Incorporated in 1983, 180 Degree Capital Corp. (f/k/a Harris & Harris Group, Inc.) is a publicly traded registered closed-end management investment company under the Investment Company Act of 1940. In addition, for tax purposes we have elected to be treated as a regulated investment company, or RIC.
The Company has also elected to be a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code (the "Code") for federal income tax purposes. In general, a RIC is not taxable on its income or gains to the extent it distributes such income or gains to its shareholders. With respect to its net long-term capital gains, Subchapter M provides the Company with three choices: it can retain them and pay tax, it can declare a deemed dividend (or designated undistributed capital gain dividend) or it can pay out the gains as a distribution.
180 Degree Capital Corp. trades on The NASDAQ Global Market under the ticker symbol "TURN". Information about our stock price and other related data can be found by visiting the stock information page (http://www.hhvc.com/stockquote.cfm) on our website.
180 Degree Capital Corp. is a registered closed-end fund focused on investing in and providing value-added assistance through constructive activism to what we believe are substantially undervalued small, publicly traded companies that have potential for significant turnarounds. Our goal is that the result of our constructive activism leads to a reversal in direction for the share price of these investee companies, i.e., a 180-degree turn!
No. Investors must go through a broker or to the Company's transfer agent, American Stock Transfer, to purchase shares. Please visit American Stock Transfer's website at www.amstock.com or call 1-888-777-0324 for more information.
We do not release information about our net asset value before the filing of our financial statements or portfolio company valuations with the Securities and Exchange Commission. These filings are required to occur within 60 days from the end of each quarterly fiscal period.
Our valuation process is conducted on a quarterly basis. The investment team prepares a detailed summary of the status of each portfolio company that includes all information relevant to value as of the end of the quarter. The investment team uses these data to calculate proposed valuations for each of our portfolio companies. These proposed valuations and the information used to derive them are reviewed and commented on by multiple parties including:
- an independent external firm with valuation expertise that reviews a rotating set of valuation summaries and proposed values each quarter;
- Our board of directors, always including the chairs of the audit committee and the valuation committee;
- Our independent auditors as part of their review of our quarterly financials and our year-end audit.
The management team then proposes these valuations to our valuation committee that is comprised of all of our independent directors. It is the valuation committee that ultimately sets the valuations of our privately held portfolio companies at the end of each quarter.
Our investments are fair valued according to the methods set forth by ASC 820 (formerly FAS 157.)
Inputs used to determine fair value include:
- The cost of the investment;
- Transactions of securities of a company following our initial investment;
- The financial condition and operating results of a company;
- The progress toward milestones;
- The long-term potential of the business and technology of a company;
- The value of similar securities issued by companies in similar businesses;
- Multiples to revenues, net income or EBITDA of similar businesses;
- The proportion of the company we own and any rights to obtain additional securities of a company; and
- The rights and preferences of the securities owned compared to other classes of securities outstanding.
In any year in which we have capital gains, the Board of Directors plans to declare a designated undistributed capital gain dividend (or deemed dividend). When the Company declares a deemed dividend instead of a cash distribution, the Company is taxable on the retained capital gains, the shareholders are deemed to have received the deemed dividend as a capital gain dividend and the shareholders are deemed to have paid the tax actually paid by the Company. Thus, they receive a tax credit that they can use to offset their tax on the deemed dividend or for other purposes. The shareholders also increase their cost basis in their shares in the Company by the amount of the deemed distribution, net of taxes paid by the Company and deemed paid by the shareholders.
Shareholders of record on the record date will be provided with the exact amount of the deemed dividend attributable to their shares by their brokerage firm or bank, if their shares are held in electronic format, or by American Stock Transfer, if their shares are held directly. This information is to be reported by you on IRS Form 2439, along with your tax return.
The following simplified examples illustrate the tax treatment under Subchapter M of the Code for us and our individual shareholders with regard to three possible distribution alternatives, assuming a net capital gain of $1.00 per share, consisting entirely of sales of non-real property assets held for more than 12 months.
Under Alternative A: 100 percent of net capital gain declared as a cash dividend and distributed to shareholders:
1. No federal taxation at the Company level.
2. Taxable shareholders receive a $1.00 per share dividend and pay federal tax at a rate not in excess of 15 percent* or $.15 per share, retaining $.85 per share.
3. Non-taxable shareholders that file a federal tax return receive a $1.00 per share dividend and pay no federal tax, retaining $1.00 per share.
Under Alternative B (Current Tax Structure Employed): 100 percent of net capital gain retained by the Company and designated as "undistributed capital gain" or deemed dividend:
1. The Company pays a corporate-level federal income tax of 35 percent on the undistributed gain or $.35 per share and retains 65 percent of the gain or $.65 per share.
2. Taxable shareholders increase their cost basis in their stock by $.65 per share. They pay federal capital gains tax at a rate not in excess of 15 percent* on 100 percent of the undistributed gain of $1.00 per share or $.15 per share in tax. Offsetting this tax, shareholders receive a tax credit equal to 35 percent of the undistributed gain or $.35 per share.
3. Non-taxable shareholders that file a federal tax return receive a tax refund equal to $.35 per share.
*Assumes all capital gains qualify for long-term rates of 15 percent.
Under Alternative C: 100 percent of net capital gain retained by the Company, with no designated undistributed capital gain or deemed dividend:
1. The Company pays a corporate-level federal income tax of 35 percent on the retained gain or $.35 per share plus an excise tax of four percent of $.98 per share, or about $.04 per share.
2. There is no tax consequence at the shareholder level.
The investor or trustee should still receive a Form 2439 for shares held in these accounts. There is a method for the trustee to apply for a refund of taxes withheld related to these accounts. The trustee needs to file a Form 990-T and the investor should also consult their personal tax advisor. You can get the Form 990-T from a tax advisor or online at www.irs.gov.