Internal Revenue Service Department of the Treasury
Index Number: 0368.03-00; 0368.13-00 Washington, DC 20224
Donald C. Burke, Vice President/Treasurer Person to Contact:
Merrill Lynch Convertible Fund, Inc. Paula Hu-Pitzer, ID# 50-03517
800 Scudders Mill Road Telephone Number:
Plainsboro, NJ 08536 (202) 622-7550
Refer Reply To:
CC:CORP:B05 - PLR-109772-00
Date:
August 22, 2000
Acquiring = Merrill Lynch Capital Fund, Inc.
a Maryland corporation
EIN: 13-2757134
Target = Merrill Lynch Convertible Fund, Inc.
a Maryland corporation
EIN: 13-3274981
State A = Maryland
Dear Mr. Burke:
This letter responds to your representative's May 5, 2000, request for
rulings on the federal income tax consequences of a proposed transaction.
Additional information was submitted in a letter dated August 8, 2000. The
information submitted for consideration is summarized below.
Acquiring is organized under the laws of State A and operates as a
diversified open-end management company. Acquiring has elected to be taxed as a
regulated investment company ("RIC") under ss.ss. 851-855 of the Internal
Revenue Code.
Target is organized under the laws of State A and operates as a
non-diversified open-end management company. Target has elected to be taxed as a
RIC under ss.ss. 851-855.
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Acquiring and Target each offers four classes of shares (Class A, Class B,
Class C and Class D) with identical rights and fees with respect to each class.
Each of Acquiring and Target is widely held. Both file their income tax returns
based on the accrual method of accounting. Each of Acquiring and Target is
registered under the Investment Company Act of 1940.
The directors of Acquiring and Target have approved a plan of
reorganization for what is represented to be valid business reasons. Pursuant to
the plan, the following transaction is proposed (the "Transaction"):
(1) Target will transfer all of its assets and liabilities to Acquiring
in exchange for equal value of newly issued Acquiring Class A, Class
B, Class C and Class D shares. The total value of the newly issued
shares received by Target shareholders will represent less then 50%
of the value of Acquiring after the Transaction.
(2) Target will liquidate and distribute to its shareholders all of the
Acquiring stock received in the exchange. Each Target shareholder
will receive, on a pro rata basis, shares of the class of Acquiring
stock with the same class designation and respective rights as the
Target stock held by such shareholder immediately prior to the
Transfer.
(3) Target will dissolve in accordance with the laws of State A and will
terminate its registration under the 1940 Act.
(4) Acquiring may sell up to 66% of the assets received in the
Transaction to unrelated purchasers and will reinvest any proceeds
consistent with its investment objectives and policies.
The following representations have been made in connection with the
Transaction:
(a) The fair market value of the Acquiring stock received by each Target
shareholder will be approximately equal to the fair market value of
the Target stock surrendered in the exchange.
(b) Acquiring will acquire at least 90 percent of the fair market value
of the net assets and at least 70 percent of the fair market value
of the gross assets held by Target immediately prior to the
Transaction. For purposes of this representation, amounts paid by
Target to shareholders who receive cash or other property, amounts
used by Target to pay its reorganization expenses, and all
redemptions and distributions (except for redemptions in the
ordinary course of Target's business as an open-end investment
company as required by section 22(e) of the 1940 Act pursuant to a
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demand of a shareholder and regular, normal dividends) made by
Target immediately preceding the transfer will be included as assets
of Target held immediately prior to the Transaction. There will be
no payments to dissenters.
(c) Acquiring has no plan or intention to reacquire any of its stock
issued in the Transaction except in connection with its legal
obligations under section 22(e) of the 1940 Act.
(d) After the Transaction, Acquiring will use the assets acquired from
Target in its business, except that a portion of these assets may be
sold or otherwise disposed of in the ordinary course of Acquiring's
business. Any proceeds will be invested in accordance with
Acquiring's investment objectives. Acquiring has no plan or
intention to sell or dispose of any of the assets of Target acquired
in the Transaction, except for dispositions made in the ordinary
course of business.
(e) Target will distribute to its shareholders the stock of Acquiring it
receives pursuant to the plan of reorganization.
(f) The liabilities of Target assumed by Acquiring and any liabilities
to which the transferred assets of Target are subject were incurred
by Target in the ordinary course of its business.
(g) Following the Transaction, Acquiring will continue the historic
business of Target or use a significant portion of Target's historic
business assets in the continuing business.
(h) Acquiring, Target, and the shareholders of Target will pay their
respective expenses, if any, incurred in connection with the
Transaction.
(i) There is no intercorporate indebtedness existing between Target and
Acquiring that was issued, acquired or will be settled at a
discount.
(j) Acquiring and Target each meets the requirements of a regulated
investment company as defined in ss. 368(a)(2)(F).
(k) Acquiring does not own, directly or indirectly, nor has it owned
during the past five years, directly or indirectly, any stock of
Target.
(l) The fair market value of the assets of Target transferred to
Acquiring will equal or exceed the sum of the liabilities assumed by
Acquiring, plus the amount of liabilities, if any, to which the
transferred assets are subject.
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(m) Target is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of ss. 368(a)(3)(A).
(n) Target and Acquiring have elected to be taxed as RICs under ss. 851
and, for all of their taxable periods (including Target's last short
taxable period ending on the date of the Transaction), have
qualified for the special tax treatment afforded RICs under the
Internal Revenue Code. After the Transaction, Acquiring intends to
continue to so qualify.
(o) There is no plan or intention for Acquiring (the issuing corporation
as defined in ss. 1.368-1(b)), or any person related (as defined
in ss. 1.368-1(e)(3)) to Acquiring, to acquire, during the five year
period beginning on the date of the Transaction, with consideration
other than Acquiring stock, Acquiring stock furnished in exchange
for a proprietary interest in Target in the Transaction, either
directly or through any transaction, agreement, or arrangement with
any other person, except for redemptions in the ordinary course of
Acquiring's business as an open-end investment company as required
under Section 22(e) of the Investment Company Act of 1940, as
amended ("1940 Act").
(p) During the five year period ending on the date of the Transaction,
(i) neither Acquiring, nor any person related (as defined
in ss. 1.368-1(e)(3)) to Acquiring, will have acquired Target stock
with consideration other than Acquiring stock, (ii) neither Target,
nor any person related (as defined in ss. 1.368-1(e)(3) without
regard to ss. 1.368-1(e)(3)(i)(A)) to Target, will have acquired
Target stock with consideration other than Acquiring stock or Target
stock, and (iii) no distributions will have been made with respect
to Target stock except for redemptions in the ordinary course of
Target's business as an open-end investment company as required
under ss. 22(e) of the 1940 Act of 1940; and (iii) no distributions
will have been made with respect to Target stock (other than
regular, normal dividend distributions made pursuant to Target's
historic dividend paying practice), either directly or through any
transaction, agreement, or arrangement with any other person, except
for (a) cash paid to dissenters and (b) distributions described
in ss.ss. 852 and 4982, as required for Target's tax treatment as a
RIC.
(q) The aggregate value of the acquisitions, redemptions, and
distributions described in paragraphs (o) and (p) above will not
exceed 50 percent of the value (without giving effect to the
acquisitions, redemptions, and distributions) of the proprietary
interest in Target on the effective date of the Transaction.
Based solely on the information submitted and on the representations set forth
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above, we hold as follows:
(1) The acquisition by Acquiring of substantially all of the assets of
Target in exchange for voting stock of Acquiring and Acquiring's
assumption of Target's liabilities, followed by the distribution by
Target to its shareholders of Acquiring stock and any remaining
assets, in complete liquidation, will qualify as a reorganization
within the meaning of ss. 368(a)(1)(C). Target and Acquiring will
each be a "party to a reorganization" within the meaning of ss.
368(b).
(2) Target will recognize no gain or loss upon the transfer of
substantially all of its assets to Acquiring in exchange for voting
stock of Acquiring and Acquiring's assumption of Target's
liabilities or upon the distribution of the Acquiring stock to the
Target shareholders (ss.ss. 361(a) and (c) and 357(a)).
(3) Acquiring will recognize no gain or loss on the receipt of the
assets of Target in exchange for voting stock of Acquiring
(ss. 1032(a)).
(4) The basis of Target's assets in the hands of Acquiring will be the
same as the basis of those assets in the hands of Target immediately
prior to the Transaction (ss. 362(b)).
(5) Acquiring's holding period for the Target assets acquired will
include the period during which such assets were held by Target (ss.
1223(2)).
(6) The Target shareholders will recognize no gain or loss on the
receipt of voting stock of Acquiring solely in exchange for their
Target stock (including fractional shares to which they may be
entitled) (ss.354(a)(1)).
(7) The basis of the Acquiring stock received by the Target shareholders
will be the same as the basis of the Target stock surrendered in
exchange therefor (ss. 358(a)(1)).
(8) The holding period of the Acquiring stock received by the Target
shareholders in exchange for their Target stock (including
fractional shares to which they may be entitled) will include the
period that the shareholder held the Target stock exchanged
therefor, provided that the shareholder held such stock as a capital
asset on the date of the exchange (ss.1223(1)).
(9) Pursuant to ss. 381(a) and ss. 1.381(a)-1, the tax year of Target
will end on the effective date of the Transaction and Acquiring will
succeed to and take into account the items of Target described in
ss. 381(c), subject to the provisions and limitations specified in
ss.ss. 381, 382, 383, and 384, and the
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PLR-109772-00
regulations thereunder.
No opinion is expressed about the tax treatment of the Transaction under
other provisions of the Code and regulations or about the tax treatment of any
conditions existing at the time of, or effects resulting from, the transactions
that are not specifically covered by the above rulings. Specifically, no opinion
was requested, and none is expressed, about whether Acquiring or Target qualify
as a RIC that is taxable under Subchapter M, Part 1 of the Code.
The rulings contained in this letter are based upon information and
representations submitted by the taxpayer and accompanied by a penalty of
perjury statement executed by an appropriate party. While this office has not
verified any of the material submitted in support of the request for rulings, it
is subject to verification on examination.
This ruling is directed only to the taxpayer(s) requesting it. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy
of this letter is being sent to your authorized representative.
A copy of this letter must be attached to any income tax return to which
it is relevant.
Sincerely yours,
Associate Chief Counsel (Corporate)
By /s/ Debra Carlisle
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Debra Carlisle
Chief, Branch 5
