As filed with the Securities and Exchange Commission on September 25, 2000
Registration No. 333-39632
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-effective Amendment No.____ Post-Effective Amendment No. 1
(Check appropriate box or boxes)
Federated Equity Funds
(Exact name of registrant as specified in charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-341-7400
John W. McGonigle, Esquire
Federated Investors Towers
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Robert J. Zutz, Esquire
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
(Names and Addresses of Agents for Service of Process)
For the new shares of Federated Aggressive Growth Fund, Federated Capital
Appreciation Fund, Federated Growth Strategies Fund, and Federated Large Cap
Growth Fund (Class A), the date of the public offering of those shares was
September 15, 2000. The public offering of shares of Registrant's series is
on-going. The title of securities being registered is shares of beneficial
interest.
It is proposed that this filing will become effective immediately upon filing
pursuant to Rule 485(b) under the Securities Act of 1933.
No filing fee is due because of Registrant's reliance on Section 24(f) of the
Investment Company Act of 1940, as amended.
<PAGE>
FEDERATED EQUITY FUNDS
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT ON FORM N-14
This Registration Statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
o Part C - Other Information
Signature Page
Exhibits
The sole purpose of this filing is to file as an exhibit the opinion
and consent of counsel supporting the tax matters and consequences to
shareholders of the reorganization described in Registrant's Registration
Statement, filed on Form N-14 on June 19, 2000, as required by Item 16(12) of
Form N-14. Parts A and B to this Registration Statement are incorporated by
reference to the Combined Prospectus and Proxy Statement and Statement of
Additional Information, each dated July 20, 2000, filed with the Securities and
Exchange Commission under Rule 497 on July 31, 2000, File No. 2-91090, EDGAR
Accession No. 0000898432-00-000536.
<PAGE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
FEDERATED EQUITY FUNDS
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION; (1)
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ITEM 16. EXHIBITS
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(1) Conformed copy of Amended and Restated Declaration of Trust dated
August 15, 1995; (2)
(a) Conformed copy of Amendment No. 8 of the Amended and Restated
Declaration of Trust dated August 19, 1999; (3)
(2) Copy of Amended and Restated By-Laws, effective August 16, 1995; (2)
(d) Copy of Amendment No. 5 to By-Laws, effective
February 23, 1998; (4)
(e) Copy of Amendment No. 6 to By-Laws, effective
February 27, 1998; (4)
(f) Copy of Amendment No. 7 to By-Laws, effective
May 12, 1998; (4)
(3) Voting Trust Agreements - none.
(4) A copy of the Agreement and Plan or Reorganization is included as
Exhibit A to the Combined Proxy Statement and Prospectus of this
Registration Statement. (15)
(5) Copy of Specimen Certificate for Shares of Beneficial Interest of the
Registrant for:
(a) Federated Small Cap Strategies Fund; (5)
(b) Federated Growth Strategies Fund; (6)
(c) Federated Capital Appreciation Fund; (7)
(d) Federated Aggressive Growth Fund; (8)
(6) (a) Conformed copy of Investment Advisory Contract on behalf of the
Registrant; (10)
(b) Conformed copy of Investment Advisory Contract on behalf of the
Registrant, which includes Exhibits A and B for Federated Small
Cap Strategies Fund and Federated Capital Appreciation Fund,
respectively; (10)
(c) Conformed copy of Exhibit C to the Investment Advisory Contract
for Federated Aggressive Growth Fund; (11)
(d) Conformed copies of Exhibits D and E for Federated Large Cap
Growth Fund and Federated Communications Technology Fund,
respectively; (3)
(7) (a) Conformed copy of Distributor's Contract of the Registrant; (10)
(b) Conformed copy of Exhibit A to the Distributor's Contract for
Federated Small Cap Strategies Fund, Class A Shares; (10)
<PAGE>
(c) Conformed copy of Exhibit B to the Distributor's Contract for
Federated Small Cap Strategies Fund, Class B Shares; (10)
(d) Conformed copy of Exhibit C to the Distributor's Contract for
Federated Small Cap Strategies Fund, Class C Shares; (10)
(e) Conformed copy of Exhibit D to the Distributor's Contract for
Federated Growth Strategies Fund, Class A Shares; (10)
(f) Conformed copy of Exhibit E to the Distributor's Contract for
Federated Growth Strategies Fund, Class B Shares; (10)
(g) Conformed copy of Exhibit F to the Distributor's Contract for
Federated Growth Strategies Fund, Class C Shares; (10)
(h) Conformed copy of Exhibit G to the Distributor's Contract for
Federated Capital Appreciation Fund, Class A Shares; (10)
(i) Conformed copy of Exhibit H to the Distributor's Contract for
Federated Capital Appreciation Fund, Class B Shares; (10)
(j) Conformed copy of Exhibit J to the Distributor's Contract for
Federated Aggressive Growth Fund, Class A Shares; (11)
(k) Conformed copy of Exhibit K to the Distributor's Contract for
Federated Aggressive Growth Fund, Class B Shares;(11)
(l) Conformed copy of Exhibit L to the Distributor's Contract for
Federated Aggressive Growth Fund, Class C Shares; (11)
(m) Conformed copy of Exhibits M and N to the Distributor's Contract
for Federated Large Cap Growth Fund (Class A and C Shares);(3)
(8) Bonus, Profit-Sharing or Pension Plans - none.
(9) (a) Conformed copy of the Custodian Agreement of the Registrant; (9)
(b) Conformed copy of Custodian Fee Schedule; (13)
(c) Conformed copy of Amended and Restated Shareholder Services
Agreement; (13)
(d) Conformed copy of Amended and Restated Agreement for Fund
Accounting Services, Administrative Services, Shareholder
Transfer Agency Services and Custody Services Procurement; (14)
(e) The Registrant hereby incorporates by reference the conformed
copy of the Shareholder Services Sub-Contract between Fidelity
and Federated Shareholder Services from Item 24(b)(9)(iii) of
the Federated GNMA Trust Registration Statement on Form N-1A,
filed with the Commission on March 25, 1996 (File Nos. 2-75670
and 811-3375).
(10) Conformed Copy of Distribution Plan of the Registrant; (10)
(a) Conformed copy of Exhibit A to the Distribution Plan for
Federated Small Cap Strategies Fund (Class A Shares); (10)
(b) Conformed copy of Exhibit B to the Distribution Plan for
Federated Small Cap Strategies Fund (Class B Shares); (10)
(c) Conformed copy of Exhibit C to the Distribution Plan for
Federated Small Cap Strategies Fund (Class C Shares); (10)
(d) Conformed copy of Exhibit D to the Distribution Plan for
Federated Growth Strategies Fund (Class B Shares); (10)
(e) Conformed copy of Exhibit E to the Distribution Plan for
Federated Growth Strategies Fund (Class C Shares); (10)
<PAGE>
(f) Conformed copy of Exhibit F to the Distribution Plan for
Federated Capital Appreciation Fund (Class A Shares); (10)
(g) Conformed copy of Exhibit I to the Distribution Plan for
Federated Aggressive Growth Fund (Class A Shares); (12)
(h) Conformed copy of Exhibit J to the Distribution Plan for
Federated Aggressive Growth Fund (Class B Shares); (11)
(i) Conformed copy of Exhibit K to the Distribution Plan for
Federated Aggressive Growth Fund (Class C Shares); (11)
(k) Copy of Schedule A to the Distribution Plan; (3)
(l) Conformed copies of Exhibits L, M, N & O to the Distribution
Plan; (3)
(11) Conformed copy of the Opinion and Consent of counsel regarding legality
of shares being registered (15)
(12) Conformed copy of the Opinion and Consent of Kirkpatrick & Lockhart LLP
regarding certain tax matters (filed herewith)
(13) None.
(14) Conformed copies of Consents of Independent Public Accountants (16)
(15) Financial Statements omitted from Part B - none.
(16) Conformed copy of Powers of Attorney; (3)
(a) Conformed copy of Power of Attorney of Chief Investment Officer
of the Registrant; (3)
(b) Conformed copy of Power of Attorney of Trustee John F.
Cunningham; (3)
(c) Conformed copy of Power of Attorney of Trustee Charles F.
Mansfield; (3)
(d) Conformed copy of Power of Attorney of Trustee John S.
Walsh; (3)
(e) Conformed copy of Limited Power of Attorney; (3)
(17) Form of Proxy (15)
--------------------------------------------------------------------------------
(1) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed July 9, 1984. (File Nos. 2-91090 and
811-4017).
(2) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 32 on Form N-1A filed September 3, 1996. (File Nos. 2-91090
and 811-4017)
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 44 on Form N-1A filed December 27, 1999. (File Nos. 2-91090
and 811-4017)
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 41 filed November 2, 1998. (File Nos. 2-91090 and 811-4017)
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 21 on Form N-1A filed June 30, 1995. (File Nos. 2-91090 and
811-4017)
(6) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22 on Form N-1A filed July 17, 1995. (File Nos. 2-91090 and
811-4017)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 25 on Form N-1A filed August 31, 1995. (File Nos. 2-91090
and 811-4017)
(8) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 34 on Form N-1A file December 30, 1996. (File Nos. 2-91090
and 811-4017)
(9) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20 on Form N-1A filed December 29, 1994; (File Nos. 2-91090
and 811-4017)
(10) Response is incorporated by reference to Registrant's Post-Effective
<PAGE>
Amendment No. 26 on Form N-1A filed September 12, 1995. (File
Nos. 2-91090 and 811-4017)
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 29 on Form N-1A filed May 30, 1997. (File Nos. 2-91090 and
811-4017)
(12) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 35 of Form N-1A filed December 30, 1997 (File Nos. 2-91090
and 811-4017)
(13) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 31 on Form N-1A filed October 30, 1997. (File Nos. 2-91090
and 811-4017)
(14) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 40 on Form N-1A filed October 9, 1998. (File Nos. 2-91090
and 811-4017)
(15) Response is incorporated by reference to Registrant's Registration
Statement on Form N-14, filed June 19, 2000. (File No. 333-39632).
(16) Previously filed in Registrant's Registration Statement on Form N-14,
filed June 19, 2000. (File No. 333-39632).
ITEM 17. UNDERTAKINGS
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(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is part
of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, as amended, the reoffering prospectus will contain the information
called for by the applicable registration form for the reofferings by
persons who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that in determining liability under the Securities Act of
1933, as amended, each post-effective amendment shall be deemed to be a
new Registration Statement for the securities offered therein; and the
offering of the securities at that time shall be deemed to be initial
BONA FIDE offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, FEDERATED EQUITY FUNDS,
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment No. 1 to its Registration Statement on Form N-14
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 25th day of September 2000.
FEDERATED EQUITY FUNDS
BY: /s/ Amanda J. Reed
Amanda J. Reed
Assistant Secretary
Attorney in Fact for John F. Donahue
September 25, 2000
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
---- ----- ----
By: /s/ Amanda J. Reed Attorney In Fact September 25, 2000
Amanda J. Reed For the Persons
ASSISTANT SECRETARY Listed Below
John F. Donahue* Chairman and Trustee
(Chief Executive Officer)
Glen R. Johnson* President
J. Christopher Donahue* Executive Vice President
and Trustee^
Richard J. Thomas* Treasurer
(Principal Financial and
Accounting Officer)
J. Thomas Madden* Chief Investment Officer
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
<PAGE>
Nicholas P. Constantakis* Trustee
John F. Cunningham* Trustee
Lawrence D. Ellis, M.D.* Trustee
Peter E. Madden* Trustee
Charles F. Mansfield, Jr.* Trustee
John E. Murray, Jr., J.D., S.J.D.* Trustee
Marjorie P. Smuts* Trustee
John S. Walsh* Trustee
* By Power of Attorney
<PAGE>
Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, N.W.
Second Floor
Washington, D.C. 20036-1800
202/778-9000
www.kl.com
Theodore L. Press
Tel: 202.778.9025
Fax: 202.778.9100
[email protected]
September 15, 2000
IAI Investment Funds II, Inc.
IAI Investment Funds IV, Inc.
IAI Investment Funds VI, Inc.
IAI Investment Funds VIII, Inc.
601 Second Avenue South
Suite 3600
Minneapolis, Minnesota 55402
Federated Equity Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237
Re: Reorganizations to Combine Minnesota Corporations or
----------------------------------------------------
Series thereof and Series of a Massachusetts Business Trust
-----------------------------------------------------------
Ladies and Gentleman:
IAI Investment Funds II, Inc., IAI Investment Funds IV, Inc. ("IAI IV"),
IAI Investment Funds VI, Inc. ("IAI VI"), and IAI Investment Funds VIII, Inc.,
each a Minnesota corporation (except for IAI VI, each operating as a single
series) (each, a "Corporation"), in the case of IAI VI on behalf of the
segregated portfolios of assets ("series") thereof listed on Schedule A attached
hereto (each Corporation other than IAI VI and each such series of IAI VI, a
"Target"), and Federated Equity Funds, a Massachusetts business trust ("Trust"),
on behalf of each series thereof listed on Schedule A (each, an "Acquiring
Fund"), have requested our opinion as to certain federal income tax consequences
of the proposed acquisition of each Target by the Acquiring Fund listed opposite
its name on Schedule A pursuant to an Agreement and Plan of Reorganization and
Termination between them dated as of July 20, 2000 ("Plan").1 Specifically, each
Investment Company has requested our opinion, with respect to each
Reorganization --
------------------------
1 Each Target and Acquiring Fund is sometimes referred to herein individually as
a "Fund" and collectively as the "Funds," and each Corporation and Trust is
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies." The series of transactions in which
each pair of Funds is participating is referred to herein as a "Reorganization."
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 2
(1) that Acquiring Fund's acquisition of Target's assets in
exchange solely for voting Class A shares of beneficial interest
in Acquiring Fund ("Acquiring Fund Shares"), 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 their shares of
common stock of Target ("Target Shares"), will qualify as a
reorganization within the meaning 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
Prospectus/Proxy Statement dated July 20, 2000, that was furnished in
connection with the solicitation of proxies by each Corporation's board of
directors for use at a special meeting of its shareholders held on September 8,
2000 3 ("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) or in letters from the Investment Companies dated
September 14, 2000 (collectively, "Representations").4
------------------------
2 All "section" references are to the Internal Revenue Code of 1986, as amended
("Code"), unless otherwise noted, and all "Treas. Reg. Sec." references are to
the regulations under the Code ("Regulations").
3 The meetings for shareholders of IAI IV and two of the Targets that are series
of IAI VI were adjourned until September 12, 2000.
4 For convenience, the balance of this letter refers only to a single
Reorganization, one Target, and one Acquiring Fund (except as noted in notes 5
and 9 and except that the parts hereof enclosed in brackets ([]), other than in
quoted text, apply only to IAI VI and its series and the parts hereof enclosed
in the symbols { } apply only to IAI IV, the IAI Emerging Growth Fund and IAI
Midcap Growth Fund series of IAI VI, and IAI Investment Funds VIII, Inc.), but
the opinions and analysis herein apply separately to each Reorganization.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 3
FACTS
-----
Corporation is a Minnesota corporation[, and Target is a series thereof].
Trust is a Massachusetts business trust that, before January 1, 1997, "claimed"
classification as an association taxable as a corporation, and it never elected
otherwise; and Acquiring Fund is a series thereof. Each Investment Company is
registered with the Securities and Exchange Commission as an open-end management
investment company under the Investment Company Act of 1940, as amended ("1940
Act").
Target has a single class of shares. Acquiring Fund's shares are divided
into multiple classes, including Class A shares. Only Acquiring Fund Shares
(I.E., Class A shares), which are substantially similar to the Target 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").
The Funds' investment objectives, policies, and restrictions (which are
described in the Proxy Statement) are similar.5 For the reasons, and after
consideration of the factors, described in the Proxy Statement, Corporation's
board of directors and Trust's board of 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 Investment Advisers,
Inc. ("IAI") or Federated Investment Management Company, the investment adviser
of Target and Acquiring Fund, respectively -- 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, and is adopted as, 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
------------------------
5 In some instances, Acquiring Fund's investment policies are significantly
broader than Target's.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 4
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 number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares determined by dividing the
value of the Assets by the net asset value ("NAV") of an
Acquiring Fund Share (both computed as set forth in paragraph 2.1
of the Plan),
(2) The constructive distribution of such Acquiring Fund
Shares to the Shareholders, 6 and
(3) The termination of Target as soon as reasonably
practicable after that distribution.
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 the 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.
{IAI has agreed to assume certain of Target's contingent liabilities.}
REPRESENTATIONS
---------------
Corporation has represented and warranted to us as follows:
-----------
(1) Corporation is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Minnesota;
its [amended and restated] articles of incorporation[, as amended by
articles of amendment thereto in substantially the form attached to the
Plan as Schedule B,] are on file with the Secretary of the State of
------------------------
6 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>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 5
Minnesota; it is duly registered as an open-end management investment
company under the 1940 Act, and such registration is in full force and
effect; [and Target is a duly established and designated series of
Corporation;]
(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 will continue to meet all the requirements for
such qualification for its current taxable year; the Assets will be
invested at all times through the Effective Time in a manner that ensures
compliance with the foregoing; and Target has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
(3) Target is not under the jurisdiction of a court in a "title 11
or similar case" (within the meaning of section 368(a)(3)(A));
(4) 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;
(5) During the five-year period ending on the date of the Closing,
neither Target nor any person "related" (as defined in Treas. Reg.
1.368-1(e)(3) without regard to Treas. Reg. Sec. 1.368-1(e)(3)(i)(A)) to
Target will have directly or through any transaction, agreement, or
arrangement with any other person, (a) acquired Target Shares with
consideration other than Acquiring Fund Shares or Target Shares, except
for shares redeemed in the ordinary course of Target's business as [a
series of] an open-end investment company as required by the 1940 Act, or
(b) made distributions with respect to Target Shares, except for
(i) dividends qualifying for the deduction for dividends paid (as defined
in section 561) referred to in sections 852(a)(1) and 4982(c)(1)(A) and
(ii) additional distributions, to the extent they do not exceed 50% of the
value (without giving effect to such distributions) of the proprietary
interest in Target on such date; and
(6) Target will be liquidated as soon as reasonably practicable
after the Effective Time, but in all events within 12 months thereafter.
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
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 6
of Massachusetts; a copy of its Amended and Restated Declaration of Trust
("Declaration of Trust") is on file with the Secretary of the Commonwealth
of Massachusetts; 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
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 will be issued
in exchange for the Assets in the Reorganization;
(4) 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;
(5) 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;
(6) 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;
(7) 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 a series of an open-end
investment company; nor does Acquiring Fund, or any person "related"
(within the meaning of Treas. Reg. Sec. 1.368-1(e)(3)) to Acquiring Fund,
have any plan or intention to redeem or 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; and
(8) Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of Treas. Reg. Sec.
1.368-1(d)(2)) and (b) will use a significant portion of Target's
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 7
"historic business assets" (within the meaning of Treas. Reg. Sec.
1.368-1(d)(3)) in a business.
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
its Target Shares constructively surrendered in exchange therefor;
(2) The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
(3) There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
(4) 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 the 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 in the
ordinary course of its business required by section 22(e) of the 1940 Act
and (b) regular, normal dividend 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
thereby immediately before the Reorganization;
(5) 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 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;
(6) Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" (within the meaning of section 304(c))
of Acquiring Fund;
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 8
(7) 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, 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 or
on the subsequent distribution of those shares to the Shareholders in
constructive exchange for their Target Shares {(unless required to do so
with respect to IAI's payment of certain of Target's contingent
liabilities)};
(3) Acquiring Fund will recognize no gain or loss on its receipt of
the Assets in exchange solely for Acquiring Fund Shares;
(4) Acquiring Fund's basis in the Assets will be the same as
Target's basis therein 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 {(except with respect to IAI's payment of
certain of Target's contingent liabilities)}; and
(6) A Shareholder's aggregate basis in the Acquiring Fund Shares it
receives in the Reorganization will be the same as the aggregate basis in
the Target Shares it constructively surrenders 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.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 9
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. Our
opinion is solely for the addressees' information and use and may not be relied
on for any purpose by any other person without our express written consent.
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
Acquiring Fund is a separate series thereof[; and Target is a separate series of
Corporation].
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.] Sec. 301.7701-2."7 Furthermore,
------------------------
7 On December 10, 1996, the Service adopted Regulations for classifying business
organizations (Treas. Reg. 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
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IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 10
pursuant to Treas. Reg. Sec. 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.8 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. Sec. 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 (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. Sec. 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. Sec. 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, since that date it has not
--------------------------------------------------------------------------------
that "a BUSINESS ENTITY is any entity recognized for federal tax purposes . . .
that is not properly classified as a trust under [Treas. Reg.] Sec. 301.7701-4
or otherwise subject to special treatment under the . . . Code." Trust is not
subject to any such special treatment.
8 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.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 11
elected 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 (Acquiring Fund) is the participant.
Ordinarily, a transaction involving a segregated pool of assets such as
Acquiring Fund 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, Acquiring 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 Trust). Accordingly, we believe that Acquiring Fund is a
separate corporation, and its shares are treated as shares of corporate stock,
for purposes of section 368(a)(1)(C).
[Trust and IAI VI 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 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).
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.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 12
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. Sec. 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. Sec. 1.368-1(d)
("continuity of business enterprise") and (2) a continuity of interest as
described in Treas. Reg. Sec. 1.368-1(e) ("continuity of interest").
1. Continuity of Business Enterprise.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. Sec. 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
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.
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 13
The Funds' investment objectives, policies, and restrictions are similar.9
Moreover, after the Reorganization Acquiring Fund will continue Target's
"historic business" (within the meaning of Treas. Reg. Sec. 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. Sec. 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 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."
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.10 Although shares of both the target and
------------------------
9 In some instances, Acquiring Fund's investment policies are significantly
broader than Target's.
10 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
<PAGE>
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).11
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 such a 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),
--------------------------------------------------------------------------------
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).
11 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>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 15
-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
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. Sec. 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>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 16
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.
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 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). Accordingly, we believe that Target will recognize no gain
or loss on the Reorganization.12
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.
------------------------
12 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. {Nor do we express any opinion whether Target will recognize any
gain if IAI pays any of Target's contingent liabilities after the Reorganization
occurs.}
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IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 17
IV. Acquiring Fund's Basis in 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 in the
Assets will be the same as Target's basis therein 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 in 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, 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
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 18
gain or loss on the constructive exchange of all its Target Shares solely for
Acquiring Fund Shares pursuant to the Reorganization.{13}
VI. A Shareholder's Basis in 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 in the
Acquiring Fund Shares it receives in the Reorganization will be the same as the
basis in its Target Shares it constructively surrenders 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. Sec. 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
for the Target Shares it constructively surrenders in exchange for those
Acquiring Fund Shares, provided the Shareholder holds them as capital assets at
the Effective Time.
------------------------
{13 Notwithstanding the foregoing, if IAI makes a payment to satisfy any of
Target's contingent liabilities after the Reorganization occurs and Target has
liquidated for tax purposes, that payment will result in the Shareholders'
recognition of income for federal tax purposes.}
<PAGE>
IAI Investment Funds II, IV, VI, and VIII, Inc.
Federated Equity Funds
September 15, 2000
Page 18
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/Theodore L. Press
--------------------
Theodore L. Press
<PAGE>
Kirkpatrick & Lockhart LLP
SCHEDULE A
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TARGET FUNDS ACQUIRING FUNDS
Name of Fund Series of (All Series of Trust)
--------------------------------------------------------------------------------
IAI Growth Fund IAI Investment Funds II, Federated Large Cap
Inc. Growth Fund
--------------------------------------------------------------------------------
IAI Regional Fund IAI Investment Funds IV, Federated Capital
Inc. Appreciation Fund
--------------------------------------------------------------------------------
IAI Emerging Growth Fund IAI Investment Funds VI, Federated Aggressive
Inc. Growth Fund
--------------------------------------------------------------------------------
IAI Capital Appreciation IAI Investment Funds VI, Federated Aggressive
Fund Inc. Growth Fund
--------------------------------------------------------------------------------
IAI Midcap Growth Fund IAI Investment Funds VI, Federated Growth
Inc. Strategies Fund
--------------------------------------------------------------------------------
IAI Long Term Growth Fund IAI Investment Funds VIII, Federated Aggressive
(formerly IAI Value Fund) Inc. Growth Fund
--------------------------------------------------------------------------------
