton, Pfizer, Medtronic, Burger King, etc), Google these words.
“Inversions tax on shareholders”
I hadn’t planned to send Uncle Sam this much in 2016.