Closed-end fund tender offers escape adverse tax consequences.Many closed-end regulated investment fund companies reserve the fight to tender for their stock (that is, to buy back shares at a set price) when management believes it is undervalued Undervalued A stock or other security that is trading below its true value. Notes: The difficulty is knowing what the "true" value actually is. Analysts will usually recommend an undervalued stock with a strong buy rating. by the market. These tender offers typically are made at net asset value as of the close of business on the day they end. The question from a tax viewpoint is whether such a buyback Buyback The buying back of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buyback shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may is part of a "periodic redemption plan." If it is, the tendering shareholders will realize dividend income equal to the full buyback proceeds. The buyback will not qualify for sale treatment because the tendering shareholders do not incur a meaningful reduction in proportionate pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. interest (the shareholder has the power to recover lost interest by electing not to participate in later buybacks). More significant, the nontendering shareholders are deemed to receive a "constructive" dividend reflecting the value of their increased proportionate interest in the corporation. A recent ruling indicates these arrangements will generally not be construed as periodic redemption plans, so no shareholder will be deemed to receive constructive dividends constructive dividend A corporate payment to a stockholder that is characterized by the Internal Revenue Service as a dividend distribution even though the corporation calls it something else. . To avoid periodic redemption plan status a corporation must not be required to redeem redeem v. to buy back, as when an owner who had mortgaged his/her real property pays off the debt. The term also refers to paying the amount due and all charges after a foreclosure (due to failure to make payments when due) has begun. its stock and, at the time of a buyback, may have no plan or commitment to make further offers. Moreover, periodic redemption plan classification will not be found even though the corporation reserves the right to make additional offers in the future. Observation: Closed-end funds Closed-end fund An investment company that issues shares like any other corporation and usually does not redeem its shares. A publicly traded fund sold on stock exchanges or over the counter that may trade above or below its net asset value. Related: Open-end fund. will have the ability to make tender offers without adverse tax consequences-so long as each offer is not required and there is no plan or commitment to make subsequent tender offers. |
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