Dec 11, 2015 - AIG was one of these companies. ... the Fund intends to qualify as a Regulated Investment Company under S
FAIRHOLME FUNDS
FAIRHOLME
SHARES DISTRIBUTED BY FAIRHOLME DISTRIBUTORS, LLC MEMBER FINRA F A I R H O L M E F U N D S . C O M
December 11, 2015 Q&A regarding the distribution from The Fairholme Fund (FAIRX) Q1.
What caused the large distribution?
A1.
The FAIRX investment objective is long-term growth of capital, which we aim to achieve by investing in businesses in fundamentally sound financial condition that are selling at highly attractive prices. AIG was one of these companies. The Fund purchased AIG common stock in 2010 and 2011 at a fraction of the company’s estimated book value at the time. In addition, the Fund received AIG warrants in 2011 from AIG as part of a dividend distribution by the company. Through June 20, 2015, the investment in AIG has appreciated over $2 billion for the Fund’s shareholders. We determined that it was an opportune time to realize the gain and began to reduce the position in AIG common stock.
Q2.
How will the distribution be taxed?
A2.
99% of the distribution will be taxed at the more favorable long-term capital gain rate.
Q3.
How will the distribution affect my tax basis?
A3.
If you elected to receive a cash distribution your tax basis in the shares should remain unchanged. If you elected to reinvest, your basis will increase by the amount of the distribution.
Q4.
Is the Fund required to distribute its income?
A4.
Yes, because the Fund intends to qualify as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended, it must distribute substantially all of its income and capital gains on an annual basis to avoid the imposition of corporate income taxes and excise taxes on undistributed amounts.
Q5.
I have been invested in the Fund less than one year. Do I still get the long term capital gain treatment on the long term capital gain portion of the distributions?
A5.
Yes. Distributions of capital gains are taxable based on the Fund’s holding period, either short-term or long-term, regardless of the length of time you held the shares in the Fund.
Q6.
If I have elected to reinvest my distribution, will I still be taxed on the distribution?
A6.
Yes, whether you reinvest in additional shares of the Fund or receive cash, the distribution will be taxable to you.
Q7.
Can I use capital losses outside the Fund to reduce the capital gains?
A7.
Capital losses outside the Fund generally can be used to offset capital gain distributions from the Fund, subject to certain limitations.
Items concerning the tax treatment of the distribution from the Fund assume shares are held in a taxable account. Please consult your tax advisor regarding the tax effects of the distribution to your particular situation.
