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EXHIBIT 12
[KIRKPATRICK & LOCKHART LLP LETTERHEAD]
THEODORE L. PRESS
Tel: 202.778.9025
Fax: 202.778.9100
[email protected]
June 16, 2000
AIM Advisor Funds, Inc.
AIM Growth Series
11 Greenway Plaza, Suite 100
Houston, Texas 77046-1173
Re: Reorganization to Combine a Series of a Maryland Corporation
and a Series of a Delaware Business Trust
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Ladies and Gentleman:
AIM Advisor Funds, Inc., a Maryland corporation ("Corporation"), on
behalf of AIM Advisor Large Cap Value Fund, a segregated portfolio of assets
("series") thereof ("Target"), and AIM Growth Series, a Delaware business trust
("Trust"), on behalf of AIM Basic Value Fund, a series thereof ("Acquiring
Fund"), 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 between them dated as of March 22,
2000, as amended by amendment dated as of the date hereof ("Plan").(1)
Specifically, each Investment Company has requested our opinion --
(1) that Acquiring Fund's acquisition of Target's assets in
exchange solely for voting shares of beneficial interest in Acquiring
Fund ("Acquiring Fund Shares") and Acquiring Fund's assumption of
Target's liabilities, followed by Target's distribution of those
shares pro rata to its shareholders of record as of the "Effective
Time" (i.e., 8:00 a.m. Eastern Time on the Closing Date (as herein
defined)) ("Shareholders") constructively in exchange for the
Shareholders' 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
--------------------
(1) Target and Acquiring Fund are sometimes referred to herein individually as
a "Fund" and collectively as the "Funds," and Corporation and Trust are
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies."
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of section 368(a)(1)(C),(2) and each Fund will be "a party to a
reorganization" within the meaning of section 368(b);
(2) that neither the Funds nor the Shareholders 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 April 25, 2000, that was
furnished in connection with the solicitation of proxies by Corporation's board
of directors for use at a special meeting of Target's shareholders held on May
31, 2000 ("Proxy Statement"), (3) each Fund's currently effective 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 Investment Company
and the representations described below and made in the Plan (as contemplated
in Section 6.2(f) thereof) (collectively, "Representations").
FACTS
-----
Corporation is a Maryland corporation, and Target is a series thereof.
Trust is a business trust organized under the Delaware Business Trust Act (Del.
Code Ann. title 12, Section 3801 et seq. (1977)) ("Delaware Act"),(3) and
Acquiring Fund is a series thereof. Each Investment Company is registered with
the Securities and Exchange Commission ("SEC") as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act").
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(2) All "section" references are to the Internal Revenue Code of 1986, as
amended ("Code"), unless otherwise noted, and all "Treas. Reg. Section"
references are to the regulations under the Code ("Regulations").
(3) On or about May 29, 1998, Acquiring Fund acquired all the assets, and
assumed all the liabilities, of G.T. Global America Value Fund, a separate
series of a Massachusetts business trust ("GT Fund"), pursuant to a
reorganization within the meaning of section 368(a)(1)(F) ("Prior F
Reorganization"). Before January 1, 1997, GT Fund claimed to be classified for
federal tax purposes as an association taxable as a corporation, and it never
elected otherwise.
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The Target Shares are divided into three classes, designated Class A,
Class B, and Class C shares ("Class A Target Shares," "Class B Target Shares,"
and "Class C Target Shares," respectively). The Acquiring Fund Shares also are
divided into three classes, also designated Class A, Class B, and Class C
shares ("Class A Acquiring Fund Shares," "Class B Acquiring Fund Shares," and
"Class C Acquiring Fund Shares," respectively), and are similar to the
correspondingly designated classes of Target's shares.
The consummation of the transactions comprising the Reorganization
will take place on or about the date hereof ("Closing Date").
The Funds' investment objectives, policies, and restrictions (which
are described in the Proxy Statement) are similar, the principal difference
being the capitalization focus of their investments, with Acquiring Fund having
a broader investment mandate than Target has. Until June 5, 2000, Acquiring
Fund sought to achieve its investment objective by investing all its investable
assets in Value Portfolio -- a series of Growth Portfolio, a Delaware business
trust (classified as a partnership, and not a "publicly traded partnership" (as
defined in section 7704(b)), for federal tax purposes), with the same
investment objectives, policies, and restrictions as Acquiring Fund -- in which
Acquiring Fund owned virtually the entire beneficial interest. On that date
Acquiring Fund liquidated that interest and received from the Portfolio a
distribution in kind of the assets represented thereby.
For the reasons, and after consideration of the factors, described in
the Proxy Statement, each Investment Company's board of directors/trustees
approved the Plan, subject to approval of Target's shareholders. In doing so,
each board -- including a majority of its members who are not "interested
persons" (as that term is defined in the 1940 Act) of either Investment Company
or A I M Advisors, 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
shareholders will not be diluted as a result of the Reorganization.
The Plan, which specifies that it is intended to be 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 cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), 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 close of the customary trading
session of the New York Stock Exchange on the
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business day immediately preceding the Closing Date ("Valuation Time")
(collectively "Assets"), in exchange solely for the following:
(a) the number of full and fractional (rounded to
the third decimal place) (i) Class A Acquiring Fund Shares
determined by dividing the net value of Target (computed
pursuant to Section 2.2 of the Plan) ("Target Value")
attributable to the Class A Target Shares by the net asset
value (computed pursuant to that section) ("NAV") of a Class
A Acquiring Fund Share, (ii) Class B Acquiring Fund Shares
determined by dividing the Target Value attributable to the
Class B Target Shares by the NAV of a Class B Acquiring Fund
Share, and (iii) Class C Acquiring Fund Shares determined by
dividing the Target Value attributable to the Class C Target
Shares by the NAV of a Class C Acquiring Fund Share, 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 Valuation Time,
and whether or not specifically referred to in the Plan
(collectively "Liabilities"),
(2) The constructive distribution of such Acquiring Fund
Shares to the Shareholders, by issuing to each Shareholder the
respective pro rata number of full and fractional (rounded to the
third decimal place) Acquiring Fund Shares due that Shareholder, by
class (whereupon all issued and outstanding Target Shares will be
canceled on Corporation's books),(4) and
(3) The termination of Target as soon as reasonably
practicable (but in all events within six months) after the Closing
Date.
--------------------
(4) 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 be issued. Accordingly, Shareholders will not
be required to and will not make physical delivery of their Target Shares, nor
will they receive certificates for Acquiring Fund Shares, pursuant to the
Reorganization. Target Shares nevertheless will be treated as having been
exchanged for Acquiring Fund Shares, and the tax consequences to the
Shareholders will be unaffected by the absence of Acquiring Fund Share
certificates. See discussion at V. under "Analysis," below.
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The Plan further provides that each Investment Company's obligations
to consummate the Reorganization is subject to the satisfaction, at or prior to
the Closing Date, of certain conditions, including the condition that the
Assets will constitute 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 these purposes, assets used by
Target to pay the expenses it incurs in connection with the Plan and the
Reorganization and to effect all shareholder redemptions and distributions --
except (a) redemptions pursuant to the 1940 Act not made as part of the
Reorganization and (b) 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
-- after the date of the Plan will be included as assets held by Target
immediately before the Reorganization.)
Section 9.1 of Trust's Agreement and Declaration of Trust ("Trust
Declaration") provides that "[i]t is intended that the Trust, or each [series
thereof] if there is more than one [series], be classified for income tax
purposes as an association taxable as a corporation, and the Trustees shall do
all things that they . . . determine are necessary to achieve that objective,
including (if they so determine) electing such classification on Internal
Revenue Form 8832."
REPRESENTATIONS
---------------
Corporation has represented and warranted to us as follows:
(1) Corporation is duly organized, validly existing, and in good
standing under the Maryland General Corporation Law, with all
requisite corporate power and authority to enter into the Plan and
perform its obligations thereunder; it is duly registered with the SEC
as an investment company under the 1940 Act; and Target is a duly
established and designated series thereof;
(2) Target is a "fund" as defined in section 851(g)(2); it has
elected to be a regulated investment company under Subchapter M of the
Code ("RIC") and has qualified for treatment as such for each taxable
year since inception that has ended prior to the Closing Date and will
continue to satisfy the requirements to maintain such qualification
for the period beginning on the first day of its current taxable year
and ending on the Closing Date; it will invest the Assets at all times
through the Effective Time in a manner that ensures compliance with
the foregoing; and it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not apply to
it;
(3) On or before the Closing Date, Corporation will declare to
Target's shareholders a dividend or dividends that, together with all
previous such
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dividends, will have the effect of distributing (a) all of Target's
investment company taxable income (determined without regard to any
deductions for dividends paid) for the taxable year ended December 31,
1999, and for the short taxable year beginning on January 1, 2000, and
ending on the Closing Date and (b) all of Target's net capital gain
recognized in such taxable years (after reduction for any capital loss
carryover);
(4) The Liabilities were incurred by Target in the ordinary
course of its business and are associated with the Assets;
(5) From the date it commenced operations and ending on the
Closing Date, Target will have conducted its "historic business"
(within the meaning of Treas. Reg. Section 1.368-1(d)(2)) in a
substantially unchanged manner. In anticipation of the Reorganization,
Target will not dispose of assets that, in the aggregate, will result
in less than 50% of its "historic business assets" (within the meaning
of Treas. Reg. Section 1.368-1(d)(3)) being transferred to Acquiring
Fund;
(6) Corporation's management is unaware of any plan or intention
of Shareholders to redeem, 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. Section 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;
(7) The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
(8) 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);
(9) 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; and
(10) None of the compensation received by any Shareholder 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 Shareholder; none of the Acquiring Fund Shares received by any
such Shareholder 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
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Shareholder will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
Trust has represented and warranted to us as follows:
(1) Trust is duly organized, validly existing, and in good
standing under the Delaware Act, with all requisite trust power and
authority to enter into the Plan and perform its obligations
thereunder; it is duly registered with the SEC as an investment
company under the 1940 Act; and Acquiring Fund is a duly established
and designated series thereof;
(2) Acquiring Fund is a "fund" as defined in section 851(g)(2);
it has elected to be a RIC and has qualified for treatment as such for
each taxable year since inception that has ended prior to the Closing
Date and will continue to satisfy the requirements to maintain such
qualification for its current taxable year; and it has no earnings and
profits accumulated in any taxable year in which the provisions of
Subchapter M did not apply to it;
(3) No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities, including for this
purpose all Liabilities to which the Assets are subject) will be
issued in exchange for the Assets in connection with the
Reorganization;
(4) Trust has no plan or intention to issue additional Acquiring
Fund Shares following the Reorganization except for shares issued in
the ordinary course of Acquiring Fund's business as a series of an
open-end investment company; nor does Trust have any plan or intention
to redeem or otherwise reacquire any Acquiring Fund Shares issued
pursuant to the Reorganization, except to the extent Acquiring Fund is
required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;
(5) Following the Reorganization, Acquiring Fund will (a) continue
Target's "historic business" (within the meaning of Treas. Reg. Section
1.368-1(d)(2)) and (b) use a significant portion of Target's "historic
business assets" (within the meaning of Treas. Reg. Section
1.368-1(d)(3)) in a business [see Plan section 4.14(d)];
(6) There is no plan or intention for Acquiring Fund to be
dissolved or merged into another business trust or a corporation or
any "fund" thereof (within the meaning of section 851(g)(2)) following
the Reorganization;
(7) 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.
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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
(8) Acquiring Fund does not directly or indirectly own, nor at the
Effective Time will it directly or indirectly own, nor has it at any
time during the five-year period ending on the Closing Date directly
or indirectly owned, any shares of Target.
Each Investment Company has represented and warranted to us as
follows:
(1) The fair market value of the Acquiring Fund Shares received
by each Shareholder in the Reorganization will be approximately equal
to the fair market value of its Target Shares constructively
surrendered in exchange therefor;
(2) There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
(3) The fair market value of the Assets on a going concern basis
will equal or exceed the sum of the Liabilities to be assumed by
Acquiring Fund plus the amount of the Liabilities, if any, to which
the Assets are subject;
(4) Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" (within the meaning of section
304(c)) of Acquiring Fund; and
(5) 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 Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares pro
rata to the Shareholders constructively in exchange for their Target
Shares, will qualify as a reorganization
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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
and Acquiring Fund's assumption of the Liabilities or on the
subsequent distribution of those shares to the Shareholders 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 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 Target's
holding period therefor;
(5) A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization; and
(6) A Shareholder's aggregate basis for the Acquiring Fund Shares
to be received by it in the Reorganization will be the same as the
aggregate basis for its Target Shares to be constructively surrendered
in exchange for those Acquiring Fund Shares, and its holding period
for those Acquiring Fund Shares will include its holding period for
those Target Shares, provided the Shareholder 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.
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ANALYSIS
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I. The Reorganization Will Qualify as a C Reorganization, and Each Fund
Will Be a Party to a Reorganization.
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A. Each Fund Is a Separate 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 (or associations taxable as
corporations). Trust, however, is a business trust, not a corporation, and each
Fund is a separate series of an Investment Company.
Regulation section 301.7701-4(b) provides that certain arrangements
known as trusts (because legal title is conveyed to trustees for the benefit of
beneficiaries) will not be classified as trusts for purposes of the Code
because they are not simply arrangements to protect or conserve the property
for the beneficiaries. That section states that these "business or commercial
trusts" generally are created by the beneficiaries simply as devices to carry
on profit-making businesses that normally would have been carried on through
business organizations classified as corporations or partnerships under the
Code and concludes that the fact that any organization is technically cast in
the trust form will not change its real character if it "is more properly
classified as a business entity under [Treas. Reg.] Section 301.7701-2."(5)
Furthermore, pursuant to Treas. Reg. Section 301.7701-4(c), "[a]n `investment'
trust will not be classified as a trust if there is a power under the trust
agreement to vary the investment of the certificate holders. See Commissioner v.
North American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied,
314 U.S. 701 (1942)."
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(5) On December 10, 1996, the Service adopted Regulations for classifying
business organizations (Treas. Reg. Sections 301.7701-1 through -3 and parts of
-4, the so-called "check-the-box" Regulations) to replace the provisions in the
then-existing Regulations that "have become increasingly formalistic. [The
check-the-box Regulations replace] those rules with a much simpler approach
that generally is elective." T.D. 8697, 1997-1 C.B. 215. Regulation section
301.7701-2(a) provides that "a business entity is any entity recognized for
federal tax purposes . . . that is not properly classified as a trust under
[Treas. Reg.] Sections 301.7701-4 or otherwise subject to special treatment
under the . . . Code." Trust is not subject to any such special treatment.
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Based on these criteria, Trust does not qualify as a trust for federal
tax purposes.(6) Trust is not simply an arrangement to protect or conserve
property for the beneficiaries but is designed to carry on a profit-making
business. Furthermore, while Trust is an "investment trust," there is a power
under its declaration of trust to vary its shareholders' investment therein.
Trust does not have a fixed pool of assets -- each series of Trust (including
Acquiring Fund) is a managed portfolio of securities, and its investment
adviser has the authority to buy and sell securities for it. Accordingly, we
believe that Trust should not be classified as a trust, and instead should be
classified as a business entity, for federal tax purposes.
Regulation section 301.7701-2(a) provides that "[a] business entity
with two or more members is classified for federal tax purposes as either a
corporation or a partnership." The term "corporation" is defined for those
purposes (in Treas. Reg. Sections 301.7701-2(b)) to include corporations
denominated as such under the federal or state statute pursuant to which they
were organized and certain other entities. Any business entity that is not
classified as a corporation under that section of the Regulations (an "eligible
entity") and has at least two members can elect to be classified as either an
association (and thus a corporation) or a partnership. Treas. Reg. Section
301.7701-3(a).
Except for eligible entities in existence before January 1, 1997,(7)
the effective date of the check-the-box Regulations, "unless the entity elects
otherwise, a domestic eligible
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(6) Because Acquiring Fund is considered separate from each other series of
Trust for federal tax purposes (see the discussion in the last paragraph of
I.A. below), the analysis in the accompanying text applies equally to Acquiring
Fund.
(7) As noted above in footnote 3, GT Fund converted to Acquiring Fund pursuant
to the Prior F Reorganization. We then opined that, for purposes of section
381, Acquiring Fund would be treated just as GT Fund would have been -- and
that, among other things, GT Fund's tax attributes enumerated in section 381(c)
would be taken into account by Acquiring Fund -- as if there had been no
reorganization. Although classification for federal tax purposes is not an
attribute so enumerated, it might be argued that Acquiring Fund nevertheless
must assume GT Fund's characteristics when determining its federal tax
classification. If that were required, however, the conclusion expressed herein
would not change. This is so because an eligible entity in existence before
January 1, 1997, "will have the same classification that the entity claimed
under [the prior Regulations]," unless it elects otherwise. Treas. Reg. Section
301.7701-3(b)(3)(i). Based on the reasoning stated in the second preceding
paragraph -- and the fact that, under the law that existed before the
check-the-box Regulations, the word "association" had been held to include a
Massachusetts business trust (see Hecht v. Malley, 265 U.S. 144 (1924)), which
for these purposes is very similar to a Delaware business trust -- GT Fund
(continued on next page)
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entity is a partnership if it has two or more members." Treas. Reg. Section
301.7701-3(b)(1)(i). Section 9.1 of the Trust Declaration states the intention
that "Trust, or each [series thereof] if there is more than one [series], be
classified for income tax purposes as an association taxable as a corporation"
and directs its trustees to do everything they deem necessary to achieve that
objective, including electing such classification on Internal Revenue Form 8832
(Entity Classification Election). Accordingly, assuming that Trust has
implemented (and continues to implement) that intention, including filing such
form if necessary,(8) we believe that Trust will be classified as a corporation
for federal tax purposes.
The Investment Companies as such, however, are not participating in
the Reorganization, but rather two separate series thereof (the Funds) are the
participants. Ordinarily, a transaction involving segregated pools of assets
such as the Funds could not qualify as a reorganization, because the pools
would not be separate taxable entities that constitute corporations. Under
section 851(g), however, each Fund is treated as a separate corporation for all
purposes of the Code save the definitional requirement of section 851(a) (which
is satisfied by the respective Investment Companies). Accordingly, we believe
that each Fund is a separate corporation, and their shares are treated as
shares of corporate stock, for purposes of section 368(a)(1)(C).
B. Transfer of "Substantially All" of Target's Properties.
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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.
---------------------
"claimed" classification under the prior Regulations as an association taxable
as a corporation, and it never elected otherwise.
(8) Absent filing such form, Trust could nevertheless achieve the intended
result because if it were classified initially as a partnership rather than as
a corporation, then it would be a "publicly traded partnership" under section
7704, which is "treated as a corporation" for federal tax purposes and thus
would be classified as a corporation under the check-the-box Regulations. See
Treas. Reg. Section 301.7701-2(b)(7), which provides that for those purposes,
the term "corporation" includes "[a] business entity that is taxable as a
corporation under a provision of the . . . Code other than section 7701(a)(3) .
. . ."
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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.
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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). Because
Acquiring Fund will exchange only Acquiring Fund Shares, and no money or other
property, for the Assets, we believe that the Reorganization will satisfy the
solely-for-voting-stock requirement to qualify as a C Reorganization.
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 in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares it receives to the
Shareholders 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. Section 1.368-1(d)
("continuity of business enterprise") and (2) a continuity of interest as
described in Treas. Reg. Section 1.368-1(e) ("continuity of interest").
1. Continuity of Business Enterprise.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. Section 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
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"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 an investment company (as defined in section
368(a)(2)(F)(iii)) that invested exclusively in municipal bonds. P acquired the
assets of T, another such investment company, 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 the capitalization focus of their
investments. Moreover, after the Reorganization Acquiring Fund, which has a
broader investment mandate than Target has, will continue Target's "historic
business" (within the meaning of Treas. Reg. ss. 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. ss. 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 of the Regulations 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
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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 shareholders is
equal in value to at least 50% of the value of all the formerly outstanding
shares of the transferor corporation.(9) Although shares of both the target and
acquiring corporations held by the target corporation's shareholders that are
disposed of before or after the transaction will be considered in determining
satisfaction of the 50% standard, the Service has recently issued private
letter rulings that excepted from that determination "shares which are required
to be redeemed at the demand of shareholders by . . . Target or Acquiring in
the ordinary course of their businesses as open-end investment companies (or
series thereof) pursuant to Section 22(e) of the 1940 Act." Priv. Ltr. Ruls.
9823018 (Mar. 5, 1998) and 9822053 (Mar. 3, 1998); cf. Priv. Ltr. Rul.
199941046 (July 16, 1999) (redemption of a target RIC shareholder's shares,
amounting to 42% of the RIC's value, and other "shares redeemed in the ordinary
course of Target's business as an open-end investment company pursuant to
section 22(e) . . ." excluded from determination of whether the target or a
related person acquired its shares with consideration other than target or
acquiring fund shares).(10)
--------------------
(9) 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
shareholders 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 shareholders acquired only 45%
of the transferee's stock, while the remaining 55% of that stock was issued to
new shareholders in a public underwriting immediately after the transfer).
(10) 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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No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. 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 shareholders to dispose of more than 50%
of an acquiring corporation's shares could be problematic. Shareholders 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 Shareholders to redeem, 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. Section
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 such
meaning) to Acquiring Fund. Although Acquiring Fund's shares will be offered
for sale to the public on an ongoing basis after the Reorganization, sales of
those shares will arise out of a public offering separate and unrelated to the
Reorganization and not as a result thereof. See Reef Corp. v. Commissioner, 368
F.2d at 134; Rev. Rul. 61-156, supra. Similarly, although Shareholders may
redeem Acquiring Fund Shares pursuant to their rights as shareholders of a
series of an open-end investment company (see Priv. Ltr. Ruls. 9823018 and
9822053, supra, and 8816064 (Jan. 28, 1988)), those redemptions will result
from the exercise of those rights in the course of Acquiring Fund's business as
an open-end series and not from the C Reorganization as such.
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. Sections 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
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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.
G. Satisfaction of Section 368(a)(2)(F).
------------------------------------
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 shareholders. 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.
---------------------------------------------
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. Section 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."
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II. Target Will Recognize No Gain or Loss.
-------------------------------------
Under sections 361(a) and (c), no gain or loss shall be recognized to
a corporation that is a party to a reorganization if, pursuant to the plan of
reorganization, (1) it exchanges property solely for stock or securities in
another corporate party to the reorganization and (2) distributes that stock or
securities to its shareholders. (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 Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities and then will be terminated pursuant to the Plan, distributing
those shares to the Shareholders in constructive exchange for their Target
Shares. 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.(11)
----------------------
(11) Notwithstanding anything herein to the contrary, we express no opinion as
to the effect of the Reorganization on either Fund or any Shareholder 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.
--------------------------------------------------------------------
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 Shareholder Will Recognize No Gain or Loss.
--------------------------------------------
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 Shareholders
will receive solely Acquiring Fund Shares for their Target Shares. 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 section 354(a)(1) requires that
the transferor corporation's shareholders exchange their shares therein for
shares of the acquiring corporation, the courts and the Service have recognized
that the Code does not require taxpayers to perform useless gestures to come
within the statutory provisions. See, e.g., Eastern Color Printing Co., 63 T.C.
27, 36 (1974); Davant v. Commissioner, 366 F.2d 874 (5th Cir. 1966). Therefore,
although Shareholders will not actually surrender Target Share certificates in
exchange for Acquiring Fund Shares,
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their Target Shares will be canceled on the issuance of Acquiring Fund Shares
to them (all of which will be reflected on Trust's books) and will be treated
as having been exchanged therefor. See Rev. Rul. 81-3, 1981-1 C.B. 125; Rev.
Rul. 79-257, 1979-2 C.B. 136. Accordingly, we believe that a Shareholder will
recognize no gain or loss on the constructive exchange of all its Target Shares
solely for Acquiring Fund Shares pursuant to the Reorganization.
VI. A Shareholder'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 by the shareholder ( a "substituted basis"). As noted above, it is
our opinion that the Reorganization will qualify as a C Reorganization and,
under section 354, a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
in the Reorganization. No property will be distributed to the Shareholders
other than Acquiring Fund Shares, and no money will be distributed to them
pursuant to the Reorganization. Accordingly, we believe that a Shareholder's
basis for the Acquiring Fund Shares it receives in the Reorganization will be
the same as the basis for its Target Shares to be constructively surrendered in
exchange for those Acquiring Fund Shares.
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.
Section 1.1223-1(a). As noted above, it is our opinion that a Shareholder will
have a substituted basis for the Acquiring Fund Shares it receives in the
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Reorganization. Accordingly, we believe that a Shareholder's holding period for
the Acquiring Fund Shares it receives in the Reorganization will include its
holding period for the Target Shares constructively surrendered in exchange
therefor, provided the Shareholder held them as capital assets at the Effective
Time.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ THEODORE L. PRESS
------------------------------
Theodore L. Press
