KIRKPATRICK & LOCKHART LLP 1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
www.kl.com
THEODORE L. PRESS
Tel: 202.778.9025
Fax: 202.778.9100
[email protected]
March 14, 2000
Executive Investors Trust
First Investors Fund For Income, Inc.
95 Wall Street
New York, New York 10005
Re: Reorganization to Combine a Series of a Massachusetts
-----------------------------------------------------
Business Trust and a Maryland Corporation
-----------------------------------------
Ladies and Gentleman:
Executive Investors Trust, a Massachusetts business trust ("Trust"), on
behalf of High Yield Fund, a segregated portfolio of assets ("series") thereof
("Target"), and First Investors Fund For Income, Inc., a Maryland corporation
("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 and Termination between them dated as of
January 7, 2000 ("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 Class A shares of common stock of
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 determined as
of the Effective Time (as herein defined) ("Shareholders")
constructively in exchange for the Shareholders' shares of beneficial
interest in 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),2 and
-----------------------
1 Target and Acquiring Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Trust and Acquiring Fund are
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies."
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").
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 2
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
Prospectus/Proxy Statement dated January 14, 2000, that was furnished in
connection with the solicitation of proxies by Trust's board of trustees for use
at a special meeting of Target's shareholders held on February 25, 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
paragraph 6.6 thereof) (collectively, "Representations").
FACTS
-----
Trust is a Massachusetts business trust and 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"); and
Target is a series thereof. Before January 1, 1997, Trust and Target each
claimed to be classified for federal tax purposes as an association taxable as a
corporation, and neither will elect not to be so classified. Acquiring Fund is a
Maryland corporation and also is registered with the SEC as an open-end
management investment company under the 1940 Act.
Target has only a single class of shares. Acquiring Fund's shares are
divided into two classes, designated Class A shares (which are similar to Target
Shares) and Class B shares; only Acquiring Fund Shares (I.E., Class A shares)
are involved in the Reorganization.
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 Investment
Companies agree ("Effective Time").
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 3
The Funds' investment objectives are identical, and their investment
policies are substantially similar. For the reasons, and after consideration of
the factors, described in the Proxy Statement, each Investment Company's board
of trustees/directors 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 their respective 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 assets, including 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 Effective Time (collectively "Assets"), in exchange
solely for the following:
(a) the number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares determined by dividing the net
value of Target (computed as set forth in paragraph 2.1 of the Plan)
by the net asset value ("NAV") 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"),
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 4
(2) The constructive distribution of such Acquiring Fund
Shares to the Shareholders,3 and
(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 (2) will be accomplished by Acquiring Fund's
transfer agent's opening accounts on Acquiring Fund's share transfer books in
the Shareholders' names and transferring such Acquiring Fund Shares thereto.
Each Shareholder's account will be credited with the respective PRO RATA number
of full and fractional (rounded to the third decimal place) Acquiring Fund
Shares due that Shareholder. All outstanding Target Shares, including those
represented by certificates, simultaneously will be canceled on Target's share
transfer books.
REPRESENTATIONS
---------------
Trust has represented and warranted to us as follows:
(1) Trust is a trust operating under a written declaration of trust,
the beneficial interest in which is divided into transferable shares, that
is duly organized and validly existing under the laws of the Commonwealth
of Massachusetts; a copy of its Amended and Restated Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts; it is
duly registered as an open-end management investment company under the
1940 Act, and such registration will be in full force and effect at the
Effective Time; and Target is a duly established and designated series
thereof;
(2) Target is a "fund" as defined in section 851(g)(2); it 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
-----------------------
3 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.
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 5
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;
(3) The Liabilities were incurred by Target in the ordinary course
of its business and are associated with the Assets;
(4) 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
(5) 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 duly organized, validly
existing, and in good standing under the laws of the State of Maryland; a
copy of its Articles of Incorporation is on file with the Secretary of the
State of Maryland; and it is duly registered as an open-end management
investment company under the 1940 Act, and such registration will be in
full force and effect at the Effective Time;
(2) 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 did not apply to it;
(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 has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as an open-end investment
company; nor does Acquiring Fund have any plan or intention to redeem or
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 6
otherwise reacquire any Acquiring Fund Shares issued to the Shareholders
pursuant to the Reorganization, except to the extent it 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 (a) will continue
Target's "historic business" (within the meaning of Treas. Reg. Section
1.368-1(d)(2)), (b) will 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, (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 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;
(6) 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;
(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. 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 past five years 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 will be approximately equal to the fair market value of
that Shareholder's Target Shares constructively surrendered in exchange
therefor;
(2) Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) 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 (ii) any portion of the Acquiring Fund Shares to be received by them in
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 7
the Reorganization to any person related (within such meaning) to
Acquiring Fund, (b) does not anticipate dispositions of those Acquiring
Fund Shares at the time of or soon after the Reorganization to exceed the
usual rate and frequency of dispositions of shares of Target as a series
of an open-end investment company, (c) expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be DE MINIMIS, and (d) does not
anticipate that there will be extraordinary redemptions of Acquiring Fund
Shares immediately following the Reorganization;
(3) The Shareholders 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;
(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 purposes of this representation, any amounts used by Target to pay its
Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions 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) will be included as assets thereof held immediately before
the Reorganization;
(8) 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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 8
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such 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;
(9) Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" (within the meaning of section 304(c))
of Acquiring Fund; and
(10) 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 time of the Closing 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 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;
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 9
(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.
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 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
Target is a separate series of Trust.
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 of the Regulations 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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 10
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."4
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)."
Based on these criteria, Trust does not qualify as a trust for federal tax
purposes.5 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 Target) 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. Section 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
----------------------
4 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.]section 301.7701-4 or otherwise subject to special treatment under
the . . . Code." Trust is not subject to any such special treatment.
5 Because Target 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 Target.
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 11
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).
An eligible entity in existence before January 1, 1997, the effective date
of the check-the-box Regulations, "will have the same classification that the
entity claimed under [the prior Regulations]," unless it elects otherwise.
Treas. Reg. sections 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)) -- Trust "claimed" classification under the prior Regulations as an
association taxable as a corporation. Moreover, Trust will not elect not to be
so classified. Accordingly, we believe that Trust will continue to be classified
as an association (and thus a corporation) for federal tax purposes.
Trust as such, however, is not participating in the Reorganization, but
rather a separate series thereof (Target) is the participant. Ordinarily, a
transaction involving a segregated pool of assets such as Target could not
qualify as a reorganization, because the pool would not be a separate taxable
entity that constitutes a corporation. Under section 851(g), however, Target is
treated as a separate corporation for all purposes of the Code save the
definitional requirement of section 851(a) (which is satisfied by Trust).
Accordingly, we believe that Target is a separate corporation, and its 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.
------------------------------------------------------
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)),
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 12
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 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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 13
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 are identical, and their investment
policies are substantially similar. Moreover, after the Reorganization Acquiring
Fund will continue Target's "historic business" (within the meaning of Treas.
Reg. Section 1.368-1(d)(2)). Accordingly, there will be business continuity.
Acquiring Fund not only will continue Target's historic business, but it
also (a) will use in that business a significant portion of Target's "historic
business assets" (within the meaning of Treas. Reg. Section 1.368-1(d)(3)), (b)
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
dispositions necessary to maintain its status as a RIC, and (c) 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. 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 considered in determining whether, in substance, a
proprietary interest in the target corporation is preserved."
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 14
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.6 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).7
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
--------------------
6 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).
7 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).
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 15
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. Moreover, each Investment Company (a) does not
anticipate dispositions of those Acquiring Fund Shares at the time of or soon
after the Reorganization to exceed the usual rate and frequency of dispositions
of shares of Target as a series of an open-end investment company, (b) expects
that the percentage of Shareholder interests, if any, that will be disposed of
as a result of or at the time of the Reorganization will be DE MINIMIS, and (c)
does not anticipate that there will be extraordinary redemptions of Acquiring
Fund Shares immediately following the Reorganization.
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 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 such a company 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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 16
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.
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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 17
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.
-------------------------------------
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.8
---------------------
8 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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 18
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 property was held by the transferor. 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
---------------------
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.
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 19
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, their Target Shares will be canceled on the
issuance of Acquiring Fund Shares to them (all of which will be reflected on
Acquiring Fund's share transfer 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
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
<PAGE>
KIRKPATRICK & LOCKHART LLP
Executive Investors Trust
First Investors Fund For Income, Inc.
March 14, 2000
Page 20
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
