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Tax hit a surprise for some Mylan shareholders

Some Mylan NV shareholders may get an unpleasant surprise because of the company's tax-lowering move to the Netherlands: They have to pay Uncle Sam.

Investors have to pay federal taxes on any money they make from selling an investment at a price that's higher than what they paid for it. But Mylan shareholders didn't sell their shares and pocket any profits, known as capital gains, as part of the company's $5.3 billion deal with Abbott Laboratories this year.

Some stockholders, however, may have to pay a capital gains tax, which can range from 15 percent to 23.8 percent, because the government wants to discourage the type of mergers and acquisitions known as tax inversions — in which American companies buy a foreign firm and set up their corporate addresses in tax-friendly countries.

“Regulators and congressional leaders are not big fans of tax inversions because they're losing tax revenue,” said Matthew Karr, manager of investment research at Fragasso Financial Advisors, Downtown. “The capital gains tax hit to shareholders was designed to discourage companies from pursuing those inversions.”

In Mylan's case, it purchased the overseas generics business of Abbott Laboratories in a deal that closed at the end of February and allowed the company to establish a headquarters in Amsterdam. By the April-June quarter, Mylan's tax rate had dropped to 18 percent, down from 25 percent last year, and officials said in August they expected it to fall even lower by the end of this year.

Mylan spokeswoman Nina Devlin declined to comment.

Mylan, whose executives continue to run the company from offices in Cecil, has justified the deal, and the controversial inversion, as a long-term gain for the company because the lower tax bill allows it to gobble up competitors, boost earnings and avoid being acquired by larger rivals.

The move allowed Mylan to use a Dutch law to fend off a takeover bid from Teva Pharmaceutical Industries of Israel this summer. But Mylan failed in its own hostile takeover of Perrigo Co., an Ireland-based maker of store-brand over-the-counter drugs. Perrigo's shareholders rejected the $26 billion bid last week.

Mylan disclosed the tax hit from the Abbott deal to shareholders in filings with the Securities and Exchange Commission before a vote on the acquisition in January. Of the company's shareholders who voted, 98 percent approved the transaction.

Yet not all stockholders were aware of the tax implications.

John Kablach, 85, of Smithton only recently found out he would have to pay capital gains on his Mylan stock, which he's owned since the mid-1980s. The retired melt shop supervisor said he was surprised when his stock broker called him recently and recommended he sell his Mylan shares at a loss to offset some of what he was going to owe in taxes.

He didn't recall receiving the company's proxy materials describing the Abbott deal, and he never voted on it. But he wishes he had.

“I would have voted against it, not that my few shares would have had much impact,” he said.

When the Abbott deal was finalized, Mylan's stockholders were issued new shares in the company valued at $57.70 each. If the deal had involved only American operations, shareholders would not have owed tax. But because it was an inversion, U.S. tax law treats the new shares as a capital gain and taxes the difference between what Mylan shareholders originally paid for their shares and the $57.70 price for the new stock.

“Normally in a merger, there's no tax consequence. The tax is deferred to the future when you cash out and sell your shares,” said Joe Nicola, a certified public accountant at Sisterson & Co., Downtown. “But when a merger involves a foreign corporation ... even though you got no cash, they're going to treat it as a transaction that's fully taxable.”

Kablach, who asked that the value of his Mylan holdings not be published, said he expects his tax bill from Mylan's inversion will be “thousands of dollars.”

He sold his shares in October when they were trading around $42, constituting a loss of about $15 a share that will reduce his tax liability. But Kablach, who planned to hold onto his Mylan shares and sell small stakes over time, will miss out on gains that the company argues its shareholders will realize as it expands.

He said he expressed that in a call to the company when he found out about the capital gains tax hit: “When I talked to their customer representative, I said, ‘You people have a lot to gain, but all of us stockholders, we get screwed.' ”

Alex Nixon is a Trib Total Media staff writer. Reach him at 412-320-7928.