EXHIBIT 3.2
XXXXXXX AND XXXXXX
000 XXXX XXXXXX XXXXXX
XXXXXXX, XXXXXXXX 00000
February 1, 1999
Xxx Xxxxxx Funds Inc.
Xxx Xxxxxxxx Xxxxx
Xxxxxxxx Xxxxxxx, Xxxxxxxx 00000
The Bank of New York
000 Xxxxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Re: Insured Municipals Income Trust, 246th Insured Multi-Series
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Gentlemen:
We have acted as counsel for Xxx Xxxxxx Funds Inc., Depositor of
Insured Municipals Income Trust, 246th Insured Multi-Series (the "Fund"), in
connection with the issuance of Units of fractional undivided interest in the
several trusts of said Fund (the "Trusts") under a Trust Agreement dated
February 1, 1999 (the "Indenture") between Xxx Xxxxxx Funds Inc., as Depositor,
American Portfolio Evaluation Services, a division of Xxx Xxxxxx Investment
Advisory Corp., as Evaluator, and The Bank of New York, as Trustee.
In this connection, we have examined the Registration Statement, the
form of Prospectus proposed to be filed with the Securities and Exchange
Commission, the Indenture and such other instruments and documents as we have
deemed pertinent. For purposes of the following opinions, it is assumed that
each asset of the Trusts is debt the interest on which is excluded from gross
income for federal income tax purposes.
Based upon the foregoing and upon an investigation of such matters of
law as we consider to be applicable, we are of the opinion that, under existing
Federal income tax law:
(i) Each Trust is not an association taxable as a corporation
but will be governed by the provisions of subchapter J (relating to
trusts) of Chapter 1, Internal Revenue Code of 1986 (the "Code").
(ii) Each Unitholder will be considered as owning a pro rata
share of each asset of the respective Trust in the proportion that the
number of Units of such Trust held by him bears to the total number of
Units outstanding of such Trust. Under Subpart E, Subchapter J of
Chapter 1 of the Code, income of each Trust will be treated as income
of each Unitholder of the respective Trust in the proportion described,
and an item of Trust income will have the same character in the hands
of a Unitholder as it would have in the hands of the Trustee.
Accordingly, to the extent that the income of a Trust consists of
interest and original issue discount excludable from gross income under
Section 103 of the Code, such income will be excludable from Federal
gross income of the Unitholders, except in the case of a Unitholder who
is a substantial user (or a person related to such user) of a facility
financed through issuance of any industrial development bonds or
certain private activity bonds held by the respective Trust. In the
case of such Unitholder who is a substantial user (and no other)
interest received with respect to his Units attributable to such
industrial development bonds or such private activity bonds is
includable in his gross income. In the case of certain corporations,
interest on the Bonds is included in computing the alternative minimum
tax pursuant to Section 56(c) of the Code, and the branch profits tax
imposed by Section 884 of the Code with respect to U.S. branches of
foreign corporations.
(iii) Gain or loss will be recognized to a Unitholder upon
redemption or sale of his Units. Such gain or loss is measured by
comparing the proceeds of such redemption or sale with the adjusted
basis of the Units represented by his Certificate. If a Bond is
acquired with accrued interest, that portion of the price paid for the
accrued interest is added to the tax basis of the Bond. When this
accrued interest is received, it is treated as a return of capital and
reduces the tax basis of the Bond. If a Bond is purchased for a
premium, the amount of the premium is added to the tax basis of the
Bond. Bond premium is amortized over the remaining term of the Bond,
and the tax basis of the Bond is reduced each tax year by the amount of
the premium amortized in that tax year. Accordingly, Unitholders must
reduce the tax basis of their Units for their share of accrued interest
received by the respective Trust, if any, on Bonds delivered after the
Unitholders pay for their Units to the extent that such interest
accrued on such Bonds before the date the Trust acquired ownership of
the Bonds (and the amount of this reduction may exceed the amount of
accrued interest paid to the seller) and, consequently, such
Unitholders may have an increase in taxable gain or reduction in
capital loss upon the disposition of such Units. In addition, such
basis will be increased by the Unitholder's aliquot share of the
accrued original issue discount (and market discount, if the Unitholder
elects to include market discount in income as it accrues) with respect
to each Bond held by the Trust with respect to which there was original
issue discount at the time the Bond was issued (or which was purchased
with market discount) and reduced by the annual amortization of bond
premium, if any, on Bonds held by the Trust.
(iv) If the Trustee disposes of a Trust asset (whether by
sale, payment on maturity, redemption or otherwise) gain or loss is
recognized to the Unitholder and the amount thereof is measured by
comparing the Unitholder's aliquot share of the total proceeds from the
transaction with his basis for his fractional interest in the asset
disposed of. Such basis is ascertained by apportioning the tax basis
for his Units among each of the Trust assets (as of the date on which
his Units were acquired) ratably according to their values as of the
valuation date nearest the date on which he purchased such Units. A
Unitholder's basis in his Units and of his fractional interest in each
Trust asset must be reduced by the amount of his aliquot share of
accrued interest received by the Trust, if any, on Bonds delivered
after the Unitholders pay for their Units to the extent that such
interest accrued on the Bonds before the date the Trust acquired
ownership of the Bonds (and the amount of this reduction may exceed the
amount of accrued interest paid to the seller), must be reduced by the
annual amortization of bond premium, if any, on Bonds held by the Trust
and must be increased by the Unitholder's share of the accrued original
issue discount (and market discount, if the Unitholder elects to
include market discount in income as it accrues) with respect to each
Bond which, at the time the Bond was issued, had original issue
discount (or which was purchased with market discount).
(v) In the case of any Bond held by the Trust where the
"stated redemption price at maturity" exceeds the "issue price," such
excess shall be original issue discount. With respect to each
Unitholder, upon the purchase of his Units subsequent to the original
issuance of Bonds held by the Trust, Section 1272(a)(7) of the Code
provides for a reduction in the accrued "daily portion" of such
original issue discount upon the purchase of a Bond subsequent to the
Bond's original issue, under certain circumstances. In the case of any
Bond held by the Trust the interest on which is excludable from gross
income under Section 103 of the Code, any original issue discount which
accrues with respect thereto will be treated as interest which is
excludable from gross income under Section 103 of the Code.
(vi) We have examined the Municipal Bond Unit Investment Trust
Insurance Policies, if any, issued to certain of the Trusts on the Date
of Deposit by AMBAC Assurance Corporation, Financial Guaranty Insurance
Corporation or a combination thereof. Each such policy, or a
combination of such policies, insures all bonds held by the Trustee for
that particular Trust (other than bonds described in paragraph (vii))
against default in the prompt payment of principal and interest. In our
opinion, any amount paid under each said policy, or a combination of
said policies, which represents maturing interest on defaulted
obligations held by the Trustee will be excludable from Federal gross
income if, and to the same extent as, such interest would have been so
excludable if paid in the normal course of business by the respective
issuer of the defaulted Bonds provided that, at the time such policies
are purchased, the amounts paid for such policies are reasonable,
customary and consistent with the reasonable expectation that the
issuer of the Bonds, rather than the insurer, will pay debt service on
the Bonds. Paragraph (ii) of this opinion is accordingly applicable to
insurance proceeds representing maturing interest.
(vii) Certain Bonds in the portfolios of certain of the Trusts
have been insured by the issuers thereof against default in the prompt
payment of principal and interest (the "Insured Bonds"). Insurance has
been obtained for such Insured Bonds, or, in the case of a commitment,
the Bonds will be ultimately insured under the terms of such an
insurance policy, which are designated as issuer Insured Bonds on the
portfolio pages of the respective Trusts in the Prospectus for the
Fund, by the issuer of such Insured Bonds. Insurance on Insured Bonds
is effective so long as such Insured Bonds remain outstanding. For each
of these Insured Bonds, we have been advised that the aggregate
principal amount of such Insured Bonds listed on the portfolio page for
the respective Trust was acquired by the applicable Trust and are part
of the series of such Insured Bonds listed in the aggregate principal
amount. Based upon the assumption that the Insured Bonds of the Trust
are part of the series covered by an insurance policy or, in the case
of a commitment, will be ultimately insured under the terms of such an
insurance policy, it is our opinion that any amounts received by the
applicable Trust representing maturing interest on such Insured Bonds
will be excludable from Federal gross income if, and to the same extent
as, such interest would have been so excludable if paid in normal
course by the issuer provided that, at the time such policies are
purchased, the amounts paid for such policies are reasonable, customary
and consistent with the reasonable expectation that the issuer of the
Insured Bonds, rather than the insurer, will pay debt service on the
Insured Bonds. Paragraph (ii) of this opinion is accordingly applicable
to such payment.
Sections 1288 and 1272 of the Code provide a complex set of rules
governing the accrual of original issue discount. These rules provide that
original issue discount accrues either on the basis of a constant compound
interest rate or ratably over the term of the Bond, depending on the date the
Bond was issued. In addition, special rules apply if the purchase price of a
Bond exceeds the original issue price plus the amount of original issue discount
which would have previously accrued based upon its issue price (its "adjusted
issue price"). The application of these rules will also vary depending on the
value of the Bonds on the date a Unitholder acquires his Units, and the price
the Unitholder pays for his Units.
Because the Trusts do not include any "private activity" bonds within
the meaning of Section 141 of the Code issued on or after August 8, 1986, none
of the Trust Funds' interest income shall be treated as an item of tax
preference when computing the alternative minimum tax. In the case of
corporations, for taxable years beginning after December 31, 1986, the
alternative minimum tax depends upon the corporation's alternative minimum
taxable income ("AMTI") which is the corporation's taxable income with certain
adjustments.
Pursuant to Section 56(c) of the Code, one of the adjustment items used
in computing AMTI of a corporation (other than an S Corporation, Regulated
Investment Company, Real Estate Investment Trust, REMIC or FASIT) for taxable
years beginning after 1989, is an amount equal to 75% of the excess of such
corporation's "adjusted current earnings" over an amount equal to its AMTI
(before such adjustment item and the alternative tax net operating loss
deduction). "Adjusted current earnings" includes all tax-exempt interest,
including interest on all Bonds in the Trust, and tax-exempt original issue
discount.
Effective for tax returns filed after December 31, 1987, all taxpayers
are required to disclose to the Internal Revenue Service the amount of
tax-exempt interest earned during the year.
Section 265 of the Code provides for a reduction in each taxable year
of 100 percent of the otherwise deductible interest on indebtedness incurred or
continued by financial institutions, to which either Section 585 or Section 593
of the Code applies, to purchase or carry obligations acquired after August 7,
1986, the interest on which is exempt from Federal income taxes for such taxable
year. Under rules prescribed by Section 265, the amount of interest otherwise
deductible by such financial institutions in any taxable year which is deemed to
be attributable to tax-exempt obligations acquired after August 7, 1986, will
generally be the amount that bears the same ratio to the interest deduction
otherwise allowable (determined without regard to Section 265) to the taxpayer
for the taxable year as the taxpayer's average adjusted basis (within the
meaning of Section 1016) of tax-exempt obligations acquired after August 7,
1986, bears to such average adjusted basis for all assets of the taxpayer.
We also call attention to the fact that, under Section 265 of the Code,
interest on indebtedness incurred or continued to purchase or carry Units is not
deductible for Federal income tax purposes. Under rules used by the Internal
Revenue Service for determining when borrowed funds are considered used for the
purpose of purchasing or carrying particular assets, the purchase of Units may
be considered to have been made with borrowed funds even though the borrowed
funds are not directly traceable to the purchase of Units. However, these rules
generally do not apply to interest paid on indebtedness incurred for
expenditures of a personal nature such as a mortgage incurred to purchase or
improve a personal residence.
"The Revenue Reconciliation Act of 1993" (the "Tax Act") subjects
tax-exempt bonds to the market discount rules of the Code effective for bonds
purchased after April 30, 1993. In general, market discount is the amount (if
any) by which the stated redemption price at maturity exceeds an investor's
purchase price (except to the extent that such difference, if any, is
attributable to original issue discount not yet accrued) subject to a statutory
de minimis rule. Market discount can arise based on the price a Trust pays for
Bonds or the price a Unitholder pays for his or her Units. Under the Tax Act,
accretion of market discount is taxable as ordinary income; under prior law, the
accretion had been treated as capital gain. Market discount that accretes while
a Trust holds a Bond would be recognized as ordinary income by the Unitholders
when principal payments are received on the Bond, upon sale or at redemption
(including early redemption), or upon the sale or redemption of his or her
Units, unless a Unitholder elects to include market discount in taxable income
as it accrues.
Xxxxxxx and Xxxxxx has expressed no opinion with respect to taxation
under any other provisions of Federal law. Ownership of the Units may result in
collateral Federal income tax consequences to certain taxpayers. Prospective
investors should consult their tax advisors as to the applicability of any such
collateral consequences.
Very truly yours,
XXXXXXX AND XXXXXX
