As filed with the Securities and Exchange Commission on January 20, 2000
Registration No. 333-80997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. ___ [ x ] Post-Effective Amendment No. 1
---
HERITAGE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
880 Carillon Parkway
St. Petersburg, Florida 33716
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 573-3800
STEPHEN G. HILL
880 Carillon Parkway
St. Petersburg, Florida 33716
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, D.C. 20036
It is proposed that this filing will become effective immediately upon filing
pursuant to Rule 485(b).
<PAGE>
HERITAGE INCOME TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o Part C of Form N-14
o Signature Page
o Exhibit 12
o Opinion of Kirkpatrick & Lockhart LLP supporting the tax matters and
consequences to shareholders discussed in the prospectus.
The sole purpose of this filing is to include an opinion from
Kirkpatrick & Lockhart LLP supporting certain tax matters in connection
with the reorganization of the Heritage U.S. Government Income Fund into
the Intermediate Government Fund, a series of Heritage Income Trust.
<PAGE>
HERITAGE INCOME TRUST
PART C
OTHER INFORMATION
Item 15. INDEMNIFICATION
---------------
Article XI, Section 2 of the Trust's Declaration of Trust provides that:
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the Trust
(hereinafter referred to as "Covered Person") shall be indemnified by the Trust
to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office or (B) not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(ii) in the event of a settlement, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office (A) by the court or other body approving the settlement; (B) by at
least a majority of those Trustees who are neither interested persons of the
Trust nor are parties to the matter based upon a review of readily available
facts (as opposed to a full trial-type inquiry); or (C) by written opinion of
<PAGE>
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry); provided, however, that any Shareholder
may, by appropriate legal proceedings, challenge any such determination by the
Trustees, or by independent counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not be exclusive
of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such Trustee or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Trustees and
officers, and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit, or proceeding of the character described in
paragraph (a) of this Section 2 may be paid by the applicable Portfolio from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust if it is ultimately determined that he is not entitled to
indemnification under this Section 2; provided, however, that:
(i) such Covered Person shall have provided appropriate security for
such undertaking,
(ii) the Trust is insured against losses arising out of any such
advance payments or
(iii) either a majority of the Trustees who are neither interested persons
of the Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of readily available
facts (as opposed to a trial-type inquiry or full investigation), that there is
reason to believe that such Covered Person will be found entitled to
indemnification under this Section 2.
According to Article XII, Section 1 of the Declaration of Trust, the Trust is a
trust, not a partnership. Trustees are not liable personally to any person
extending credit to, contracting with or having any claim against the Trust, a
particular Portfolio or the Trustees.
Article XII, Section 2 of the Declaration of Trust provides that, subject
to the provisions of Section 1 of Article XII and to Article XI, the Trustees
are not liable for errors of judgment or mistakes of fact or law, or for any act
or omission in accordance with advice of counsel or other experts or for failing
to follow such advice. A Trustee, however, is not protected from liability due
to willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
Paragraph 8 of the Investment Advisory and Administration Agreement of
Heritage Income Trust ("Advisory Agreement") between the Trust and Heritage
Asset Management, Inc. ("Heritage" or the "Manager") provides that the Manager
shall not be liable for any error of judgment or mistake of law for any loss
suffered by the Trust in connection with the matters to which the Advisory
Agreement relates except a loss resulting from willful misfeasance, bad faith or
C-2
<PAGE>
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under the Advisory Agreement. Any
person, even though also an officer, partner, employee, or agent of the Manager,
who may be or become an officer, director, employee or agent of the Trust shall
be deemed, when rendering services to the Trust or acting in any business of the
Trust, to be rendering such services to or acting solely for the Trust and not
as an officer, partner, employee, or agent or one under the control or direction
of the Manager even though paid by it.
Paragraph 7 of the Distribution Agreement of Heritage Income Trust
("Distribution Agreement") between the Trust and Raymond James & Associates,
Inc. ("Raymond James") provides that the Trust agrees to indemnify, defend and
hold harmless Raymond James, its several officers and directors, and any person
who controls Raymond James within the meaning of Section 15 of the Securities
Act of 1933, as amended (the "1933 Act") from and against any and all claims,
demands, liabilities and expenses (including the cost of investigating or
defending such claims, demands or liabilities and any counsel fees incurred in
connection therewith) which Raymond James, its officers or Trustees, or any such
controlling person may incur under the 1933 Act or under common law or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of Additional
Information or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, provided that in no event shall
anything contained in the Distribution Agreement be construed so as to protect
Raymond James against any liability to the Trust or its shareholders to which
Raymond James would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations and duties under the Distribution
Agreement.
Paragraph 13 of the Heritage Funds Accounting and Pricing Services
Agreement ("Accounting Agreement") between the Trust and Heritage provides that
the Trust shall indemnify and hold harmless Heritage and its nominees from all
losses, damages, costs, charges, payments, expenses (including reasonable
counsel fees), and liabilities arising directly or indirectly from any action
that Heritage takes or does or omits to take to do (i) at the request or on the
direction of or in reasonable reliance on the written advice of the Trust or
(ii) upon Proper Instructions (as defined in the Accounting Agreement),
provided, that neither Heritage nor any of its nominees shall be indemnified
against any liability to the Trust or to its shareholders (or any expenses
incident to such liability) arising out of Heritage's own willful misfeasance,
willful misconduct, gross negligence or reckless disregard of its duties and
obligations specifically described in the Accounting Agreement or its failure to
meet the standard of care set forth in the Accounting Agreement.
ITEM 16. EXHIBITS
Exhibit
Number Description
- ------ -----------
(1) Declaration of Trust, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
C-3
<PAGE>
Exhibit
Number Description
- ------ -----------
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(2) (a) Bylaws, incorporated by reference from the Post-Effective
Amendment No. 11 to the Registration Statement of the Trust, SEC
File No. 33-30361, filed previously on December 1, 1995.
(b) Amended and Restated Bylaws, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination,
incorporated by reference from the Heritage Income Trust's
Registration Statement on Form N-14, filed previously on June 18,
1999, accession number 0000898432-99-000697.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII, VIII,
X, and XI of the Declaration of Trust, as amended, which were
filed as part of an Exhibit to Post-Effective Amendment No. 11 on
December 1, 1995 and are hereby incorporated by reference, and
Article III of the Amended and Restated Bylaws which were filed
as a part of an Exhibit to Post-Effective Amendment No. 11 on
December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Subadvisory Agreement between Heritage Asset Management, Inc.
and Eagle Asset Management, Inc., incorporated by reference from
the Post-Effective Amendment No. 11 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 1, 1995.
(c) Subadvisory Agreement between Heritage Asset Management, Inc.
and Salomon Brothers Asset Management Inc., incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361,
filed previously on December 1, 1995.
(7) Distribution Agreement, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
C-4
<PAGE>
Exhibit
Number Description
- ------ -----------
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(10) (a) Class A Plan pursuant to Rule 12b-1, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Class C Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 14 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 2, 1997.
(c) Class B Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 11 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 1, 1995.
(d) Plan pursuant to Rule 18f-3, incorporated by reference from the
Post-Effective Amendment No. 13 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on January
29, 1997.
(e) Amended Plan pursuant to Rule 18f-3, incorporated by reference
from the Post-Effective Amendment No. 14 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 2, 1997.
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 16 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on February 1, 1999.
(12) Opinion of Kirkpatrick & Lockhart LLP supporting the tax matters
and consequences to shareholders discussed in the prospectus -
filed herewith.
(13) (a) Transfer Agency and Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Fund Accounting and Pricing Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(14) Consent of Independent Auditors, filed previously on June 18,
1999, from the Heritage Income Trust's Registration Statement on
Form N-14, accession number 0000898432-99-000697.
C-5
<PAGE>
Exhibit
Number Description
- ------ -----------
(15) Omitted Financial Statements - None.
(16) Powers of Attorney - None.
(17) Form of Proxy, incorporated by reference from the Heritage
Income Trust's Registration Statement on Form N-14, filed
previously on June 18, 1999, accession number
0000898432-99-000697.
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public re-offering of
the securities registered through the use of the prospectus which is a 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, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offering 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 a part of an amendment to the Registration
Statement and will not be used until the amendment is effective, and that, in
determining any liability under the Securities Act of 1933, 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 the initial bona fide offering of them.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Post-Effective Amendment No. 1 to
its Registration Statement on Form N-14 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of St. Petersburg and State of
Florida on the 19th day of November 1999.
HERITAGE INCOME TRUST
By: /s/ Stephen G. Hill
----------------------------
Stephen G. Hill
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 1 to the Registration Statement on Form N-14
has been signed below by the following persons in the capacities indicated on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen G. Hill President November 19, 1999
- ----------------------
Stephen G. Hill
Thomas A. James* Trustee November 19, 1999
- ----------------------
Thomas A. James
Richard K. Riess* Trustee November 19, 1999
- ----------------------
Richard K. Riess
C. Andrew Graham* Trustee November 19, 1999
- ----------------------
C. Andrew Graham
David M. Phillips* Trustee November 19, 1999
- ----------------------
David M. Phillips
James L. Pappas* Trustee November 19, 1999
- ----------------------
James L. Pappas
Donald W. Burton* Trustee November 19, 1999
- ----------------------
Donald W. Burton
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Eric Stattin* Trustee November 19, 1999
- ----------------------
Eric Stattin
/s/ Donald H. Glassman, Treasurer November 19, 1999
- ----------------------
Donald H. Glassman
*By /s/ Donald H. Glassman,
-----------------------
Donald H. Glassman,
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
(1) Declaration of Trust, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(2) (a) Bylaws, incorporated by reference from the Post-Effective
Amendment No. 11 to the Registration Statement of the Trust, SEC
File No. 33-30361, filed previously on December 1, 1995.
(b) Amended and Restated Bylaws, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(3) Voting trust agreement - none
(4) Agreement and Plan of Reorganization and Termination,
incorporated by reference from the Heritage Income Trust's
Registration Statement on Form N-14, filed previously on June 18,
1999, accession number 0000898432-99-000697.
(5) Provisions of instruments defining the rights of holders of
Registrant's securities are contained in Articles III, VII, VIII,
X, and XI of the Declaration of Trust, as amended, which were
filed as part of an Exhibit to Post-Effective Amendment No. 11 on
December 1, 1995 and are hereby incorporated by reference, and
Article III of the Amended and Restated Bylaws which were filed
as a part of an Exhibit to Post-Effective Amendment No. 11 on
December 1, 1995.
(6) (a) Investment Advisory and Administration Agreement between
Registrant and Heritage Asset Management, Inc., incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Subadvisory Agreement between Heritage Asset Management, Inc.
and Eagle Asset Management, Inc., incorporated by reference from
the Post-Effective Amendment No. 11 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 1, 1995.
(c) Subadvisory Agreement between Heritage Asset Management, Inc.
and Salomon Brothers Asset Management Inc., incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361,
filed previously on December 1, 1995.
<PAGE>
Exhibit
Number Description
- ------ -----------
(7) Distribution Agreement, incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(8) Bonus, profit sharing or pension plans - None.
(9) Custodian Agreement incorporated by reference from the
Post-Effective Amendment No. 11 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on December
1, 1995.
(10) (a) Class A Plan pursuant to Rule 12b-1, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Class C Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 14 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 2, 1997.
(c) Class B Plan pursuant to Rule 12b-1, incorporated by reference
from the Post-Effective Amendment No. 11 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 1, 1995.
(d) Plan pursuant to Rule 18f-3, incorporated by reference from the
Post-Effective Amendment No. 13 to the Registration Statement of
the Trust, SEC File No. 33-30361, filed previously on January
29, 1997.
(e) Amended Plan pursuant to Rule 18f-3, incorporated by reference
from the Post-Effective Amendment No. 14 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on December 2, 1997.
(11) Opinion and Consent of counsel - incorporated by reference from
the Post-Effective Amendment No. 16 to the Registration
Statement of the Trust, SEC File No. 33-30361, filed previously
on February 1, 1999.
(12) Opinion of Kirkpatrick & Lockhart LLP supporting the tax matters
and consequences to shareholders discussed in the prospectus -
filed herewith.
(13) (a) Transfer Agency and Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
(b) Fund Accounting and Pricing Service Agreement, incorporated by
reference from the Post-Effective Amendment No. 11 to the
Registration Statement of the Trust, SEC File No. 33-30361, filed
previously on December 1, 1995.
2
<PAGE>
Exhibit
Number Description
- ------ -----------
(14) Consent of Independent Auditors, filed previously on June 18,
1999, from the Heritage Income Trust's Registration Statement on
Form N-14, accession number 0000898432-99-000697.
(15) Omitted Financial Statements - None.
(16) Powers of Attorney - None.
(17) Form of Proxy, incorporated by reference from the Heritage
Income Trust's Registration Statement on Form N-14, filed
previously on June 18, 1999, accession number
0000898432-99-000697.
3
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
(202) 778-9000
www.kl.com
Theodore L. Press
(202) 778-9025
[email protected]
October 15, 1999
Heritage U.S. Government Income Fund
Heritage Income Trust
880 Carillon Parkway
St. Petersburg, FL 33716
Re: REORGANIZATION TO COMBINE A MASSACHUSETTS BUSINESS TRUST
--------------------------------------------------------
AND A SERIES OF A MASSACHUSETTS BUSINESS TRUST
----------------------------------------------
Ladies and Gentleman:
Heritage U.S. Government Income Fund, a Massachusetts business trust
("Target"), and Heritage Income Trust, also a Massachusetts business trust
("Trust"), on behalf of Intermediate Government Fund, a segregated portfolio of
assets ("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 June 16, 1999 ("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 reorganization within the meaning of
section 368(a)(1)(D),(2) and each Fund will be "a party to a
reorganization" within the meaning of section 368(b),
- --------
(1) Target and Acquiring Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Target and Trust are sometimes
referred to herein individually as an "Investment Company" and collectively as
the "Investment Companies."
(2) All "section" references are to the Internal Revenue Code of 1986, as
amended ("Code"), unless otherwise noted, and all "Treas. Reg. ss." references
are to the regulations under the Code ("Regulations").
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 2
(2) that neither the Funds nor the Shareholders will recognize gain
or loss on the Reorganization, and
(3) regarding the basis and holding period after the Reorganization
of the transferred assets and the Acquiring Fund Shares issued pursuant
thereto.
In rendering this opinion, we have examined (1) the Plan, (2) the Combined
Proxy Statement and Prospectus dated July 19, 1999, that was furnished in
connection with the solicitation of proxies by Target's board of trustees for
use at the special meeting of Target's shareholders held on September 27, 1999
("Proxy Statement"), (3) Acquiring 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
-----
Each Investment Company is a Massachusetts business trust. Before January
1, 1997, each of them claimed to be classified for federal income tax purposes
as an association taxable as a corporation, and neither of them will elect not
to be so classified. Target is registered with the Securities and Exchange
Commission ("SEC") as a closed-end management investment company under the
Investment Company Act of 1940, as amended ("1940 Act"). Trust is registered
with the SEC as an open-end management investment company under the 1940 Act,
and Acquiring Fund is a series thereof.
Target has only a single class of shares, which can be purchased and sold
only on the New York Stock Exchange. Acquiring Fund's shares are divided into
three classes, designated Class A, Class B, and Class C 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, policies, and restrictions (which are
described in the Proxy Statement) are similar and they have the same investment
adviser and portfolio manager. 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
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 3
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 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, 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 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"),
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.
- -----------------
(3) The Plan provides that, at the time of the Reorganization, the Target Shares
will in effect be constructively exchanged for Acquiring Fund Shares,
certificates for which will not be issued. Accordingly, Shareholders will not be
required to and will not make physical delivery of their Target Shares, nor will
they receive certificates for Acquiring Fund Shares, pursuant to the
Reorganization. Target Shares nevertheless will be treated as having been
exchanged for Acquiring Fund Shares, and the tax consequences to the
Shareholders will be unaffected by the absence of Acquiring Fund Share
certificates. SEE discussion at V. under "Analysis," below.
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 4
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
---------------
TARGET has represented and warranted as follows:
------
1. Target 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, and a copy of its Declaration of
Trust is on file with the Secretary of the Commonwealth of Massachusetts.
It is duly registered as a closed-end management investment company under
the 1940 Act, and such registration will be in full force and effect at the
Effective Time;
2. Target 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; 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);
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; and
6. Target will be terminated as soon as reasonably practicable after
the Effective Time, but in all events within six months thereafter.
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 5
TRUST has represented and warranted as follows:
-----
1. Trust is a Business Trust that is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts, and 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. 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; Acquiring Fund intends to
continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
3. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the
Assets in the Reorganization;
4. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares issued
in the ordinary course of its business as 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) 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;
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 6
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 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. Its management is unaware of any plan or intention of Shareholders
to redeem, sell, or otherwise dispose of (a) any portion of their Target
Shares before the Reorganization to any person related (within the meaning
of Treas. Reg. ss. 1.368-1(e)(3)) to either Fund or (b) any portion of the
Acquiring Fund Shares to be received by them in the Reorganization to any
person related (within such meaning) to Acquiring Fund;
3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4. 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;
5. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
6. 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;
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 7
7. 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;
8. Immediately after the Reorganization, the Shareholders will own
shares constituting "control" (within the meaning of section 304(c)) of
Acquiring Fund; and
9. 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. Target's transfer of the Assets to Acquiring Fund 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)(D), 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 from Target in exchange solely for Acquiring Fund Shares and its
assumption of the Liabilities;
4. Acquiring Fund's basis for the Assets will be the same as Target's
basis therefor immediately before the Reorganization, and Acquiring Fund's
holding period for the Assets will include Target's holding period
therefor;
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 8
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 held them as capital assets at the Effective Time.
The foregoing opinion (1) 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 and (2) is applicable only to the
extent each Fund is solvent. 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 D 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)(D) (a "D Reorganization")
involves a transfer by a corporation of all or a part of its assets to another
corporation if immediately after the transfer the transferor, or one or more of
its shareholders (including persons who were shareholders immediately before the
transfer), or any combination thereof, is in control of the transferee
corporation; but only if, pursuant to the plan of reorganization, stock or
securities of the transferee corporation are distributed in a transaction that
qualifies under sections 354, 355, or 356.(4)For a transaction to qualify as a D
Reorganization, 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 Acquiring Fund is a separate series of
Trust.
Treasury 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
- -------------------
(4) For purposesof section 368(a)(1)(D), in the case of a transaction such as
the Reorganization, the term "control" means ownership of stock possessing at
least 50% of the total combined voting power of all classes of stock entitled to
vote or at least 50% of the total value of shares of all classes of stock. SEE
sections 368(a)(2)(H)(i) and 304(c).
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 9
property for the beneficiaries. That section of the Regulations states that
these "business or commercial trusts" generally are created by the beneficiaries
simply as devices to carry on profit-making businesses that normally would have
been carried on through business organizations classified as corporations or
partnerships under 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."(5) 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 income tax purposes.(6) 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
declaration of trust to vary its shareholders' investment therein. Neither
Investment Company has a fixed pool of assets -- Target and 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 each Investment Company should not be classified as
a trust, and instead should be classified as a business entity, for federal
income tax purposes.
Treasury 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
- ----------------
(5) 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. Treasury 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." Neither Investment Company is subject to any such special
treatment.
(6)Because Acquiring Fund is considered separate from each other series of Trust
for federal income 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>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 10
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 income 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)(D).
B. TRANSFER OF "SUBSTANTIALLY ALL" OF TARGET'S PROPERTIES.
------------------------------------------------------
Section 354(b)(1)(A) provides that, for an exchange pursuant to a plan
of a D Reorganization to receive tax-free treatment under section 354 (see V.
below), the transferee corporation must acquire "substantially all" of the
assets of the transferor. 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. We
believe that the Plan constitutes a "plan of reorganization" within the
meaning of Treas. Reg. ss. 1.368-2(g); and 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. REQUIREMENTS OF CONTINUITY.
--------------------------
Treasury 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
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 11
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
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 reorganization under section
368(a)(1)(C) (the acquisition by one corporation, in exchange solely for voting
stock, of substantially all the properties of another corporation), which also
is subject to the continuity of business enterprise requirement. Prior to the
exchange, T sold its entire portfolio of corporate stocks and bonds and
purchased a portfolio of municipal bonds. The Service held that this transaction
did not qualify as a reorganization for the following reasons: (1) because T had
sold its historic assets prior to the exchange, there was no asset continuity;
and (2) the failure of P to engage in the business of investing in corporate
stocks and bonds after the exchange caused the transaction to lack business
continuity as well.
The Funds' investment objectives, policies, and restrictions are
similar, and they have the same investment adviser and portfolio manager.
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 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. Acquiring Fund also
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 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.
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 12
2. CONTINUITY OF INTEREST.
----------------------
Treasury Regulation section 1.368-1(e)(1)(i) provides that "[c]ontinuity
of interest requires that in substance a substantial part of the value of the
proprietary interests in the target corporation be preserved in the
reorganization. A proprietary interest in the target corporation is preserved
if, in a potential reorganization, it is exchanged for a proprietary interest in
the issuing corporation . . . ." That section of the Regulations goes on to
provide that "[h]owever, a proprietary interest in the target corporation is not
preserved if, in connection with the potential reorganization, . . . stock of
the issuing corporation furnished in exchange for a proprietary interest in the
target corporation in the potential reorganization is redeemed. All facts and
circumstances must be considered in determining whether, in substance, a
proprietary interest in the target corporation is preserved."
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. 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). 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 by
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 13
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 between 30% and 50% of the RIC's value, and other "shares redeemed
in the ordinary course of Target's business as an open-end investment company
pursuant to section 22(e) . . ." excluded from determination of whether the
target or a related person acquired its shares with consideration other than
target or acquiring fund shares).(7)
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
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. Although Acquiring Fund's shares will be offered for
sale to the public on an ongoing basis after the Reorganization, sales of those
shares will arise out of a public offering separate and unrelated to the
Reorganization and not as a result thereof. SEE REEF CORP. V. COMMISSIONER, 368
F.2d at 134; Rev. Rul. 61-156, SUPRA. Similarly, although Shareholders may
redeem Acquiring Fund Shares pursuant to their rights as shareholders of a
series of an open-end investment company (SEE Priv. Ltr. Ruls. 9823018 and
9822053, SUPRA, and 8816064 (Jan. 28, 1988)), those redemptions will result from
the exercise of those rights in the course of Acquiring Fund's business as an
open-end series and not from the D Reorganization as such.
Accordingly, we believe that the Reorganization will satisfy the
continuity of interest requirement of Treas. Reg. ss. 1.368-1(b).
D. CONTROL AND DISTRIBUTION BY TARGET.
----------------------------------
As noted above, a corporation's transfer of assets to another corporation
will qualify as a D Reorganization only if (1) immediately thereafter the
transferor, or one or more of its shareholders (including persons who were
shareholders immediately before the transfer), or any combination thereof, is in
- -------------------------
(7) Although, under section 6110(j)(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>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 14
control of the transferee and (2) pursuant to the plan, stock or securities of
the transferee are distributed in a transaction that qualifies under section
354, among others (and, pursuant to section 354(b)(1)(B), all such stock or
securities, as well as the transferor's other properties, are distributed
pursuant to the plan). For purposes of clause (1), as applicable here (SEE
sections 368(a)(2)(H)(i) and 304(c)(1)), "control" is defined as the ownership
of stock possessing at least 50% of the total combined voting power of all
classes of stock entitled to vote or at least 50% of the total value of shares
of all classes of stock; the Shareholders will be in control (as so defined) of
Acquiring Fund immediately after the Reorganization. With respect to clause (2),
under the Plan -- which, as noted above, we believe constitutes a plan of
reorganization -- Target will distribute all the Acquiring Fund Shares to the
Shareholders in constructive exchange for their Target Shares. As noted in V.
below, we believe that that distribution will qualify under section 354(a).
Accordingly, we believe that the control and distribution requirements will be
satisfied.
E. 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.
F. 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
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 199
Page 15
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 D Reorganization with respect
to either Fund.
For all the foregoing reasons, we believe that the Reorganization will
qualify as a D Reorganization.
G. EACH FUND WILL BE A PARTY TO A REORGANIZATION.
---------------------------------------------
Section 368(b)(2) provides, in pertinent part, that the term "a party to a
reorganization" includes both corporations in the case of a reorganization
resulting from the acquisition by one corporation of properties of another.
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. (As noted above, such a distribution is required
for a reorganization to qualify as a D 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 D Reorganization, each Fund will be a party to a reorganization, and the Plan
constitutes a plan of reorganization. Target will exchange the Assets solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities and
then will be terminated pursuant to the Plan, distributing those shares to its
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
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 16
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 by it of money or other property in exchange for its
stock. Acquiring Fund will issue Acquiring Fund Shares to Target in exchange for
the Assets, which consist of money and securities. Accordingly, we believe that
Acquiring Fund will recognize no gain or loss on the Reorganization.
IV. ACQUIRING FUND'S BASIS FOR THE ASSETS WILL BE A CARRYOVER BASIS, AND ITS
--------------------------------------------------------------------------
HOLDING PERIOD WILL INCLUDE TARGET'S HOLDING PERIOD.
---------------------------------------------------
Section 362(b) provides, in pertinent part, that the basis of property
acquired by a corporation in connection with a reorganization to which section
368 applies shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on the transfer (a
"carryover basis"). As noted above, it is our opinion that the Reorganization
will qualify as such a reorganization and that Target will recognize no gain on
the Reorganization. Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as Target's basis therefor immediately before the
Reorganization.
Section 1223(2) provides in general that the period for which a taxpayer
has held acquired property that has a carryover basis shall include the period
for which the property was held by the transferor. As noted above, it is our
opinion that Acquiring Fund's basis for the Assets will be a carryover basis.
Accordingly, we believe that Acquiring Fund's holding period for the Assets will
include Target's holding period therefor.
V. A SHAREHOLDER WILL RECOGNIZE NO GAIN OR LOSS.
--------------------------------------------
Under section 354(a)(1), no gain or loss shall be recognized if stock in a
corporation that is a party to a reorganization is exchanged pursuant to a plan
of reorganization solely for stock in that corporation or another corporate
party to the reorganization. Pursuant to the Plan, the Shareholders will receive
solely Acquiring Fund Shares for their Target Shares. As noted above, it is our
- -------------------
(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.
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 17
opinion that the Reorganization will qualify as a D 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 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 D Reorganization and, under
section 354, a Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
Acquiring Fund Shares, and no money will be distributed to them pursuant to the
Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares it receives in the Reorganization will be the same as the
basis for its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares.
Section 1223(1) provides in general that the period for which a taxpayer
has held property received in an exchange that has a substituted basis shall
include the period for which the taxpayer held the property exchanged therefor
if the latter property was a capital asset (as defined in section 1221) in the
taxpayer's hands at the time of the exchange. SEE Treas. Reg. 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.
<PAGE>
Heritage U.S. Government Income Fund
Heritage Income Trust
October 15, 1999
Page 18
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
---------------------
Theodore L. Press
