General Tax Information
Subject to the discussion included in the First Amendment to the Amended and Restated Trust Agreement, Compass Diversified Holdings (the "Trust") will be classified as a Publicly Traded Partnership for U.S federal income tax purposes effective January 1, 2007.
As a result, for U.S federal income tax purposes, each investor will be treated as the beneficial owner of a pro-rata portion of the interests in Compass Group Diversified Holdings LLC (the "Company") held by the Trust. The Company will be classified as a partnership for U.S federal income tax purposes.
Accordingly, neither the Company nor the Trust will incur U.S. federal income tax liability; rather, each investor will be required to report their allocable share of the Company's income, gains, losses, deductions and other items in their individual income tax returns as though each investor had incurred such items directly.
The Company's taxable year is the calendar year ending on December 31.
The Company's taxable income is expected to consist mostly of interest income, capital gains, dividends and investment interest expense. Interest income will be earned upon funds loaned by the Company to the operating subsidiaries and from temporary investments of the Company, and will be taxable to the holders at ordinary income rates. Capital gains will be reported upon the sale of stock or assets by the Company, and will be taxed at the appropriate capital gains rates to the holders of shares on the actual date on which such gains are realized. Any dividends received by the Company from its domestic corporate holdings generally will constitute qualified dividend income, and will be taxed at the appropriate dividend income rates. Any dividends received by the Company that do not constitute qualified dividend income will be taxed to holders at the tax rates generally applicable to ordinary income. Investment interest expense would generally include interest expense incurred by the Company. The deductibility of a non-corporate U.S. holder's investment interest expense is generally limited to the amount of such holder's net investment income. Please consult with your tax advisors regarding these items.
Distributions to holders of Trust stock that are treated as return of capital for U.S. federal income tax purposes are generally not taxable to the extent that the total amount of such distributions do not exceed the holder's basis in the Trust stock. Instead such distributions serve to reduce the holder's basis in the Trust stock resulting in more capital gain or less capital loss upon ultimate disposal of the trust stock.
We will provide the necessary tax information on a Schedule K-1, which will enable an investor to prepare their federal and state income tax returns.
Investors may receive tax information from their broker or nominee on Form 1099 or 1042 in relation to their investment in the Trust. We recommend that investors use the tax information provided by their broker or nominee only in conjunction with the tax information made available by the Company when preparing their returns. We also urge investors to consult their tax advisors regarding the tax consequences of investing in the Trust.
For further information on the U.S. federal income tax consequences of investing in shares issued by the Trust, please refer to the prospectus for the Trust's latest public offering dated December 7, 2016 and our periodic filings with the Securities and Exchange Commission.
It is the responsibility of each holder to investigate the legal and tax consequences of their investment under State and Federal law. Each holder should consult with their legal and tax advisors regarding these matters.
IRS Circular 230 Disclosure: As provided for in U.S. Treasury Regulations, the discussion of U.S. tax matters contained in this communication (including any attachments) was not intended or written to be used, and cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer; (ii) promoting, marketing or recommending an interest as a holder of Trust stock; and (iii) taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.