1
Exhibit 8.1
▇▇. ▇▇▇▇▇ ▇▇▇▇▇▇
Chief Financial Officer
Colonial BancGroup, Inc.
P.O. Box 1109
Montgomery, AL 36101
Dear ▇▇. ▇▇▇▇▇▇:
For various business reasons, ASB Bancshares, Inc. (Acquired Corporation) and
The Colonial BancGroup, Inc. (BancGroup) have entered into an Agreement and Plan
of Merger (Agreement) on September 5, 1997. Pursuant to your request, our letter
addresses the income tax consequences of the proposed transaction as outlined
below. We will address whether the merger will qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986
(I.R.C.). We will also address additional income tax consequences to Acquired
Corporation, BancGroup, and shareholders. This letter is not a comprehensive
analysis of the income tax consequences to Acquired Corporation shareholders.
Acquired Corporation shareholders should consult their own tax advisors
regarding the income tax consequences of the merger.
BACKGROUND
Acquired Corporation operates as a bank holding company for its wholly owned
subsidiary, Ashville Savings Bank (Bank). BancGroup, a Delaware corporation, is
a bank holding company with Subsidiary banks in Florida , Alabama (Colonial
Bank), Georgia and Tennessee.
CERTAIN TERMS OF THE MERGER
At the effective date of the merger, Acquired Corporation will merge with and
into BancGroup, with BancGroup as the surviving corporation. Pursuant to the
terms of the transaction, each share of common stock of Acquired Corporation
outstanding and held by Acquired Corporation's shareholders other than shares
held by shareholders who perfect their dissenter's rights and other than shares
held by ▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇, will be converted by operation of law
and without any action on the part of the parties or the holders thereof into
shares of BancGroup common stock at a rate of $245.18 divided by the market
value of BancGroup common stock as determined by the Agreement.
On the effective date of the merger, each share of Acquired Corporation stock
held by ▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇ will be converted by operation of law
and without any action on the part of the parties or the holders thereof into
BancGroup's 1997 Subordinated Acquisition Debentures, Series A at a rate of
$245.18 principal amount for each share of Acquired Corporation stock held by
▇▇▇ ▇. ▇▇▇▇▇▇ and ▇▇▇▇▇▇▇ ▇▇▇▇▇.
No fractional shares of BancGroup common stock will be issued. Instead, each
holder of shares of
1
2
Acquired Corporation stock having a fractional interest arising upon the
conversion of such shares into shares of BancGroup common stock shall, at the
time of surrender of the certificates previously representing Acquired
Corporation stock, be paid by BancGroup an amount in cash. Any shareholder of
Acquired Corporation who does not vote in favor of the Agreement and who
complies with certain procedures relating to the rights of dissenting
shareholders will be entitled to receive payment for the fair value of his or
her Acquired Corporation stock.
Further, after consummation of the merger, BancGroup and Acquired Corporation
anticipate merging two bank subsidiaries, the Bank and Colonial Bank. Colonial
Bank will be the surviving entity.
REPRESENTATIONS OF PARTIES
- BancGroup and Acquired Corporation intend that the merger will qualify
for federal income tax purposes as a "reorganization" within the meaning of
I.R.C. Section 368(a) of the Code.
- The fair market value of the BancGroup stock received by each shareholder
of Acquired Corporation pursuant to the terms of the Agreement will be
approximately equal to the fair market value of Acquired Corporation
surrendered in the exchange. The terms of the Agreement are the result of
arm's-length negotiations between unrelated parties.
- There is no plan or intention by the shareholders of Acquired Corporation
to sell, exchange, or otherwise dispose of a number of shares of BancGroup
stock received in the transaction that will reduce the Acquired Corporation
shareholders' ownership of BancGroup stock to a number of shares having a
value, as of the date of the transaction, of less than fifty percent of the
value of all of the formerly outstanding stock of Acquired Corporation as
of the same date. For purposes of this representation, shares of Acquired
stock exchanged for cash, and surrendered by dissenters, or exchanged for
cash in lieu of fractional shares of BancGroup stock will be treated as
outstanding Acquired Corporation stock on the date of the transaction. In
addition, Acquired Corporation stock exchanged for debentures will be
treated as outstanding Acquired Corporation stock on the date of the
transaction. Shares of Acquired stock and shares of BancGroup stock held by
Acquired Corporation shareholders and otherwise sold, redeemed or disposed
of prior or subsequent to the transaction will be considered in making this
representation.
- Collectively, ▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇. and ▇▇▇▇▇▇▇ ▇▇▇▇▇ own approximately
37.45% of the outstanding stock of Acquired Corporation immediately prior
to the merger.
- Following the merger, BancGroup will continue the historic business of
Acquired Corporation or use a significant portion of Acquired Corporation's
historic business assets in a business.
- Acquired Corporation, BancGroup and Acquired shareholders will pay their
respective expenses, if any, incurred in connection with the transaction.
- No part of the consideration received by the Acquired Corporation
shareholders will be received
2
3
by them in their capacity as debtor, creditor, employee, or any way other
than as shareholder.
- The fair market value of the assets of Acquired Corporation transferred
to BancGroup will equal or exceed the sum of the liabilities assumed by
BancGroup plus the amount of liabilities, if any, to which the assets
transferred are subject.
- The total adjusted basis of the assets of Acquired Corporation
transferred to BancGroup will equal or exceed the sum of the liabilities
assumed by BancGroup plus the amount of liabilities, if any, to which the
assets transferred are subject.
TAX CONSEQUENCES TO ACQUIRED CORPORATION AND BANCGROUP
The merger of Acquired Corporation with and into BancGroup will constitute a
merger within the meaning of I.R.C. Section 368(a)(1)(A), provided that the
merger qualifies as a statutory merger pursuant to state law . Acquired
Corporation and BancGroup will each be "a party to the reorganization" within
the meaning of I.R.C. Section 368(b) of the Code. Based upon I.R.C. Sections
357(a) and 361(a), Acquired Corporation will recognize no gain or loss when it
transfers its assets to BancGroup in a constructive exchange for BancGroup's
stock, BancGroup's debentures, and the assumption of Acquired Corporation's
liabilities by BancGroup. Acquired Corporation will also not recognize any gain
or loss upon the receipt of cash in the exchange if it distributes such property
as part of the plan of reorganization under I.R.C. Section 361(b).
IRS Regulation Section 1.368-1(b) requires a continuity of interest therein on
the part of those persons who, directly or indirectly, were the owners of the
enterprise prior to the reorganization. The "continuity of interest" requirement
will be satisfied if there is a continuing interest through stock ownership in
BancGroup on the part of the former shareholders of the Acquired Corporation
which is equal in value, as of the effective date of the reorganization, to at
least 50% of the value of all the formerly outstanding stock of the Acquired
Corporation as of the same date. The debentures received by the former
shareholders of Acquired Corporation in exchange for Acquired Corporation stock
will not be considered in determining the overall percentage of equity retained
by Acquired Corporation shareholders.
Pursuant to I.R.C. Section 1032 of the Code, no gain or loss will be recognized
by BancGroup upon the acquisition by BancGroup of the assets of Acquired
Corporation in exchange for BancGroup common stock, debentures, and the
assumption of Acquired Corporation's liabilities. BancGroup's basis in the
assets acquired in the transaction will be equal to the basis of the assets in
the hands of Acquired Corporation immediately before the transaction under
I.R.C. Section 362(b). I.R.C. Section 1223(2) provides that BancGroup's holding
period for each Acquired Corporation asset received in the merger will include
the period during which the asset was held by Acquired Corporation immediately
before the transaction.
Pursuant to I.R.C. Section 381(a), BancGroup will succeed to and take into
account the items of Acquired Corporation described in I.R.C. Section 381(c),
subject to the conditions and limitations of I.R.C. Sections 381, 382, 383, 384,
and 1502 and the regulations thereunder. BancGroup will
3
4
succeed to and take into account the earnings and profits, or deficit in
earnings and profits, of Acquired Corporation as provided by I.R.C. Section
382(c)(2) of the Code and Section 1.381(c)(2)-1 of the Regulations.
TAX CONSEQUENCES TO BANK AND COLONIAL BANK
The merger of Bank with and into Colonial Bank will constitute a merger within
the meaning of I.R.C. Section 368(a)(1)(A), provided that the merger qualifies
as a statutory merger pursuant to state law. Bank and Colonial Bank will each be
"a party to the reorganization" within the meaning of I.R.C. Section 368(b) of
the Code. Based upon I.R.C. Sections 357(a) and 361(a), Bank will recognize no
gain or loss when it transfers its assets to Colonial Bank in a constructive
exchange solely for Colonial Bank's stock and the assumption of Bank's
liabilities by Colonial Bank. Bank will also not recognize any gain or loss upon
the receipt of cash in the exchange if it distributes such property as part of
the plan of reorganization under I.R.C. Section 361(b).
Pursuant to I.R.C. Section 1032 of the Code, no gain or loss will be recognized
by Colonial Bank upon the acquisition by Colonial Bank of the assets of Bank in
exchange for Colonial Bank's common stock and the assumption of Bank's
liabilities. Colonial Bank's basis in the assets acquired in the transaction
will be equal to the basis of the assets in the hands of Bank immediately before
the transaction per I.R.C. Section 362(b). I.R.C. Section 1223(2) provides that
Colonial Bank's holding period for each Bank asset received in the merger will
include the period during which the asset was held by Bank immediately before
the transaction.
Pursuant to I.R.C. Section 381(a), Colonial Bank will succeed to and take into
account the items of Bank described in I.R.C. Section 381(c), subject to the
conditions and limitations of I.R.C. Sections 381, 382, 383, 384, and 1502 and
the regulations thereunder. Colonial Bank will succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of Bank as
provided by I.R.C. Section 382(c)(2) of the Code and Section 1.381(c)(2)-1 of
the Regulations.
TAX CONSEQUENCES TO ACQUIRED CORPORATION SHAREHOLDERS
I.R.C. Section 354 states that a shareholder who receives solely BancGroup
common stock in exchange for Acquired Corporation common stock will recognize no
gain or loss on the exchange, except with respect to cash received in lieu of a
fractional interest in BancGroup common stock. I.R.C. Section 358 of the Code
provides that the shareholder's tax basis in the BancGroup common stock received
in the exchange will be the same as the basis of the Acquired Corporation common
stock surrendered, decreased by the amount of cash (if any) received by the
shareholder and increased by the amount of gain (if any) recognized in the
exchange. I.R.C. Section 1223 of the Code provides that such shareholder will
include the period during which Acquired Corporation stock was held in his
holding period for the BancGroup common stock received in the exchange.
Shareholders of Acquired Corporation who receive debentures will be treated as
having received such debentures in exchange for their Acquired Corporation
stock. The gain, if any, recognized by Acquired Corporation shareholders who
receive debentures will be reported as capital gain under the installment
4
5
method ( provided that Acquired Corporation shares are not traded on an
established securities market and assuming Acquired Corporation shareholders do
not elect out of installment sale treatment). The receipt of BanGroup debentures
will not constitute payment within the meaning of I.R.C. Section 453(f)(3)
because the debentures are not payable on demand and the debentures are not
readily tradeable as defined in Section 453(f)(5). I.R.C. Section 453 states
that installment gain is recognized in the year the payments on the debentures
are received by the Acquired Corporation shareholders. As Acquired Corporation
shareholders receive payments (exclusive of interest) on the installment
obligation, I.R.C. Section 453(c) requires that a percentage of each payment
will be gain attributable to the exchange and a percentage of each payment will
be characterized as a recovery of basis. I.R.C. Section 453A provides that a
taxpayer must pay interest on the deferred tax liability attributable to
installment obligations arising from the sale of any property if the sales price
of the property exceeds $150,000 and the face amount of all of the taxpayer's
installment obligations that arose during, and are outstanding at the end of,
the tax year exceeds $5 million.
The payment of cash in lieu of fractional shares of BancGroup common stock will
be treated as if the fractional shares were issued as part of the exchange and
then redeemed by BancGroup. These cash payments will be treated as having been
received as distributions in full payment in exchange for the stock redeemed as
provided in I.R.C. Section 302(a) of the Code. Generally, any gain or loss
recognized upon such exchange will be capital gain or loss, provided the
fractional share constitutes a capital asset in the hands of the exchanging
shareholder. The shareholders will recognize capital gain or loss equal to the
difference between the cash received and the basis of the fractional share
interest that would have been issued.
Holders of shares of Acquired Corporation common stock who receive cash upon the
exercise of any appraisal rights will be subject to a taxable transaction for
federal income tax purposes. Such a shareholder will recognize gain or loss
measured by the difference between the tax basis for his or her shares and the
amount of cash received pursuant to I.R.C. Section 1012 of the Code (unless the
receipt of cash is treated as a dividend, as described below).
In certain circumstances, the receipt of solely cash or debentures by an
Acquired Corporation shareholder could be treated as a dividend under Section
302(a) (to the extent of the shareholder's ratable share of applicable earnings
and profits) if the shareholder constructively owns shares of Acquired
Corporation common stock that are exchanged for BancGroup common stock in the
Merger. Generally, a shareholder constructively owns stock that is owned by
members of the shareholder's family, and by certain controlled or related
partnerships, estates, trusts and corporations, pursuant to the constructive
ownership rules of I.R.C. Section 318 of the Code, as well as any shares that
the shareholder has an option to acquire.
The receipt of solely cash or debentures by an Acquired Corporation shareholder
in exchange for his stock will not be treated as a dividend if such exchange or
receipt results in a meaningful reduction or a substantially disproportionate
reduction in the shareholder's ownership interest or results in a complete
termination of the shareholder's interest, taking into account, in each case,
the constructive ownership rules described above. A complete termination of a
shareholder's interest will occur if, after the receipt of cash or debentures in
exchange for stock, the shareholder owns no shares of stock in BancGroup. Thus,
a shareholder who receives solely cash or debentures for all of the stock
5
6
actually owned by him will generally qualify for capital gain treatment under
the complete termination test if none of the shares constructively owned by him
are exchanged in the merger for BancGroup Common Stock and the shareholder does
not otherwise own, actually or constructively, any shares of BancGroup Common
Stock after the merger.
Where the complete termination of interest test is not satisfied with respect to
a particular shareholder (because, for example, Acquired Corporation shares
owned by a related party are exchanged for BancGroup Common Stock in the
merger), that shareholder will nonetheless generally be entitled to capital gain
treatment if the receipt of cash or debentures in exchange for his shares
results in a "substantially disproportionate" reduction or a "meaningful"
reduction in his ownership interest. I.R.C. Section 302 of the Code provides
that a shareholder's reduction in ownership interest should normally be
"substantially disproportionate," and capital gain treatment should normally
result, if (1) the shareholder owns less than 50% of the total combined voting
power of all classes of stock immediately after the merger, and (2) the
shareholder's proportionate stock interest in BancGroup immediately after the
merger is 20% or more below what his proportionate interest in BancGroup would
have been if he had received solely BancGroup Common Stock in the merger.
Acquired Corporation shareholders who constructively own stock in Acquired
Corporation should consult a tax advisor regarding the characterization of cash
payments or debentures received in the reorganization in exchange for Acquired
Corporation stock as either capital gain income or dividend income.
SUMMARY
The merger of BancGroup and Acquired Corporation will qualify as a tax-free
reorganization within the meaning of I.R.C. Section 368(a)(1)(A). BancGroup's
basis in Acquired Corporation's assets will be the same as Acquired
Corporation's basis in its assets before the merger. The merger of Colonial Bank
and Bank will also qualify as a tax-free reorganization within the meaning of
I.R.C. Section 368(a)(1)(A). Colonial Bank's basis in Bank's assets will be the
same as Bank's basis in its assets before the merger. Acquired Corporation
shareholders will retain a substituted basis in the shares of BancGroup stock
received in the merger decreased by the amount of cash received and increased by
the amount of gain recognized in the deal. The only taxable consequences will be
to those shareholders who receive cash in lieu of fractional shares, to those
shareholders who receive solely cash in the exchange upon perfecting their
dissenter's rights, and to those shareholders who receive solely debentures in
exchange for their Acquired Corporation stock. The receipt of the BancGroup
debentures for Acquired Corporation stock should be treated as a taxable
installment sale by Acquired Corporation shareholders. Shareholders receiving
cash or debentures must examine their actual and constructive ownership of
Acquired Corporation and BancGroup stock for purposes of determining the tax
consequences of the cash payments.
If you have any questions or comments, please call ▇▇▇▇▇▇ ▇▇▇ or ▇▇▇▇ ▇▇▇▇▇▇ at
(▇▇▇) ▇▇▇-▇▇▇▇.
Very truly yours,
/S/ ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ LLP
6
