AB 2020 Form 10-K

to stockholders. To the extent the Fund meets the Annual Distribution Requirement for a taxable year, but retains the its net capital gains (i.e., the Fund’s net realized long-term capital gains in excess of net realized short-term capital losses) for investment or any investment company taxable income, the Fund will be subject to U.S. federal income tax on such retained capital gains and investment company taxable income. The Fund may choose to retain the Fund’s net capital gains for investment or any investment company taxable income, and pay the associated U.S. federal corporate income tax. If the Fund qualifies as a RIC and meets the Annual Distribution Requirement, the Fund will be subject to a nondeductible 4% U.S. federal excise tax on undistributed income, unless the Fund timely distributes (or is deemed to have timely distributed) each calendar year an amount equal to the sum of: • at least 98% of the Fund’s ordinary income (taking into account certain deferrals and elections) for the calendar year; • at least 98.2% of the amount by which the Fund’s capital gains exceed its capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year (unless an election is made by the Fund to use its own taxable year); and • certain undistributed amounts from previous years on which the Fund paid no U.S. federal income tax. While the Fund intends to make sufficient distributions to satisfy the Annual Distribution Requirement as discussed above, the Fund may choose to defer certain distributions of net income or net realized capital gains. If the Fund does so, it will be subject to this 4% U.S. federal excise tax only on the amount by which it does not meet the foregoing distribution requirement. The Fund is authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, the Fund is not permitted to make distributions to its stockholders while any senior securities are outstanding unless the Fund meets the applicable asset coverage ratios. See “ Business — Regulation as a Business Development Company — Senior Securities .” Moreover, the Fund’s ability to dispose of assets to meet its distribution requirements may be limited by (1) the illiquid nature of the Fund’s portfolio and/or (2) other requirements relating to the Fund’s status as a RIC, including the Diversification Tests. If the Fund disposes of assets in order to meet the Annual Distribution Requirement or to avoid the 4% U.S. federal excise tax, the Fund may make such dispositions at times that, from an investment standpoint, are not advantageous. For example, the Fund may have to sell assets at times when their fair market value is lower than cost due to temporary market conditions. In the absence of a need to sell assets to generate cash to satisfy the Fund’s distributions requirements, the Fund may believe that it would be better from an investment standpoint to retain such assets until they mature or market conditions improve. A RIC is limited in its ability to deduct expenses in excess of its investment company taxable income. If the Fund’s expenses in a given year exceed investment company taxable income, the Fund would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. Due to these limits on the deductibility of expenses, the Fund may, for tax purposes, have aggregate taxable income for several years that the Fund is required to distribute and that is taxable to its stockholders even if such income is greater than the aggregate net income the Fund actually earned during those years. Such required distributions may be made from the Fund’s cash assets or by liquidation of investments, if necessary. The Fund may realize gains or losses from such liquidations. In the event the Fund realizes net capital gains from such transactions, stockholders may receive a larger capital gain distribution than they would have received in the absence of such transactions. Failure to Qualify as a RIC The Fund has elected to be treated as a RIC for U.S. federal income tax purposes. To the extent that the Fund has net taxable income prior to its qualification as a RIC, the Fund will be subject to U.S. federal income tax on such income at regular corporate rates. In addition, the Fund would not be able to deduct distributions to stockholders, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to the Fund’s stockholders as ordinary dividend income to the extent of the Fund’s current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate stockholders would be eligible to claim a dividend received deduction with respect to such dividend; non-corporate stockholders would generally be able to treat such dividends as “qualified dividend income,” which is subject to reduced rates of U.S. federal income tax. Distributions in excess of the Fund’s current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. In order to qualify as a RIC, in addition to the other requirements discussed above, the Fund would be required to distribute all of its previously undistributed earnings attributable to any period prior to the Fund becoming a RIC by the end of the first year that the Fund intends to qualify as a RIC. To the extent that the Fund has any net built-in gains in its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Fund had been liquidated) as of the beginning of the first year that the Fund qualifies as a RIC, the Fund would be subject to a corporate-level U.S. federal income tax on such built-in gains when recognized over the next five years. Alternatively, the Fund may choose to recognize such built-in gains immediately prior to its qualification as a RIC. 18