Tax Consequences to U.S. Holders
Receipt of Subscription Rights Assuming the Rights Offering is Considered Non-Taxable
Receipt of Subscription Rights
We anticipate that the distribution of subscription rights to a Shareholder with respect to such Shareholder’s Securities will be treated, for U.S. federal income tax purposes, as a non-taxable distribution. The remainder of this section entitled “—Tax Consequences to U.S. Holders—Receipt of Subscription Rights Assuming the Rights Offering is Considered Non-Taxable” assumes that the receipt by a U.S. Holder of subscription rights with respect to such U.S. Holder’s Securities pursuant to this rights offering is non-taxable for U.S. federal income tax purposes. However, this conclusion is not free from doubt, and it is possible that the IRS may take a contrary view.
If, by way of example only, receipt by a U.S. Holder of subscription rights were part of a “disproportionate distribution,” then such receipt would be treated as a taxable distribution to such U.S. Holder in an amount equal to fair market value of the subscription rights received. In such a case, the treatment discussed below under the section entitled “—Tax Consequences to U.S. Holders—Receipt of Subscription Rights if the Rights Offering Is Considered Taxable” would be applicable.
Tax Basis in the Subscription Rights
If the fair market value of the subscription rights received by a U.S. Holder is less than 15% of the fair market value of such U.S. Holder’s Securities as of the date the subscription rights are distributed, then such U.S. Holder’s subscription rights should be allocated a zero tax basis for U.S. federal income tax purposes. However, in such a case, such U.S. Holder may affirmatively elect to allocate a portion of such U.S. Holder’s tax basis in such U.S. Holder’s existing Securities between (i) such U.S. Holder’s Securities and (ii) such U.S. Holder’s subscription rights received pursuant to this offering, in proportion to the relative fair market values of such existing Securities and subscription rights determined as of the date of the receipt of the subscription rights. If a U.S. Holder chooses to make such an election, then such holder must make this election on a statement included with such holder’s tax return for the taxable year in which such U.S. Holder receives subscription rights pursuant to this offering. Such an election, if made, is irrevocable.
If the fair market value of the subscription rights received by a U.S. Holder is 15% or more of the fair market value of such U.S. Holder’s Securities as of the date the subscription rights are distributed, then such U.S. Holder must allocate such U.S. Holder’s tax basis in such U.S. Holder’s existing Securities between (i) such U.S. Holder’s shares of Securities, and (ii) such U.S. Holder’s subscription rights received pursuant to this offering, in proportion to the relative fair market values of such existing Securities and subscription rights determined as of the date of the distribution of the subscription rights.
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Fair Market Value of Subscription Rights
The fair market value of the subscription rights on the date the subscription rights are received is uncertain, and we have not obtained, and do not intend to obtain, an appraisal of the fair market value of the subscription rights as of that date. Fair market value is defined generally as the price at which property would hypothetically change hands between a willing buyer and a willing seller, where neither is under any compulsion to buy or sell. Fair market value is a factual determination. In determining the fair market value of the subscription rights, you should consider all relevant facts and circumstances, including but not limited to any difference between the subscription price of the subscription rights and the trading price of our common stock on the date that the subscription rights are distributed or received, the length of the time period during which the subscription rights may be exercised, the fact that the subscription rights are non-transferable, and any other relevant facts and circumstances.
Exercise of the Subscription Rights
A U.S. Holder will not recognize any gain or loss upon the exercise of subscription rights received pursuant to this rights offering. A U.S. Holder’s tax basis of shares of our common stock acquired through the exercise of such subscription rights will equal the sum of (i) the subscription price paid for the shares, plus (ii) the tax basis, if any, in the subscription rights immediately prior to such exercise. The holding period for shares of our common stock acquired through the exercise of such subscription rights should begin on the date the subscription rights are exercised.
Expiration of the Subscription Rights
A U.S. Holder who allows subscription rights received pursuant to this rights offering to expire generally will not recognize any gain or loss upon such expiration. If, in connection with the receipt of subscription rights pursuant to this offering, a U.S. Holder, by election or otherwise, is allocated a portion of the tax basis in such U.S. Holder’s then existing Securities to such U.S. Holder’s subscription rights, then upon the expiration of such subscription rights, the portion of the tax basis previously allocated to the subscription rights will be re-allocated, or re-attributed, to such U.S. Holder’s Securities, and the tax basis of such Securities will be restored to what it was immediately before the receipt of the subscription rights in this offering.
Receipt of Subscription Rights if the Rights Offering is Considered Taxable
Receipt of Subscription Rights
In general, receipt by a U.S. Holder of subscription rights to acquire shares of our common stock will be taxable if the distribution or issuance (alone or as part of a series of distributions or issuances, including deemed distributions and issuances) either (i) has the result of the receipt of cash or property by some Shareholders, and an increase in the proportionate interests, of other Shareholders, in the assets or earnings and profits of the Company (i.e., a disproportionate distribution, as contemplated in Code Section 305(b)(2)), or (ii) is, at the election of any of the Shareholders, payable either in cash or property in lieu of the rights to acquire additional shares (i.e., a distribution in lieu of money, as contemplated in Code Section 305(b)(1)). Where the receipt of cash or property is not within 36 months before or after a distribution or series of distributions of stock (including stock rights), the distribution is presumed not to have the result described in (i), above. As previously indicated, for these purposes, the term “Securities” means shares of our common stock and rights or warrants to acquire shares of our common stock.
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During the last 36 months, we have not made any distributions of cash or other property with respect to our stock, nor do we have any intention of making any distributions of cash or other property with respect to our stock within the 36 months following the offering. Currently, our common stock is our sole outstanding class of stock; we do not have any convertible debt outstanding; and we have no intention of issuing another class of stock or convertible debt. However, the fact that we have outstanding options could cause, under certain circumstances that cannot currently be predicted (such as a failure to properly adjust the option price in connection with a stock distribution), the receipt of subscription rights pursuant to this offering to be part of a disproportionate distribution, as contemplated in Code Section 305(b)(2). The Company anticipates that it will take the position that the outstanding options do not cause the subscription rights issued pursuant to this rights offering to be part of a disproportionate distribution, in which case the Company believes the discussion set forth in “—Tax Consequences to U.S. Holders—Receipt of Subscription Rights Assuming the Rights Offering is Considered Non-Taxable” is applicable to all U.S. Holders. If we were to make a distribution in cash or other property on our common stock within the 36 months following this offering, such distribution could cause the receipt of subscription rights to be treated as part of a disproportionate distribution.
If, contrary to the Company’s anticipated position, the distribution or issuance to a Shareholder pursuant to this offering of subscription rights is considered part of a disproportionate distribution (or part of a distribution in lieu of money), then such distribution would generally be taxable. With respect to U.S. Holders, in general, a taxable distribution is treated as a dividend to the extent that the fair market value of the subscription rights distributed is allocable to our current and accumulated earnings and profits for the taxable year in which the subscription rights are distributed. Dividend income received by certain non-corporate U.S. Holders with respect to shares of our common stock generally will be “qualified dividends” subject to preferential rates of U.S. federal income tax, provided that the U.S. Holder meets applicable holding period and certain other requirements. Subject to similar exceptions for short-term and hedged positions, dividend income on our shares of common stock paid to U.S. Holders that are domestic corporations generally will qualify for the dividends received deduction. To the extent that the amount of a distribution exceeds our current and accumulated earnings and profits, such distribution will be treated first as a tax-free return of capital to the extent of your adjusted tax basis in such shares of our common stock and thereafter as capital gain (either long-term or short-term depending on your holding period in the stock).
The remainder of the discussion in this section entitled “—Tax Consequences to U.S. Holders —Receipt of Subscription Rights Assuming the Rights Offering is Considered Taxable” assumes that the receipt of subscription rights pursuant to this offering is considered part of a disproportionate distribution and generally taxable to the receiving U.S. Holder.
Tax Basis in the Subscription Rights
If the receipt of subscription rights pursuant to this offering were taxable to a receiving U.S. Holder, then a U.S. Holder’s tax basis in the subscription rights received should be equal to the fair market value of such subscription rights when received, regardless of whether the receipt of subscription rights is treated as a dividend, as a tax-free return of basis, as gain from the sale or exchange of our common stock, or otherwise.
Exercise of the Subscription Rights
If the receipt of subscription rights pursuant to this offering is taxable to the receiving U.S. Holder, then such U.S. Holder will not recognize any gain or loss upon the exercise of such subscription rights. In such a case, a U.S. Holder’s tax basis of shares of our common stock acquired through the exercise of such subscription rights will equal the sum of (i) the subscription price paid for the shares of our common stock, plus (ii) the tax basis, if any, in the subscription rights immediately prior to such exercise. The holding period for shares of our common stock acquired through the exercise of the subscription rights should begin on the date the subscription rights are exercised.
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Expiration of the Subscription Rights
If the receipt of subscription rights pursuant to this offering is taxable, and a U.S. Holder allows the subscription rights received in this offering to expire, then such U.S. Holder should recognize a short-term capital loss equal to such U.S. Holder’s tax basis in the expired subscription rights. A U.S. Holder’s ability to use any capital loss may be subject to limitations.
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