September 25, 2000
Mountain States Capital, Inc.
1407 East Thomas Road
Phoenix, Arizona 85014
Re: Federal Income Tax Issues Concerning Recission Offer to
Purchase Outstanding Notes and Offering of New Notes
Ladies and Gentlemen:
You have requested our opinion with respect to certain federal income
tax issues in connection with: (i) the offer, in the aggregate amount of
$2,600,000, representing principal and interest, to holders of promissory notes
(the "Outstanding Notes") of the opportunity to rescind or void their purchase
of the Outstanding Notes, and (ii) the offer, in the aggregate principal amount
of $10,000,000, to sell new promissory notes (the "New Notes"). All capitalized
terms used but not otherwise defined in this letter will have the same meaning
as in the Prospectus included in the Company's Registration Statement on Form
SB-2 (the "Prospectus").
For purposes of rendering our opinions, we have examined and relied
upon (i) the Prospectus, (ii) the Internal Revenue Code of 1986, as amended
through the date hereof (the "Code"), the Treasury Regulations issued
thereunder, Revenue Rulings and Revenue Procedures issued by the Internal
Revenue Service (the "Service") and applicable case law, and (iii) such other
documents as we have considered necessary in order for us to render the opinions
contained herein. For purposes of this examination, we have assumed the
authenticity of original documents, the conformity to original documents of all
documents submitted to us as copies, the genuineness of all signatures, and the
capacity of each party executing a document to so execute such document.
In rendering our opinions, we have also made the following assumptions
with respect to the Outstanding Notes and the New Notes: (i) the Outstanding
Notes were issued for and the New Notes will be issued for an amount equal to
their stated redemption price at maturity, (ii) the Outstanding Notes and the
New Notes both call for the payment of interest at a fixed rate, and at fixed
periodic intervals of one year or less, and (iii) the Outstanding Notes and New
Notes have fixed maturity dates of one year or less.
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Mountain States Capital, Inc.
September 25, 2000
Page 2
Based on our interpretation of the currently applicable sections of the
Code, the Treasury Regulations issued thereunder, Revenue Rulings and Revenue
Procedures issued by the Service and applicable case law, and the assumptions
described above, and subject to the qualifications and discussion in the
"Material Federal Income Tax Consequences" section of the Prospectus, it is our
opinion that:
(A) In our opinion, the statements made in the Prospectus under
"Material Federal Income Tax Consequences" are correct as to matters of law as
of the date of this letter.
(B) The interest to be paid to a holder of Outstanding Notes or New
Notes will be taxable to the holder as interest income at the time the interest
accrues or is received by the holder in accordance with the holder's method of
accounting for federal income tax purposes.
(C) The Outstanding Notes do not have and the New Notes will not have
original issue discount or market discount.
(D) The Outstanding Notes do not have and the New Notes will not have
bond premium in the hands of the initial holders.
(E) The Outstanding Notes and the New Notes will have bond premium in
the hands of subsequent purchasers if the subsequent purchaser of an Outstanding
Note or a New Note pays more for the note than its stated redemption price at
maturity. Conversely, the Outstanding Notes and the New Notes will not have bond
premium in the hands of subsequent purchasers if the subsequent purchaser of an
Outstanding Note or a New Note does not pay more for the note than its stated
redemption price at maturity.
(F) Upon the sale, exchange or redemption of an Outstanding Note or a
New Note, the holder of an Outstanding Note or a New Note will recognize taxable
gain or loss equal to the difference between the amount realized (excluding any
amounts attributable to unpaid accrued interest which will be includible in
income as interest in accordance with the holder's method of accounting) on the
sale, exchange or redemption of the note and such holder's adjusted tax basis in
the note subject to the sale, exchange or redemption.
(G) A holder's adjusted tax basis in an Outstanding Note or New Note
will generally equal the cost of such note to the holder, reduced by any
principal payments received by the holder and any amortizable bond premium.
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Mountain States Capital, Inc.
September 25, 2000
Page 3
(H) If the holder of an Outstanding Note accepts the recission offer,
receipt of a cash payment in consideration for the Outstanding Note, whether or
not applied to the purchase of a New Note, will be treated as a sale or exchange
and therefore, will be a taxable event.
(I) Assuming that the Outstanding Notes or the New Notes are held as
capital assets within the meaning of Section 1221 of the Code, gain or loss on
the sale, exchange or redemption of an Outstanding Note or a New Note will be
capital gain or loss.
Our opinions are based on our current understanding of the applicable
federal law. There can, of course, be no assurance that a court or the Service,
when faced with the same facts, will reach the same conclusions as we have or
that the law will not be changed after the date of this letter. The information
and opinions given in this letter are effective as of the date of this letter.
This opinion is rendered as of the date hereof and we disclaim any
obligations to advise you of any events hereafter arising which may adversely
affect such opinion.
Except as specifically provided herein, we do not express any opinion
in this letter with respect to any issues pertaining to state, local or foreign
tax law that might affect the taxation of Mountain States or the holders of the
Outstanding Notes or the New Notes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm appearing under the
caption "Legal Matters" in the Prospectus constituting part of the Registration
Statement; provided, however, that by so consenting, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Very truly yours,
/s/ QUARLES & BRADY LLP
QUARLES & BRADY LLP
