BFH

Are there any tax implications for shareholders who hold the notes being tendered?

Created August 07, 2025 at 11:32 AM

Short answer:

Yes – the cash you receive for tendering the 9.750 % Senior Notes due 2029 and the 8.375 % Fixed‑Rate Reset Subordinated Notes due 2035 is taxable. For most shareholders the transaction will be treated as a sale/redemption of a debt security, so the amount received is compared with the shareholder’s tax basis in the notes to determine a capital gain or loss (or, in limited cases, ordinary income). The exact tax result depends on the original purchase price, the holding period, the note’s original issue discount (OID) or premium, and the shareholder’s tax jurisdiction.

Below is a step‑by‑step breakdown of the typical tax consequences, the items you should review, and the practical actions you may need to take.

1. What the tender actually does

Cash consideration: $1,070 per $1,000 of principal (i.e., a 7 % premium) will be paid to anyone who validly tenders the notes by the Early Participation Date (August 6 2025, 5 p.m. NY time).
Notes being tendered:
- $28,402,000 of the 9.750 % Senior Notes due 2029 (2029 Notes)
- $121,000 of the 8.375 % Fixed‑Rate Reset Subordinated Notes due 2035 (2035 Notes)

When the tender is accepted, the notes are retired (i.e., the company repurchases them) and the holder receives the cash payment. For tax purposes this is generally a disposition of the debt instrument.

2. Primary tax concepts that apply

Concept	How it works for this tender
Capital gain / loss	The cash received ($1,070 per $1,000) is compared to the shareholder’s tax basis (what you originally paid, adjusted for any amortization of original issue discount, premium amortization, or accrued interest that was previously taxed). The difference is a gain (taxed) or loss (potentially deductible).
Holding period	If you held the notes more than one year, the gain is a long‑term capital gain (generally taxed at the lower long‑term rates). If held one year or less, it is a short‑term capital gain (taxed at ordinary income rates).
Original Issue Discount (OID)	If the notes were issued at a discount, the discount is amortized each year and taxed as ordinary income. The remaining un‑amortized OID is added to your basis, reducing the gain on redemption.
Premium amortization	If you bought the notes at a premium, the premium is amortized (generally over the remaining life) and reduces the basis, increasing the gain on redemption.
Accrued interest	The tender price is ex‑interest (it excludes accrued interest). Any accrued interest you are entitled to receive is usually taxed as ordinary interest income when you actually receive it (often at the same time the cash consideration is paid).
State and local taxes	Most states treat the gain the same way as the federal return, but rates and rules differ. Some jurisdictions may also impose a withholding on the cash payment.
Potential withholding	If the shareholder is a non‑U.S. person, the company may be required to withhold U.S. tax on the cash consideration (generally 30% unless a treaty reduces it). U.S. persons generally do not face withholding on the cash payment, but may have to report the transaction on Form 1099‑B/1099‑INT.

3. How to calculate the gain (or loss)

Determine your adjusted tax basis in each note:
- Original purchase price (including any premium or discount).
- Add any un‑amortized OID (if the note was bought at discount).
- Subtract any amortized premium (if the note was bought at premium).
- Add any accrued interest that you have already been taxed on (if you previously received interest payments and reported them).
Calculate cash received:
- Cash consideration = $1,070 × (principal amount tendered).
- Add any accrued interest that is paid together with the cash (this is taxed separately as ordinary interest).
Compute gain/loss:

[
\text{Gain/Loss} = \text{Cash received (ex‑interest)} - \text{Adjusted basis}
]
Classify the gain:
- Long‑term if you held the notes > 1 year.
- Short‑term if ≤ 1 year.
Report on the appropriate tax form:
- Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D for capital gains.
- Form 1099‑INT for any accrued interest paid.

4. Example (illustrative)

Item	Assumptions
Principal tendered	$10,000 (i.e., 10 notes of $1,000 each)
Cash consideration per $1,000	$1,070
Total cash received (ex‑interest)	$10,700
Original purchase price per $1,000	$950 (discount)
Un‑amortized OID per $1,000	$30
Adjusted basis per $1,000	$950 + $30 = $980
Accrued interest paid with cash	$20 (taxed as ordinary interest)

Gain calculation:

[
\text{Gain} = \$10,700 - (10 \times \$980) = \$10,700 - \$9,800 = \$900
]

Holding period: 2 years → Long‑term capital gain of $900.
Tax rate (example): 15 % federal long‑term rate → $135 federal tax.
State tax (example): 5 % → $45 state tax.

The $20 accrued interest is taxed as ordinary interest at your marginal rate (e.g., 24 % federal → $4.80).

5. Special considerations for different types of shareholders

Shareholder type	Key points
Individual U.S. investors	Report capital gain on Form 8949/Schedule D; report accrued interest on Form 1040, line 2b (or Schedule B). No automatic withholding, but the broker will issue a 1099‑B/1099‑INT.
Corporate or partnership shareholders	Gains flow through to the entity’s tax return (Form 1120, 1065, etc.). The entity may have different capital‑gain tax rates (e.g., 21 % corporate).
Tax‑advantaged accounts (IRA, 401(k), etc.)	Gains are generally tax‑deferred (or tax‑free in a Roth). The cash receipt is treated as a distribution; if the account is non‑taxable, no immediate tax is due, but the distribution may be subject to early‑withdrawal penalties if you are under age 59½.
Non‑U.S. persons	The company is likely required to withhold 30 % (or reduced treaty rate) on the cash consideration unless a valid Form W‑8BEN is on file. The withheld amount is creditable against the foreign‑person’s U.S. tax liability.
Shareholders with a loss on the notes	A capital loss can offset other capital gains; up to $3,000 of net capital loss can offset ordinary income each year, with the remainder carried forward.

6. Practical steps you should take now

Locate your original purchase records for the 2029 and 2035 notes (trade confirmations, broker statements, or original offering documents).
Identify any OID or premium amortization that has already been reported on your tax returns.
Calculate the adjusted basis for each lot of notes you intend to tender.
Determine the holding period for each lot (date of acquisition → August 6 2025).
When you receive the cash:
- Verify the amount of accrued interest paid (if any).
- Ensure your broker issues the appropriate 1099‑B (for the cash) and 1099‑INT (for interest).
Report the transaction on your next tax return:
- Form 8949 → Schedule D for capital gains/losses.
- Schedule B (or line 2b) for accrued interest.
Consult a tax professional if:**
- You hold a large amount of notes and the gain could push you into a higher tax bracket.
- You are a non‑resident alien or have complex state‑tax considerations.
- You have previously reported OID or premium amortization and need to reconcile the remaining balance.

7. Bottom line

Yes, there are tax implications. The cash you receive for tendering the notes is taxable, and the transaction will generate a capital gain or loss (or, in rare cases, ordinary income) based on the difference between the cash consideration and your adjusted tax basis.
The character of the gain (long‑term vs. short‑term) hinges on how long you held the notes.
Accrued interest paid with the cash is taxed as ordinary interest income.
State, local, and possible foreign‑person withholding may also apply.

Because the exact tax outcome depends on the specifics of your original investment (price, OID/premium, holding period, etc.), you should review your records and, if needed, seek professional tax advice to ensure the proper reporting and to evaluate any planning opportunities (e.g., offsetting gains with other losses).