KIRKPATRICK & LOCKHART LLP 1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
202/778-9000
www.kl.com
Theodore L. Press
Tel: 202.778.9025
Fax: 202.778.9100
[email protected]
June 2, 2000
Managed High Yield Fund Inc.
Managed High Yield Plus Fund Inc.
51 West 52nd Street
New York, New York 10019-6114
Re: Reorganization to Combine Two Maryland Corporations
---------------------------------------------------
Ladies and Gentleman:
Managed High Yield Fund Inc. ("Target") and Managed High Yield Plus Fund
Inc. ("Acquiring Fund"), each a Maryland corporation (each a "Fund" and
collectively "Funds"), have requested our opinion as to certain federal income
tax consequences of the proposed acquisition of Target by Acquiring Fund
pursuant to an Agreement and Plan of Reorganization and Termination between them
dated as of May 22, 2000 ("Plan"). Specifically, each Fund has requested our
opinion --
(1) that Acquiring Fund's acquisition of Target's assets in
exchange solely for full and fractional shares of common stock of
Acquiring Fund ("Acquiring Fund Shares"), plus cash in lieu of
certain fractional shares, and Acquiring Fund's assumption of
Target's liabilities, followed by Target's distribution of those
full Acquiring Fund Shares pro rata to all its stockholders of
record as of the Effective Time (as herein defined)
("Stockholders") plus (i) fractional Acquiring Fund Shares pro
rata to the Stockholders that then participate in Target's
Dividend Reinvestment Plan ("DRP Stockholders") and (ii) cash in
lieu of any fractional shares pro rata to the Stockholders that
are not DRP Stockholders ("Non-DRP Stockholders") constructively
in exchange for the Stockholders' shares of common stock of
Target ("Target Shares") (such transactions sometimes being
referred to herein collectively as the "Reorganization"), will
qualify as a reorganization within the meaning of section
368(a)(1)(C)[1] and each Fund will be "a party to a
reorganization" within the meaning of section 368(b);
-------------------
[1] All "section" references are to the Internal Revenue Code of 1986, as
amended ("Code"), unless otherwise noted, and all "Treas. Reg. Sec." references
are to the regulations under the Code ("Regulations").
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(2) that neither the Funds nor the Stockholders will
recognize gain or loss on the Reorganization; and
(3) regarding the basis and holding period after the
Reorganization of the transferred assets and the Acquiring Fund
Shares issued pursuant thereto.
In rendering this opinion, we have examined (1) the Plan, (2) the Combined
Proxy Statement and Prospectus dated March 30, 2000, that was furnished in
connection with the solicitation of proxies by Target's board of directors for
use at the special meeting of its stockholders held on April 24, 2000, and May
22, 2000 ("Proxy Statement"), (3) Acquiring Fund's most recent prospectus and
statement of additional information, and (4) other documents we have deemed
necessary or appropriate for the purposes hereof. As to various matters of fact
material to this opinion, we have relied, exclusively and without independent
verification, on statements of responsible officers of each Fund and the
representations described below and made in the Plan (as contemplated in
paragraph 6.6 thereof) (collectively, "Representations").
FACTS
-----
Each Fund is registered with the Securities and Exchange Commission
("SEC") as a closed-end management investment company under the Investment
Company Act of 1940, as amended ("1940 Act"). Each Fund has only a single class
of shares, which can be purchased and sold only on the New York Stock Exchange.
The Reorganization, together with related acts necessary to consummate the
same ("Closing"), will take place on or about the date hereof. All acts taking
place at the Closing will be deemed to take place simultaneously as of the close
of business on the date thereof or at such other time as to which the Funds
agree ("Effective Time").
The Funds' investment objectives, policies, and restrictions (which are
described in the Proxy Statement) are similar, the principal difference being
Acquiring Fund's use of leverage and its greater flexibility in choosing the
credit quality of its portfolio securities. Additionally, Acquiring Fund has a
broader investment mandate than Target has. For the reasons, and after
consideration of the factors, described in the Proxy Statement, each Fund's
board of directors approved the Plan, subject to approval of Target's
stockholders. In doing so, each board -- including a majority of its members who
are not "interested persons" (as defined in the 1940 Act) of either Fund or
Mitchell Hutchins Asset Management Inc., each Fund's investment adviser --
determined that (1) the Reorganization is in its Fund's best interests, (2) the
terms of the Reorganization are fair and reasonable, and (3) the interests of
its Fund's stockholders will not be diluted as a result of the Reorganization.
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The Plan, which specifies that it is intended to be, and is adopted as, a
"plan of reorganization" within the meaning of the Regulations, provides in
relevant part for the following:
(1) The acquisition by Acquiring Fund of all assets,
including all cash, cash equivalents, securities, receivables
(including interest and dividend receivables), claims and rights
of action, rights to register shares under applicable securities
laws, books and records, deferred and prepaid expenses shown as
assets on Target's books, and other property, owned by Target at
the Effective Time (collectively "Assets"), in exchange solely
for the following:
(a) the number of full Acquiring Fund Shares plus
(i) fractional Acquiring Fund Shares, rounded to the third
decimal place, for DRP Stockholders and (ii) cash in lieu of any
fractional shares with respect to Non-DRP Stockholders, the sum
thereof determined by dividing the net value of Target (computed
as set forth in paragraph 2.1 of the Plan) by the net asset value
of an Acquiring Fund Share (computed as set forth in paragraph
2.2 of the Plan), and
(b) Acquiring Fund's assumption of all of Target's
liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise,
whether or not arising in the ordinary course of business,
whether or not determinable at the Effective Time, and whether or
not specifically referred to in the Plan (collectively
"Liabilities"),
(2) The constructive distribution of such Acquiring Fund
Shares to the Stockholders, [2] and
-------------------
[2] The Plan provides that, at the time of the Reorganization, the Target
Shares will in effect be constructively exchanged for Acquiring Fund Shares,
certificates for which will not then be issued. After the Effective Time, each
holder of an outstanding certificate or certificates formerly representing
Target Shares ("Old Certificate(s)") will be entitled to receive, on surrender
of the certificate(s), a certificate representing the Acquiring Fund Shares
distributable with respect to the Target Shares represented thereby. Although
Old Certificates will be deemed for all purposes after the Effective Time to
evidence ownership of Acquiring Fund Shares distributable with respect thereto
in the Reorganization, until a holder of Old Certificate(s) surrenders them, no
dividends payable to Acquiring Fund shareholders will be paid to that holder.
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(3) The termination of Target as soon as reasonably
practicable after that distribution, but in all events within
twelve months after the Effective Time.
The distribution described in clause (2) will be accomplished by Acquiring
Fund's transfer agent's opening accounts on Acquiring Fund's share transfer
books in the Stockholders' names and transferring the Acquiring Fund Shares
thereto. Each Stockholder's account will be credited with the respective pro
rata number of full Acquiring Fund Shares plus (i) fractional Acquiring Fund
Shares, rounded to the third decimal place, for DRP Stockholders and (ii) cash
in lieu of any fractional shares for Non-DRP Stockholders.
REPRESENTATIONS
---------------
Target has represented and warranted to us as follows:
------
(1) Target is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of
Maryland; and its Articles of Incorporation are on file with that
state's Department of Assessments and Taxation;
(2) Target is duly registered as a closed-end management
investment company under the 1940 Act and is duly registered
under the Securities Exchange Act of 1934, as amended ("1934
Act"), and such registrations will be in full force and effect at
the Effective Time;
(3) The Liabilities were incurred by Target in the ordinary
course of its business and are associated with the Assets;
(4) Target qualified for treatment as a regulated
investment company under Subchapter M of the Code ("RIC") for
each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for
its current taxable year; it has no earnings and profits
accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it; and the Assets will be invested
at all times through the Effective Time in a manner that ensures
compliance with the foregoing;
(5) Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar
case within the meaning of section 368(a)(3)(A); and
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(6) Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not
more than 50% of the value of such assets is invested in the
stock and securities of five or fewer issuers.
Acquiring Fund has represented and warranted to us as follows:
--------------
(1) Acquiring Fund is a corporation that is duly organized,
validly existing, and in good standing under the laws of the
State of Maryland; and its Articles of Incorporation are on file
with that state's Department of Assessments and Taxation;
(2) Acquiring Fund is duly registered as a closed-end
management investment company under the 1940 Act and is duly
registered under the 1934 Act, and such registrations will be in
full force and effect at the Effective Time;
(3) No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
(4) Acquiring Fund qualified for treatment as a RIC for
each past taxable year since it commenced operations and will
continue to meet all the requirements for such qualification for
its current taxable year; it intends to continue to meet all such
requirements for the next taxable year; and it has no earnings
and profits accumulated in any taxable year in which the
provisions of Subchapter M of the Code did not apply to it;
(5) Acquiring Fund has no plan or intention to issue
additional Acquiring Fund Shares following the Reorganization
other than in the ordinary course of business pursuant to its
Dividend Reinvestment Plan; nor does Acquiring Fund have any plan
or intention to redeem or otherwise reacquire any Acquiring Fund
Shares issued to the Stockholders pursuant to the Reorganization;
(6) Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of
Treas. Reg. Sec. 1.368-1(d)(2)) and (b) will use a significant
portion of Target's "historic business assets" (within the
meaning of Treas. Reg. Sec. 1.368-1(d)(3)) in a business;
furthermore, Acquiring Fund (c) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for
dispositions made in the ordinary course of that business and
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dispositions necessary to maintain its status as a RIC, and
(d) expects to retain substantially all the Assets in the same
form as it receives them in the Reorganization, unless and until
subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to
maintain such status;
(7) There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or a business trust
or any "fund" thereof (within the meaning of section 851(g)(2))
following the Reorganization;
(8) Immediately after the Reorganization, (a) not more than
25% of the value of Acquiring Fund's total assets (excluding
cash, cash items, and U.S. government securities) will be
invested in the stock and securities of any one issuer and
(b) not more than 50% of the value of such assets will be
invested in the stock and securities of five or fewer issuers; and
(9) Acquiring Fund does not directly or indirectly own, nor
at the Effective Time will it directly or indirectly own, nor has
it directly or indirectly owned, at any time during the past five
years, any shares of Target.
Each Fund has represented and warranted to us as follows:
---------
(1) The fair market value of the Acquiring Fund Shares
received by each Stockholder will be approximately equal to the
fair market value of its Target Shares constructively surrendered
in exchange therefor;
(2) Its management is unaware of any plan or intention of
Stockholders to sell or otherwise dispose of (a) any portion of
their Target Shares before the Reorganization to any person
"related" (within the meaning of Treas. Reg. Sec. 1.368-1(e)(3))
to either Fund or (b) any portion of the Acquiring Fund Shares to
be received by them in the Reorganization to any person related
(within such meaning) to Acquiring Fund;
(3) The Stockholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
(4) Immediately following consummation of the
Reorganization, Acquiring Fund will hold substantially the same
assets and be subject to substantially the same liabilities that
Target held or was subject to immediately prior thereto (in
addition to the assets and liabilities Acquiring Fund then held
or was subject to), plus any liabilities and expenses of the
parties incurred in connection with the Reorganization;
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(5) The fair market value of the Assets on a going concern
basis will equal or exceed the Liabilities to be assumed by
Acquiring Fund and those to which the Assets are subject;
(6) There is no intercompany indebtedness between the Funds
that was issued or acquired, or will be settled, at a discount;
(7) Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of
the fair market value of the net assets, and at least 70% of the
fair market value of the gross assets, held by Target immediately
before the Reorganization. For the purposes of this
representation, any amounts (a) paid to Stockholders who receive
cash or other property (whether in lieu of fractional Acquiring
Fund Shares or otherwise) and (b) used by Target to pay its
Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except distributions made
to conform to its policy of distributing all or substantially all
of its income and gains to avoid the obligation to pay federal
income tax and/or the excise tax under section 4982) will be
included as assets held thereby immediately before the
Reorganization;
(8) None of the compensation received by any Stockholder
who is an employee of or service provider to Target will be
separate consideration for, or allocable to, any of the Target
Shares held by such Stockholder; none of the Acquiring Fund
Shares received by any such Stockholder will be separate
consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and
the consideration paid to any such Stockholder will be for
services actually rendered and will be commensurate with amounts
paid to third parties bargaining at arm's-length for similar
services;
(9) Cash is being distributed to the Non-DRP Stockholders
in lieu of fractional Acquiring Fund Shares solely to save
Acquiring Fund the expense and inconvenience of issuing and
transferring fractional shares to those Stockholders; that
distribution does not represent separately bargained-for
consideration in the Reorganization; the total cash consideration
paid to those Stockholders instead of issuing fractional
Acquiring Fund Shares will not exceed 1% of the total
consideration that will be issued to them in exchange for their
Target Shares; and the fractional share interests of the
Stockholders will be aggregated, and no Stockholder will receive
cash in an amount equal to or greater than the value of one full
Acquiring Fund Share;
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(10) Immediately after the Reorganization, the Stockholders
will not own shares constituting "control" (within the meaning of
section 304(c)) of Acquiring Fund; and
(11) Neither Fund will be reimbursed for any expenses
incurred by it or on its behalf in connection with the
Reorganization unless those expenses are solely and directly
related to the Reorganization (determined in accordance with the
guidelines set forth in Rev. Rul. 73-54, 1973-1 C.B. 187).
OPINION
-------
Based solely on the facts set forth above, and conditioned on the
Representations being true at the Effective Time and the Reorganization being
consummated in accordance with the Plan, our opinion (as explained more fully in
the next section of this letter) is as follows:
(1) Acquiring Fund's acquisition of the Assets in exchange
solely for full and fractional Acquiring Fund Shares (plus cash in
lieu of certain fractional Acquiring Fund Shares) and Acquiring
Fund's assumption of the Liabilities, followed by Target's
distribution of those full Acquiring Fund Shares pro rata to all
Stockholders, those fractional Acquiring Fund Shares pro rata to
the DRP Stockholders, and that cash pro rata to the Non-DRP
Stockholders, constructively in exchange for their Target Shares,
will qualify as a reorganization within the meaning of section
368(a)(1)(C), and each Fund will be "a party to a reorganization"
within the meaning of section 368(b);
(2) Target will recognize no gain or loss on the transfer of
the Assets to Acquiring Fund in exchange solely for Acquiring Fund
Shares (plus cash in lieu of certain fractional Acquiring Fund
Shares) and Acquiring Fund's assumption of the Liabilities or on
the subsequent distribution of those shares and cash to the
Stockholders in constructive exchange for their Target Shares;
(3) Acquiring Fund will recognize no gain or loss on its
receipt of the Assets in exchange solely for Acquiring Fund Shares
(plus cash in lieu of certain fractional Acquiring Fund Shares)
and its assumption of the Liabilities;
(4) Acquiring Fund's basis for the Assets will be the same
as Target's basis therefor immediately before the Reorganization,
and Acquiring Fund's holding period for the Assets will include
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Target's holding period therefor;
(5) A Stockholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for
Acquiring Fund Shares, plus cash in lieu of a fractional Acquiring
Fund Share where appropriate, pursuant to the Reorganization,
except with respect to such cash; and
(6) A Stockholder's aggregate basis for the Acquiring Fund
Shares it receives in the Reorganization will be the same as the
aggregate basis for the Target Shares it constructively surrenders
in exchange for those Acquiring Fund Shares, decreased by any cash
it receives, and increased by any gain it recognizes, on the
exchange; and its holding period for those Acquiring Fund Shares
will include its holding period for those Target Shares, provided
the Stockholder holds them as capital assets at the Effective
Time.
Our opinion is based on, and is conditioned on the continued applicability
of, the provisions of the Code and the Regulations, judicial decisions, and
rulings and other pronouncements of the Internal Revenue Service ("Service") in
existence on the date hereof. All the foregoing authorities are subject to
change or modification that can be applied retroactively and thus also could
affect our opinion; we assume no responsibility to update our opinion with
respect to any such change or modification. Our opinion also is applicable only
to the extent each Fund is solvent, and we express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent. Our
opinion is solely for the addressees' information and use and may not be relied
on for any purpose by any other person without our express written consent.
ANALYSIS
--------
I. THE REORGANIZATION WILL QUALIFY AS A C REORGANIZATION, AND EACH
FUND WILL BE A PARTY TO A REORGANIZATION.
---------------------------------------------------------------
A. Each Fund is a Corporation.
--------------------------
A reorganization under section 368(a)(1)(C) (a "C Reorganization")
involves the acquisition by one corporation, in exchange solely for all or a
part of its voting stock, of substantially all of the properties of another
corporation. For a transaction to qualify under that section, therefore, both
entities involved therein must be corporations; each Fund is a Maryland
corporation.
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B. Transfer of "Substantially All" of Target's Properties.
------------------------------------------------------
For an acquisition to qualify as a C Reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation in exchange solely for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers the
transfer of at least 90% of the fair market value of the transferor's net
assets, and at least 70% of the fair market value of its gross assets, held
immediately before the reorganization to satisfy the "substantially all"
requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The Reorganization will involve
such a transfer. Accordingly, we believe that the Reorganization will involve
the transfer to Acquiring Fund of substantially all of Target's properties.
C. Qualifying Consideration.
------------------------
The acquiring corporation in an acquisition intended to qualify as a C
Reorganization must acquire at least 80% (by fair market value) of the
transferor's property solely for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally is disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Although
Acquiring Fund will transfer to Target some cash (in lieu of certain fractional
Acquiring Fund Shares), in addition to Acquiring Fund Shares, in exchange for
the Assets, the payment of cash to the Non-DRP Stockholders in lieu of those
fractional shares will not violate the solely-for-voting-stock requirement (see
Rev. Rul. 66-365, 1966-2 C.B. 116) and will be treated as if those shares were
distributed as part of the Reorganization and then redeemed by Acquiring Fund
(see, e.g., Priv. Ltr. Ruls. 200021018-019 (Feb. 17, 2000), 200016015-016 (Jan.
21, 2000), 9823018 (Mar. 5, 1998), and 9703017-019 (Oct. 15 and 17, 1996)[3].
Because Acquiring Fund thus will be treated as exchanging only Acquiring Fund
Shares for the Assets, we believe that the Reorganization will satisfy the
solely-for-voting-stock requirement to qualify as a C Reorganization.
-------------------
[3] Although, under section 6110(k)(3), a private letter ruling may not be
cited as precedent, tax practitioners look to such rulings as generally
indicative of the Service's views on the proper interpretation of the Code and
the Regulations. CF. ROWAN COMPANIES, INC. V. COMMISSIONER, 452 U.S. 247 (1981).
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D. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as a
C Reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property pursuant to the plan of
reorganization. Under the Plan -- which we believe constitutes a "plan of
reorganization" within the meaning of Treas. Reg. Sec. 1.368-2(g) -- Target will
distribute all the Acquiring Fund Shares it receives to the Stockholders in
constructive exchange for their Target Shares; as soon as is reasonably
practicable thereafter, Target will be terminated. Accordingly, we believe that
the requirements of section 368(a)(2)(G)(i) will be satisfied.
E. Requirements of Continuity.
--------------------------
Regulation section 1.368-1(b) sets forth two prerequisites to a valid
reorganization: (1) a continuity of the business enterprise through the issuing
corporation -- defined in the Regulation as "the acquiring corporation (as that
term is used in section 368(a))," with an exception not relevant here -- under
the modified corporate form as described in Treas. Reg. Sec. 1.368-1(d)
("continuity of business enterprise") and (2) a continuity of interest as
described in Treas. Reg. Sec. 1.368-1(e) ("continuity of interest").
1. Continuity of Business Enterprise.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. Sec. 1.368-1(d)(1), the issuing corporation must either (i) continue the
target corporation's "historic business" ("business continuity") or (ii) use a
significant portion of the target corporation's "historic business assets" in a
business ("asset continuity").
While there is no authority that deals directly with the continuity of
business enterprise requirement in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
bonds. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C Reorganization. Prior to the
exchange, T sold its entire portfolio of corporate stocks and bonds and
purchased a portfolio of municipal bonds. The Service held that this transaction
did not qualify as a reorganization for the following reasons: (1) because T had
sold its historic assets prior to the exchange, there was no asset continuity;
and (2) the failure of P to engage in the business of investing in corporate
stocks and bonds after the exchange caused the transaction to lack business
continuity as well.
The Funds' investment objectives, policies, and restrictions are similar,
the principal difference being Acquiring Fund's use of leverage and its greater
flexibility in choosing the credit quality of its portfolio securities.
Moreover, after the Reorganization, Acquiring Fund, which has a broader
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investment mandate than Target has, will continue Target's "historic business"
(within the meaning of Treas. Reg. Sec. 1.368-1(d)(2)). Accordingly, there will
be business continuity.
Acquiring Fund not only will continue Target's historic business, but it
also will use in that business a significant portion of Target's "historic
business assets" (within the meaning of Treas. Reg. Sec. 1.368-1(d)(3)).
Accordingly, there will be asset continuity as well.
For all the foregoing reasons, we believe that the Reorganization will
satisfy the continuity of business enterprise requirement.
2. Continuity of Interest.
----------------------
Regulation section 1.368-1(e)(1)(i) provides that "[c]ontinuity of
interest requires that in substance a substantial part of the value of the
proprietary interests in the target corporation be preserved in the
reorganization. A proprietary interest in the target corporation is preserved
if, in a potential reorganization, it is exchanged for a proprietary interest in
the issuing corporation . . . ." That section goes on to provide that
"[h]owever, a proprietary interest in the target corporation is not preserved
if, in connection with the potential reorganization, . . . stock of the issuing
corporation furnished in exchange for a proprietary interest in the target
corporation in the potential reorganization is redeemed. All facts and
circumstances must be considered in determining whether, in substance, a
proprietary interest in the target corporation is preserved."
For purposes of issuing private letter rulings, the Service considers the
continuity of interest requirement satisfied if ownership in an acquiring
corporation on the part of a transferor corporation's former stockholders is
equal in value to at least 50% of the value of all the formerly outstanding
shares of the transferor corporation.[4] Shares of both the target and acquiring
-------------------
[4] Rev. Proc. 77-37, supra; but see Rev. Rul. 56-345, 1956-2 C.B. 206
(continuity of interest was held to exist in a reorganization of two RICs where
immediately after the reorganization 26% of the shares were redeemed to allow
investment in a third RIC); see also Reef Corp. v. Commissioner, 368 F.2d 125
(5th Cir. 1966), cert. denied, 386 U.S. 1018 (1967) (a redemption of 48% of a
transferor corporation's stock was not a sufficient shift in proprietary
interest to disqualify a transaction as a reorganization under section
368(a)(1)(F) ("F Reorganization"), even though only 52% of the transferor's
Stockholders would hold all the transferee's stock); Aetna Casualty and Surety
Co. v. U.S., 568 F.2d 811, 822-23 (2d Cir. 1976) (redemption of a 38.39%
minority interest did not prevent a transaction from qualifying as an F
Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a transaction qualified as an
F Reorganization even though the transferor's Stockholders acquired only 45% of
the transferee's stock, while the remaining 55% of that stock was issued to new
Stockholders in a public underwriting immediately after the transfer).
(continued on next page)
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corporations held by the target corporation's stockholders that are disposed of
before or after the transaction will be considered in determining satisfaction
of the 50% standard. No minimum holding period for shares of an acquiring
corporation is imposed under the Code on the acquired corporation's
stockholders. Rev. Rul. 66-23, 1966-1 C.B. 67, provides generally that
"unrestricted rights of ownership for a period of time sufficient to warrant the
conclusion that such ownership is definite and substantial" will suffice and
that "ordinarily, the Service will treat five years of unrestricted . . .
ownership as a sufficient period" for continuity of interest purposes. A
preconceived plan or arrangement by or among an acquired corporation's
stockholders to dispose of more than 50% of an acquiring corporation's shares
could be problematic. Stockholders with no such preconceived plan or
arrangement, however, are basically free to sell any part of the shares received
by them in the reorganization without fear of breaking continuity of interest,
because the subsequent sale will be treated as an independent transaction from
the reorganization.
There is no plan or intention of Stockholders to sell or otherwise dispose
of (1) any portion of their Target Shares before the Reorganization to any
person "related" (within the meaning of Treas. Reg. Sec. 1.368-1(e)(3)) to
either Fund or (2) any portion of the Acquiring Fund Shares to be received by
them in the Reorganization to any person related (within that meaning) to
Acquiring Fund.
Accordingly, we believe that the Reorganization will satisfy the
continuity of interest requirement.
F. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
U.S. 465 (1935), and is now set forth in Treas. Reg. Sec.Sec. 1.368-1(b), -1(c),
and -2(g) (the last of which provides that, to qualify as a reorganization, a
transaction must be "undertaken for reasons germane to the continuance of the
business of a corporation a party to the reorganization"). Under that doctrine,
a transaction must have a bona fide business purpose (and not a purpose to avoid
federal income tax) to qualify as a valid reorganization. The substantial
business purposes of the Reorganization are described in the Proxy Statement.
Accordingly, we believe that the Reorganization is being undertaken for bona
fide business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
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G. Satisfaction of Section 368(a)(2)(F).
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Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (with an exception not relevant here) were
"investment companies" immediately before the transaction, then the transaction
shall not be considered a reorganization with respect to any such investment
company and its stockholders. But that section does not apply to a participating
investment company if, among other things, it is a RIC or --
(1) not more than 25% of the value of its total assets is
invested in the stock and securities of any one
issuer and
(2) not more than 50% of the value of its total assets is
invested in the stock and securities of five or fewer
issuers.
In determining total assets for these purposes, cash and cash items (including
receivables) and U.S. government securities are excluded. Section
368(a)(2)(F)(iv). Each Fund will meet the requirements to qualify for treatment
as a RIC for its respective current taxable year and will satisfy the foregoing
percentage tests. Accordingly, we believe that section 368(a)(2)(F) will not
cause the Reorganization to fail to qualify as a C Reorganization with respect
to either Fund.
For all the foregoing reasons, we believe that the Reorganization will
qualify as a C Reorganization.
H. Each Fund Will Be a Party to a Reorganization.
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Section 368(b)(2) provides, in pertinent part, that in the case of a
reorganization involving the acquisition by one corporation of properties of
another -- and Treas. Reg. Sec. 1.368-2(f) further provides that if one
corporation transfers substantially all its properties to a second corporation
in exchange for all or a part of the latter's voting stock (i.e., a C
Reorganization) -- the term "a party to a reorganization" includes each
corporation. Pursuant to the Reorganization, Target is transferring all its
properties to Acquiring Fund in exchange for Acquiring Fund Shares. Accordingly,
we believe that each Fund will be "a party to a reorganization."
II. Target Will Recognize No Gain or Loss.
-------------------------------------
Section 361(a) provides that no gain or loss shall be recognized to a
corporate party to a reorganization that exchanges property, pursuant to the
plan of reorganization, solely for stock or securities in another corporate
party to the reorganization. Section 361(b)(1)(A) provides that if section
361(a) would apply to an exchange but for the fact that the property received in
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the exchange consists not only of such stock or securities but also of other
property or money, then no gain shall be recognized to the corporation from the
exchange if it distributes that other property or money pursuant to the plan of
reorganization. Section 361(c) provides in general that no gain or loss shall be
recognized to a corporate party to a reorganization on the distribution to its
shareholders of property pursuant to the plan of reorganization. (Such a
distribution is required by section 368(a)(2)(G)(i) for a reorganization to
qualify as a C Reorganization.) Section 361(c)(4) provides that sections 311 and
336 (which require recognition of gain on certain distributions of appreciated
property) shall not apply to such a distribution.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a bona fide
business purpose.
As noted above, it is our opinion that the Reorganization will qualify as
a C Reorganization, each Fund will be a party to a reorganization, and the Plan
constitutes a plan of reorganization. Target will exchange the Assets solely for
full and fractional Acquiring Fund Shares (plus cash in lieu of certain
fractional Acquiring Fund Shares) and Acquiring Fund's assumption of the
Liabilities and then will be terminated pursuant to the Plan, distributing those
full Acquiring Fund Shares pro rata to all Stockholders, those fractional
Acquiring Fund Shares pro rata to DRP Stockholders, and that cash pro rata to
the other Stockholders in constructive exchange for their Target Shares. See
Rev. Rul. 56-345, supra. As also noted above, it is our opinion that the
Reorganization is being undertaken for bona fide business purposes (and not a
purpose to avoid federal income tax); we also do not believe that the principal
purpose of Acquiring Fund's assumption of the Liabilities is avoidance of
federal income tax on the proposed transaction. Accordingly, we believe that
Target will recognize no gain or loss on the Reorganization.[5]
-------------------
[5] Notwithstanding anything herein to the contrary, we express no opinion
as to the effect of the Reorganization on either Fund or any Stockholder with
respect to any Asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
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III. Acquiring Fund Will Recognize No Gain or Loss.
---------------------------------------------
Section 1032(a) provides that no gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for its stock.
Acquiring Fund will issue Acquiring Fund Shares to Target in exchange for the
Assets, which consist of money and securities. Accordingly, we believe that
Acquiring Fund will recognize no gain or loss on the Reorganization.
IV. Acquiring Fund's Basis for the Assets Will Be a Carryover Basis,
and Its Holding Period Will Include Target's Holding Period.
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Section 362(b) provides, in pertinent part, that the basis of property
acquired by a corporation in connection with a reorganization to which section
368 applies shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on the transfer (a
"carryover basis"). As noted above, it is our opinion that the Reorganization
will qualify as such a reorganization and that Target will recognize no gain on
the Reorganization. Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as Target's basis therefor immediately before the
Reorganization.
Section 1223(2) provides in general that the period for which a taxpayer
has held acquired property that has a carryover basis shall include the period
for which the transferor held the property. As noted above, it is our opinion
that Acquiring Fund's basis for the Assets will be a carryover basis.
Accordingly, we believe that Acquiring Fund's holding period for the Assets will
include Target's holding period therefor.
V. A Stockholder Will Recognize No Gain or Loss, except with respect to
Cash Received in Lieu of Fractional Shares.
--------------------------------------------------------------------
Under section 354(a)(1), no gain or loss shall be recognized if stock in a
corporation that is a party to a reorganization is exchanged pursuant to a plan
of reorganization solely for stock in that corporation or another corporate
party to the reorganization. Pursuant to the Plan, the Stockholders will receive
for their Target Shares full Acquiring Fund Shares plus (1) fractional Acquiring
Fund Shares in the case of DRP Stockholders and (2) cash in lieu of any
fractional shares in the case of Non-DRP Stockholders. As noted above, it is our
opinion that the Reorganization will qualify as a C Reorganization, each Fund
will be a party to a reorganization, and the Plan constitutes a plan of
reorganization. Although Acquiring Fund will not issue certificates representing
Acquiring Fund Shares in connection with the Reorganization, Old Certificates
will be deemed for all purposes after the Effective Time to evidence ownership
of the Acquiring Fund Shares distributable with respect thereto in the
Reorganization and holders thereof will be entitled to receive, on surrender
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thereof, certificates representing those Acquiring Fund Shares. Accordingly, we
believe that a DRP Stockholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization.
In addition to receiving full Acquiring Fund Shares, Non-DRP Stockholders
will receive cash in lieu of fractional Acquiring Fund Shares. Cash is being
distributed to the Non-DRP Stockholders in lieu of fractional Acquiring Fund
Shares solely to save Acquiring Fund the expense and inconvenience of issuing
and transferring fractional shares to those Stockholders; that distribution does
not represent separately bargained-for consideration in the Reorganization; the
total cash consideration paid to those Stockholders instead of issuing
fractional Acquiring Fund Shares will not exceed 1% of the total consideration
that will be issued to them in exchange for their Target Shares; and the
Stockholders' fractional share interests will be aggregated, and no Stockholder
will receive cash in an amount equal to or greater than the value of one full
Acquiring Fund Share. Under these circumstances, the payments of cash to the
Non-DRP Stockholders in lieu of fractional shares will be treated as
distributions in full payment for those fractional shares under section 302(a),
with the result that a Non-DRP Stockholder will have short- or long-term capital
gain or loss to the extent the cash it receives differs from its basis allocable
to its redeemed fractional share. See Rev. Rul. 66-365, supra; Rev. Proc. 77-41,
1977-2 C.B. 574; and the private letter rulings cited under I.C. above.
Accordingly, we believe that a Non-DRP Stockholder will recognize no gain or
loss on the constructive exchange of all its Target Shares solely for Acquiring
Fund Shares and cash in lieu of a fractional Acquiring Fund Share pursuant to
the Reorganization, except as stated in the preceding sentence with respect to
that cash.
VI. A Stockholder's Basis for Acquiring Fund Shares Will Be a
Substituted Basis, and its Holding Period therefor Will Include
its Holding Period for its Target Shares.
----------------------------------------------------------------
Section 358(a)(1) provides, in pertinent part, that in the case of an
exchange to which section 354 applies, the basis of the property permitted to be
received thereunder without the recognition of gain or loss shall be the same as
the basis of the property exchanged therefor, decreased by, among other things,
the fair market value of any other property and the amount of any money received
in the exchange and increased by the amount of any gain recognized on the
exchange (a "substituted basis"). As noted above, it is our opinion that the
Reorganization will qualify as a C Reorganization and, under section 354, a
Stockholder will recognize no gain or loss on the constructive exchange of all
its Target Shares solely for Acquiring Fund Shares, and cash in lieu of a
fractional Acquiring Fund Share where appropriate, pursuant to the
Reorganization, except with respect to that cash. No property will be
distributed to the Stockholders pursuant to the Reorganization other than
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Acquiring Fund Shares and that cash. Accordingly, we believe that a
Stockholder's basis for the Acquiring Fund Shares it receives in the
Reorganization will be the same as the basis for the Target Shares it
constructively surrenders in exchange for those Acquiring Fund Shares, decreased
by any cash it receives, and increased by any gain it recognizes, on the
exchange.
Section 1223(1) provides in general that the period for which a taxpayer
has held property received in an exchange that has a substituted basis shall
include the period for which the taxpayer held the property exchanged therefor
if the latter property was a capital asset (as defined in section 1221) in the
taxpayer's hands at the time of the exchange. See Treas. Reg. Sec. 1.1223-1(a).
As noted above, it is our opinion that a Stockholder will have a substituted
basis for the Acquiring Fund Shares it receives in the Reorganization.
Accordingly, we believe that a Stockholder's holding period for the Acquiring
Fund Shares it receives in the Reorganization will include its holding period
for the Target Shares it constructively surrenders in exchange for those
Acquiring Fund Shares, provided the Stockholder holds them as capital assets at
the Effective Time.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
/s/Theodore L. Press
By ----------------------------
Theodore L. Press
