KIRKPATRICK & LOCKHART LLP 1800 Massachusetts Ave., NW
Washington, DC 20036-1800
March 14, 2000
Executive Investors Trust
First Investors Series Fund
95 Wall Street
New York, New York 10005
Re: Reorganization to Combine Series of two Massachusetts
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Business Trusts
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Ladies and Gentleman:
Executive Investors Trust, a Massachusetts business trust ("Target
Trust"), on behalf of Blue Chip Fund, a segregated portfolio of assets
("series") thereof ("Target"), and First Investors Series Fund, also a
Massachusetts business trust ("Acquiring Trust"), on behalf of Blue Chip Fund, a
series thereof ("Acquiring Fund"), have requested our opinion as to certain
federal income tax consequences of the proposed acquisition of Target by
Acquiring Fund pursuant to an Agreement and Plan of Reorganization 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 beneficial interest in
Acquiring Fund ("Acquiring Fund Shares") and Acquiring Fund's
assumption of Target's liabilities, followed by Target's distribution
of those shares pro rata to its shareholders of record 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
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(1) Target and Acquiring Fund are sometimes referred to herein individually as
a "Fund" and collectively as the "Funds," and Target Trust and Acquiring Trust
are sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies."
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 2
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 January 14, 2000, that was furnished in
connection with the solicitation of proxies by Target Trust's board of trustees
for use at the annual 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
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Each Investment Company is a Massachusetts business trust that 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 is a series of Target Trust, and Acquiring Fund is a series of
Acquiring Trust. Before January 1, 1997, each of them claimed to be classified
for federal tax purposes as an association taxable as a corporation, and none of
them will elect not to be so classified.
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
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(2) All "section" references are to the Internal Revenue Code of 1986, as
amended ("Code"), unless otherwise noted, and all "Treas. Reg.ss." references
are to the regulations under the Code ("Regulations").
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 3
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").
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 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"),
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Executive Investors Trust
First Investors Series Fund
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 six
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
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Target Trust has represented and warranted to us as follows:
(1) Target Trust is a trust operating under a written declaration
of trust, the beneficial interest in which is divided into transferable
shares ("Business Trust"), 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
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(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.
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 5
commenced operations and 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 Trust has represented and warranted to us as follows:
(1) Acquiring Trust is a Business Trust that is duly organized and
validly existing under the laws of the Commonwealth of Massachusetts; a
copy of its 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 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 (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 6
(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 a series of an
open-end investment company; nor does 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;
(5) Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of Treas. Reg. ss.
1.368-1(d)(2)), (b) will use a significant portion of Target's
"historic business assets" (within the meaning of Treas. Reg. ss.
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 business trust or a corporation or any
"fund" thereof (within the meaning of section 851(g)(2)) following the
Reorganization;
(7) Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. 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;
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 7
(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. ss. 1.368-1(e)(3)) to either Fund or
(ii) 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, (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;
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 8
(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 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
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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;
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 9
(4) Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
(5) A Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization; and
(6) A Shareholder's aggregate basis for the Acquiring Fund Shares
to be received by it in the Reorganization will be the same as the
aggregate basis for its Target Shares to be constructively surrendered
in exchange for those Acquiring Fund Shares, and its holding period for
those Acquiring Fund Shares will include its holding period for those
Target Shares, provided the Shareholder holds them as capital assets at
the Effective Time.
Our opinion is based on, and is conditioned on the continued
applicability of, the provisions of the Code and the Regulations, judicial
decisions, and rulings and other pronouncements of the Internal Revenue Service
("Service") in existence on the date hereof. All the foregoing authorities are
subject to change or modification that can be applied retroactively and thus
also could affect our opinion; we assume no responsibility to update our opinion
with respect to any such change or modification. Our opinion also is applicable
only to the extent each Fund is solvent, and we express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent.
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.
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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). Each Investment Company, however, is a business trust, not a
corporation, and each Fund is a separate series of an Investment Company.
Regulation section 301.7701-4(b) provides that certain arrangements
known as trusts (because legal title is conveyed to trustees for the benefit of
beneficiaries) will not be classified as trusts for purposes of the Code because
they are not simply arrangements to protect or conserve the property for the
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 10
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
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.]ss. 301.7701-2."(4)
Furthermore, pursuant to Treas. Reg.ss. 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, neither Investment Company qualifies as a
trust for federal tax purposes.(5) Each Investment Company 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 each
Investment Company is an "investment trust," there is a power under its
respective declaration of trust to vary its shareholders' investment therein.
Neither Investment Company has a fixed pool of assets -- each series thereof
(including each 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 each Investment Company should not be classified as a trust, and
instead should be classified as a business entity, for federal tax purposes.
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(4) On December 10, 1996, the Service adopted Regulations for classifying
business organizations (Treas. Reg. ss.ss. 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.]ss. 301.7701-4 or otherwise subject to special treatment under the
. . . Code." Trust is not subject to any such special treatment.
(5) Because each Fund is considered separate from each other series of its
Investment Company for federal tax purposes (see the discussion in the last
paragraph of I.A. below), the analysis in the accompanying text applies equally
to each Fund.
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 11
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.ss. 301.7701(2)(b)) to include corporations denominated
as such under the federal or state statute pursuant to which they were organized
and certain other entities. Any business entity that is not classified as a
corporation under that section of the Regulations (an "eligible entity") and has
at least two members can elect to be classified as either an association (and
thus a corporation) or a partnership. Treas. Reg.ss. 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. ss. 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)) -- each
Investment Company "claimed" classification under the prior Regulations as an
association taxable as a corporation. Moreover, neither Investment Company will
elect not to be so classified. Accordingly, we believe that each Investment
Company will continue to be classified as an association (and thus a
corporation) for federal tax purposes.
The Investment Companies as such, however, are not participating in the
Reorganization, but rather 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 each Investment Company). 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.
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For an acquisition to qualify as a C Reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation in exchange solely for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers the
transfer of at least 90% of the fair market value of the transferor's net
assets, and at least 70% of the fair market value of its gross assets, held
immediately before the reorganization to satisfy the "substantially all"
requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The Reorganization will involve
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 12
such a transfer. Accordingly, we believe that the Reorganization will involve
the transfer to Acquiring Fund of substantially all of Target's properties.
C. Qualifying Consideration.
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The acquiring corporation in an acquisition intended to qualify as a C
Reorganization must acquire at least 80% (by fair market value) of the
transferor's property solely for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally is disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only Acquiring Fund Shares, and no money or other
property, for the Assets, we believe that the Reorganization will satisfy the
solely-for-voting-stock requirement to qualify as a C Reorganization.
D. Distribution by Target.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as
a C Reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. ss. 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.ss. 1.368-1(d)
("continuity of business enterprise") and (2) a continuity of interest as
described in Treas. Reg.ss. 1.368-1(e) ("continuity of interest").
1. Continuity of Business Enterprise.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. ss. 1.368-1(d)(1), the issuing corporation must either (i) continue the
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 13
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.
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.ss. 1.368-1(d)(2)). Accordingly, there will be business continuity.
Acquiring Fund not only will continue Target's historic business, but
it also (a) will use in that business a significant portion of Target's
"historic business assets" (within the meaning of Treas. Reg. ss.
1.368-1(d)(3)), (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
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 14
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.(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) . . ."
-------------
(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).
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 15
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
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. ss.
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
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(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).
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 16
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. ss.ss. 1.368-1(b),
-1(c), and -2(g) (the last of which provides that, to qualify as a
reorganization, a transaction must be "undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization").
Under that doctrine, a transaction must have a bona fide business purpose (and
not a purpose to avoid federal income tax) to qualify as a valid reorganization.
The substantial business purposes of the Reorganization are described in the
Proxy Statement. Accordingly, we believe that the Reorganization is being
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
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 17
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. ss. 1.368-2(f) further provides that if one
corporation transfers substantially all its properties to a second corporation
in exchange for all or a part of the latter's voting stock (i.e., a C
Reorganization) -- the term "a party to a reorganization" includes each
corporation. Pursuant to the Reorganization, Target is transferring all its
properties to Acquiring Fund in exchange for Acquiring Fund Shares. Accordingly,
we believe that each Fund will be "a party to a reorganization."
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
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 18
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)
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
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(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
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 19
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
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
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Executive Investors Trust
First Investors Series Fund
March 14, 2000
Page 20
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. ss.
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 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
