[BARNES & THORNBURG LETTERHEAD]
June 19, 2000
Citizens Bancorp
60 South Main Street
Frankfort, Indiana 46041
Ladies and Gentlemen:
In connection with the proposed merger (the "Merger") of Citizens
Bancorp, a savings and loan holding company organized under the laws of the
State of Indiana ("Citizens"), into Lincoln Bancorp, a savings and loan holding
company organized under the laws of the State of Indiana ("Lincoln"), pursuant
to an Agreement and Plan of Reorganization dated as of March 21, 2000, by and
between Citizens and Lincoln (the "Merger Agreement"), we have been asked by
Citizens to render our opinion to you with respect to certain Federal income tax
consequences of the Merger.
Capitalized terms used but not defined herein shall have the meanings
ascribed to them in the Merger Agreement.
Pursuant to the Merger Agreement, upon consummation of the Merger,
shares of Citizens common stock, without par value, (the "Citizens Common
Stock") will be converted into the right to receive .9375 shares of Lincoln
common stock, without par value, (the "Lincoln Common Stock") (plus cash in lieu
of fractional shares) plus $9.375 in cash. Citizens shareholders who comply with
the requirements of Indiana law for dissenting shareholders will be entitled to
receive cash in payment for their shares of Citizens Common Stock. Barnes &
Thornburg has assumed, for purposes of its opinion, that none of the Citizens
shareholders will dissent.
As of June 15, 2000, the closing sale price of Citizens Common Stock as
reported on the NASDAQ National Market System was $17.8125 per share and there
were 959,401 total authorized and issued shares of Citizens Common Stock,
944,079 of which will be exchanged in the merger (with the remaining 15,322 to
be cancelled at the effective date). As of June 15, 2000, the closing sale price
of Lincoln Common Stock as reported on the NASDAQ National Market System was
$10.3125 per share.
Pursuant to the Merger Agreement, Citizens may exercise its right to
terminate the Merger if the value of the Lincoln Common Stock is less than 45%
of the aggregate value of the formerly outstanding Citizens Common Stock. Barnes
& Thornburg has assumed, for purposes of its opinion, that Citizens will not
proceed with the Merger if, at the effective time of the merger (the "Effective
Time"), the value of the Lincoln Common Stock received by the Citizens
shareholders in the Merger is less than 45% of the aggregate value of Citizens.
At or shortly after the Effective Time, Citizens Savings Bank
(Citizens's wholly-owned subsidiary) will be merged into Lincoln Federal Savings
Bank (Lincoln's wholly-owned subsidiary).
We have received, and are relying upon, certificates of certain
officers of Citizens and/or Lincoln to the effect that, to the best of the
officers' knowledge:
1. At the time Citizens acquired Citizens Savings Bank, the Merger was
neither agreed to nor planned.
2. Citizens has had no significant asset or business since Citizens was
incorporated, other than the ownership and operation of its savings bank
subsidiary and activities related thereto.
3. Lincoln has no plan or intention to sell, exchange, liquidate or
otherwise dispose of any of the assets of Citizens acquired in the Merger,
except for dispositions in the ordinary course of business, dispositions related
to the contemplated merger of Citizens Savings Bank into Lincoln Federal Savings
Bank, and dispositions to other corporations 80% or more owned by Lincoln.
4. There is no understanding between Lincoln and the Citizens
shareholders that the Citizens shareholders' ownership of Lincoln Common Stock
is transitory and further there is no agreement or plan for Lincoln to reacquire
any of the Lincoln Common Stock to be issued pursuant to the Merger other than
pursuant to a repurchase plan or program involving the general repurchase of any
Lincoln Common Stock on the open market.
5. There has been, and it is expected that as of the Effective Time of
the Merger there will have been, no significant change in the identities and
proportionate holdings of Citizens' shareholders since Citizens acquired
Citizens Savings Bank.
6. Cash to be paid in lieu of fractional shares of Lincoln Common Stock
will be paid solely to avoid the administrative expense and inconvenience of
fractional shares and not as separately bargained-for consideration.
7. Payments and benefits to be provided by Lincoln or Lincoln Federal
Savings Bank to certain present or former employees, officers, directors of
Citizens Savings Bank and its predecessors, as set forth in the Merger
Agreement, are intended as compensation for services rendered or to be rendered
by them and not as consideration in exchange for their shares of Citizens Common
Stock.
Our opinion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations, rulings and judicial decisions thereunder,
all as in effect on the date hereof.
We have investigated such facts, examined such documents and reviewed
such authorities as we, in our judgment, deem advisable to enable us to render
this opinion.
Based upon the foregoing, our opinion is as follows:
1. Tax-free Reorganization. Based on the above assumptions, the Merger
will constitute a tax-free reorganization for Federal income tax purposes within
the meaning of Section 368(a)(1)(A) of the Code, meaning that neither Citizens
nor Lincoln will recognize any gain or loss with respect to the Merger, provided
that the continuity of interest requirement is met, as discussed below. Sections
361 and 1032 of the Code.
The continuity of interest test imposed by the Internal Revenue Service
(the "Service") requires that the aggregate value of Lincoln Common Stock issued
in the Merger is not less than 50% of the value of formerly outstanding shares
of Citizens Common Stock, in order for the Service to make an advance ruling
that the Merger qualifies as a tax-free reorganization. Rev. Proc. 77-37, 1977-2
C.B. 568, 569. Although the Service has set the 50% guideline, the Service has
acknowledged that the 50% guideline does not define, as a matter of law, the
minimum stock consideration required to meet the continuity of interest test.
Rev. Proc. 77-37, at 569. In fact, in Rev. Rul. 61-156, 1961-2 C.B. 62, 64, the
Service found sufficient continuity of interest at the 45% level, stating that
it is necessary only that the shareholders continue to have a "definite and
substantial equity interest" in the acquiring corporation. Moreover, the courts
have clearly accepted lower levels of continuity, finding tax-free
reorganizations in the case, for example, of 38% stock, all of which was
nonvoting preferred stock (John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935))
and 25% stock (Miller v. Comr., 84 F. 2d 415 (6th Cir. 1936)).
Since a 45% continuity level will exceed these judicially accepted
figures and assuming no Citizens shareholders dissent to the Merger, it is the
opinion of Barnes & Thornburg that the continuity of interest requirement will
be met in the Merger, if consummated pursuant to the assumptions referred to
above, because the Citizens shareholders in the aggregate will receive Lincoln
Common Stock whose value is not less than 45% of the value of all of the
formerly outstanding shares of Citizens Common Stock. However, if the market
price of the Lincoln Common Stock as of the Effective Time relative to the
market price of Citizens Common Stock declines to the extent that the value of
the Lincoln Common Stock received by the Citizens shareholders in the Merger is
less than 45% of the value of formerly outstanding shares of Citizens Common
Stock, then Citizens will not be obligated to consummate the Merger pursuant to
the Merger Agreement.
2. Exchange of Citizens Common Stock for a Combination of Cash and
Lincoln Common Stock. As of the Effective Time, a Citizens shareholder who
receives Lincoln Common Stock and cash pursuant to the Merger will not recognize
gain or loss to the extent that such shareholder receives Lincoln Common Stock
as consideration, but such shareholder will recognize gain (if any) in an amount
not in excess of the amount of cash received. Section 354 of the Code. Any
recognized gain (limited, again, by the amount of cash received) will be
eligible for capital gain treatment (assuming the shareholder's shares of
Citizens Common Stock are held as a capital asset by the shareholder) unless
such receipt of cash has the effect of a distribution of a dividend, as provided
in Section 356 of the Code, in which case such gain will be taxable as ordinary
income to the extent of the shareholder's ratable share of Citizens' accumulated
earnings and profits. Any capital gain will be long-term capital gain if, as of
the date of the exchange, the shareholder's holding period for such shares is
greater than one year.
The stock redemption provisions of Section 302 of the Code, as
interpreted by the United States Supreme Court in Clark v. Commissioner, 489
U.S. 726 (1989), apply in determining whether cash received by a Citizens
shareholder pursuant to the Merger has the effect of a dividend under Section
356 of the Code (the "Hypothetical Redemption Analysis"). Under the Hypothetical
Redemption Analysis, a Citizens shareholder will be treated as if the portion of
the Citizens Common Stock exchanged for cash in the Merger instead had been
exchanged for shares of Lincoln Common Stock (the "Hypothetical Shares"),
followed immediately by a redemption of the Hypothetical Shares by Lincoln for
cash. Under the principles of Section 302 of the Code, a Citizens shareholder
will recognize capital gain rather than dividend income with respect to the cash
received if the Hypothetical Redemption is (1) "substantially disproportionate,"
or (2) "not essentially equivalent to a dividend" with respect to such
shareholder. In applying the principles of Section 302 of the Code, the
constructive ownership rules of Section 318 of the Code will apply in comparing
a shareholder's ownership interest in Lincoln both immediately after the Merger
(but before the Hypothetical Redemption) and after the Hypothetical Redemption.
The Hypothetical Redemption by Lincoln of the Hypothetical Shares for
cash would be "substantially disproportionate," and therefore, would not have
the effect of a distribution of a dividend with respect to a Citizens
shareholder who owns less than 50% of the voting power of the outstanding
Lincoln Common Stock, if the percentage of Lincoln Common Stock actually and
constructively owned by such shareholder immediately after the Hypothetical
Redemption is less than 80% of the percentage of Lincoln Common Stock actually,
hypothetically, and constructively owned by such shareholder immediately before
the Hypothetical Redemption.
Whether the Hypothetical Redemption by Lincoln of the Hypothetical
Shares for cash is "not essentially equivalent to a dividend" with respect to a
Citizens shareholder will depend upon such shareholder's particular
circumstances. However, the Hypothetical Redemption must, in any event, result
in a "meaningful reduction" in such shareholder's percentage ownership of
Lincoln Common Stock. In determining whether the Hypothetical Redemption by
Lincoln results in a meaningful reduction in the shareholder's percentage
ownership of Lincoln Common Stock, and therefore does not have the effect of a
distribution of a dividend, a Citizens shareholder should compare his or her
interest in Lincoln (including interests owned actually, hypothetically, and
constructively) immediately after the Merger (but before the Hypothetical
Redemption) to his or her interest after the Hypothetical Redemption. The
Service has indicated, in Rev. Rul. 76-385, 1976-2 C.B. 92, that a shareholder
in a publicly held corporation whose relative stock interest in the corporation
is minimal and who exercises no "control" over corporate affairs is generally
treated as having had a meaningful reduction in his or her stock after a
redemption transaction, if his or her percentage stock ownership in the
corporation has been reduced to any extent, taking into account the
shareholder's actual and constructive ownership before and after the
Hypothetical Redemption. In Revenue Ruling 76-385, the Service found a reduction
from .0001118% to .0001081% to be a meaningful reduction.
The aggregate tax basis of the Lincoln Common Stock (including any
fractional shares) in the received by a Citizens shareholder will be equal to
the tax basis of Citizens Common Stock surrendered in exchange therefor,
decreased by the amount of cash received, and increased by the amount of gain
(including any amount which is characterized as a dividend) which was recognized
on the exchange, provided the Citizens Common Stock were held as a capital asset
as of the Effective Time. Section 358 of the Code. The holding period of the
Lincoln Common Stock (including any fractional share) received by a Citizens
shareholder will be the same as the period of the Citizens Common Stock
surrendered in exchange therefor, provided that the shares of Citizens Common
Stock were held as capital assets as of the Effective Time. Section 1223(l) of
the Code.
3. Cash in Lieu of Fractional Shares of Lincoln Common Stock. The
payment of cash in lieu of fractional shares of Lincoln Common Stock will be
treated as if the fractional shares were issued by Lincoln in the Merger and
then redeemed by Lincoln in a taxable transaction. Rev. Rul. 66-365, 1966-2 C.B.
116. A Citizens shareholder otherwise entitled to receive the fractional share
will recognize gain or loss measured by the difference between the amount of
cash received and the shareholder's basis allocable to the fractional share.
Rev. Proc. 77-41, 1977-2 C.B. 574; Section 1001(a) of the Code. Any gain or loss
realized on the redemption will be capital gain or loss, provided the fractional
share would have constituted a capital asset in the hands of the redeeming
shareholder, and will be long-term capital gain or loss if the holding period of
the fractional share (determined by reference to the shares of Citizens Common
Stock exchanged therefor) is more than one year.
4. Dissenting Shareholders. In the case of a dissenting Citizens
shareholder who receives only cash in exchange for all of his or her shares of
Citizens Common Stock, the cash will be treated as received by such shareholder
as a distribution in redemption of the shareholder's Citizens Common Stock,
subject to the provisions and limitations of Section 302 of the Code. Unless the
redemption is treated as a dividend under Section 302(d) of the Code, the
Citizens shareholder will recognize gain or loss measured by the difference
between the amount of cash received and the tax basis of the Citizens Common
Stock redeemed. Sections 302(b)(3) and 1001 of the Code. The gain or loss will
be capital gain or loss if the Citizens Common Stock was held by the Citizens
shareholder as a capital asset at the Effective Time. If, on the other hand, the
redemption is treated as a dividend under Section 302(d) of the Code, the full
amount of cash received by the Citizens shareholder will be treated as ordinary
income.
5. Information Reporting and Withholding. Payments of cash to a
Citizens shareholder surrendering shares of Citizens Common Stock will be
subject to information reporting and "backup" withholding at a rate of 31% of
the cash payment to such shareholder, unless the such shareholder (1) furnishes
his or her taxpayer identification number in the manner prescribed in applicable
Treasury Regulations, (2) certifies that such number is correct, (3) certifies
as to no loss of exemption from backup withholding and (4) meets certain other
conditions. Any amounts withheld from payments to a Citizens shareholder under
the backup withholding rules will be allowed as a refund or credit against such
shareholder's United States federal income ax liability, provided the required
information is furnished to the Service.
6. Exercise of Citizens Options Pursuant to the Merger. The receipt in
the Merger by a holder of vested options to acquire shares of Citizens Common
Stock of an amount of cash equal to the excess of $18.75 over the per share
exercise price for each share of Citizens Common Stock subject to such vested
stock options will result in the recognition of taxable income by such holder in
the amount of cash received as consideration for the termination of such vested
stock options. Section 83 of the Code.
7. Exchange of Citizens Options for Lincoln Options. The receipt by a
holder of a non-vested option to acquire Citizens Common Stock of a comparable
option to acquire Lincoln Common Stock will not result in the recognition of
gain or loss by such holder to the extent that the options constitute
securities. Rev. Rul. 70-269, 1970-1 C.B. 82, as modified by Rev. Rul. 98-10,
I.R.B. 1998-10, 11. The term "securities" includes rights (options) issued by a
party to a reorganization to acquire its stock. Treas. Reg.ss.1.354-1(e).
The foregoing tax consequences set forth in Paragraphs 1 through 7 may
not apply to a Citizens shareholder who acquired his or her shares of Citizens
Common Stock through the exercise of an employee stock option or who acquired
such Citizens Common Stock as compensation.
For this tax opinion to be effective as of the Effective Time, the
Citizens shareholders in the aggregate must receive Lincoln Common Stock whose
value is not less than 45% of the value of all of the formerly outstanding
shares of Citizens Common Stock. If, as of the Effective Time, the market price
of the Lincoln Common Stock declines or the market price of Citizens Common
Stock increases to the extent that the value of the Lincoln Common Stock
received by the Citizens shareholders in the Merger is less than 45% of the
value of formerly outstanding shares of Citizens Common Stock, Citizens may
exercise its right not to consummate the Merger. Further, this opinion is
limited to the material federal income tax consequences of the proposed Merger
and does not discuss state, local, or foreign tax consequences.
We consent to the use of our name under the caption "Material Federal
Income Tax Consequences" and "Legal Matters" in the Prospectus included in the
Form S-4 Registration Statement (the "Registration Statement) to be filed by
Lincoln with the Securities and Exchange Commission in connection with the
issuance of Lincoln Common Stock to the shareholders of Citizens in the merger,
and to the filing of this opinion as Exhibit 8(1) to the Registration Statement.
Very truly yours,
/s/ Barnes & Thornburg
Barnes & Thornburg
