I am not sure where I am losing you. The basic rule of tax accounting is that the tax basis of an asset is increased by any gain realized (or decreased by any loss realized) and decreased by any cash received (or increased by any cash contributed). Investors in partnerships are familiar with these rules.
A simple example is a cash dividend which is a wash. The gain or income increase offsets the cash decrease and the tax basis of the investment is unchanged. If additional cash is contributed it increases the basis. If a non taxable (return of capital) dividend is paid it reduces the tax basis by that amount with no taxable gain to offset it. If an asset results in a taxable gain or income without any cash being received then the tax basis of that asset in increased by that amount..When you take a tax deduction for an asset such as for depreciation or amortization (with no contribution of cash) then the tax basis of that asset is decreased by the amount of that deduction.
I am not sure whether this addresses your concern.
I hear what you are saying but I will continue to wait for something more definitive. They cannot rewrite the tax laws It should be taxable to the extent of the "gain realized" but limited to the amount of the cash received.. This is called the "gain recognized". Therefore, for those who have a tax basis less than the FMV of ARCC shares received they will have a "taxable gain recognized" equal to the cash received and will have a tax deferral equal to the excess of the "gain realized" over the cash received, ("gain recognized"). They will have a tax basis in ARCC stock equal to the ACAS stock less the amount of that tax deferral.
TIme will tell. .
You are assuming that there is no decline in ARCC stock price which would derail the deal. I think that a fall to $13 for ARCC could derail the deal.
What irritates me is the fact that ARCC will not be increasing its NAV from $16.50 because it is being stripped out in dividends before the closing, Yet ACAS will probably increase its NAV by 70 cents to a dollar if it takes about 6 months to close. Elliott should have insisted that ACAS distribute this to its shareholders at closing or be compensated in some way.
Specifically the spread is currently $.92. ARCC at $14.02 is worth $16.83 v ACAS at $15.91.
The spread is being closed more by ARCC falling in price rather than ACAS rising in price.
Sorry for the language but the facts don't change: ARCCs NAV is holding steady and ACASs is increasing. ARCC shareholdersare being compensated for the time value of money and the ACAS shareholders are not. Make an additional payment to ACAS shareholders for the increase in NAV from Q1 ubtil the closing..
I agree with your viewpoint assuming that one wants to acquire and hold ARCC shares, However, for those who want the cash and move on the longer they wait the greater the risk. There is the possibility of a bear market, A downturn in the economy would not be good for leveraged BDC.s.
It is now beginning to appear that the initial gap between the $17.40 initiad deal value and the $16+ market price of ACAS will be closed mostly by a decline in the market price of ARCC rather than an increase in the market price of ACAS. The market action of ARCC appears to reflect a negative view of the ACAS acquisition.
There are many variables that will be resolved when the tax details of the plan are spelled out.
It appears fairly certain that we will have a tax free merger with boot (cash) received. We need to know the fair market value of the proceeds received (cash and .483 shares of ARCC) and the tax basis of the ACAS shares held. If the tax basis of the ACAS shares held is greater than the FMV of ARCC shares received the taxable gain will be equal to the gain because it will be less than the cash received. If the tax basis of the ACAS shares held is less than the FMV of the ARCC shares received the taxable gain will be equal to the cash received because it will be less than the gain.
We don't yet know how the 1.20 cash from Ares Management and the 2.45 cash from American Capital Mortgage will be treated. If they are taxable dividends then they will have no effect on the tax basis of the ACAS shares held and you can apply the foregoing paragraph using as proceeds the FMV of ARCC stock and the 6.41 cash from Ares Capital. If these payments are tax free dividends (returns of capital) then they will not be taxable but will reduce the tax basis of your ACAS shares held. Again, apply the previous paragraph using as poceeds the FMV of ARCC shares received and the 6.41 cash.
Remember first determine the gain and it will be taxable in full if less than cash received or limited to the cash received if that is less than the gain. The tax basis of the ARCC shares will be equal to the tax basis of the ACAS shares (reduced first by any return of capital dividends) then increased by the taxable gain recognized and reduced by the cash received.
There will be tax deferral for you for the excess of FMV of ARCC shares received over the tax basis of your ACAS shares with a basis below the FMV of ARCC at the closing. Say FMV of ARCC is 7.34 and your tax basis is 5 then 2.34 of the gain will be deferred (not currently taxed) and the ARCC shares will take on that 5 basis.
This is not the case for ACAS shares with a bass over the FMV of ARCC shares received. The tax law provides that the gain (excess of FMV of what is received for cash and stock over the basis of stock held),say 17.40, is taxable in an amount equal to the lesser of that gain (12.40 with 5 basis) or the cash received (10.06). You will have 10.06 of the 12.40 gain taxable and 2.34 deferred in the substituted 5 tax basis of ARCC stock.
We are late in the business cycle. The market remembers what happened to BDC's in the Great Recession and it doesn't want to get burned again.
in summary, the primary risk is in the decline in value of the.483 shares while the $10.06 cash is a hedge in that it will buy even more shares at the lower price and a higher yield.
This is about 90 cents below the 15.19 deal value and ACAS could then be trading at about 15.75.
In the past 5 years ARCC has lost about 12% in value falling from about $16.40. This compares to a gain of about 65% in the S&P 500.. (All my investments are bench marked on a worksheet v the S&P500. If i cannot beat this index I will join it). During these 5 years ARCC paid out about $7.65 in dividends which would have been worth (compounded) a bit more than 50% on the $16.40. The S&P yielding about 2% a year produced an an additional amount equal to a bit more than 10% on the beginning value. Adjusting for the dividends ARCC increased in value by about 38% v about 75% for the S&P 500. Further, the SPY was much more tax efficient with qualified dividends and appreciation v ordinary income. By way of comparison ACAS gained about 80% over this 5 year period.
I have no insight as to what the future may bring but based on past performance I am not attracted to ARCC as an investment nor to BDCs as a class. Clearly BDC's are more volatile that the average stock and will suffer more in a market downturn.
The only tax deferral will be for ACAS shares with a tax basis below the FMV of the ARRC shares received.
Assuming FMV of $7.34 there will be no tax deferral for those ACAS shares with a basis of $7.34 or more. There will be a tax deferral for ACAS shares with a tax basis of less than $7.34 to the extent of the excess of $7.34 over the tax basis of their ACAS shares. Therefore, the taxable gain will be equal to the excess of the FMV of cash and ARRC received less the sum of the tax basis of ACAS stock and any tax deferred.
Section 368 of the IRC.
However, it doesn't matter what we make think it will be resolved by ARCC and ACAS tax attorneys.
Yes, if part of the proceeds such as that from Ares and AGNC were distributed as a dividend prior to the merger and assuming no earnings and profits for ACAS then this would reduce the 5 tax basis of the ARCC stock received and increase the amount of taxable income deferred,
Why doesn't ACAS pay a dividend of about 75 cents to compensate for the increase in NAV from May 23rd until the closing?. ARCC is paying dividends which will cause NAV to have little change from May 23rd until the closing.