June 24, 1999
Board of Trustees
Franklin Municipal Securities Trust
000 Xxxxxxxx Xxxxxx Xxxx.
Xxx Xxxxx, XX 00000
Board of Directors
Franklin Federal Tax-Free Income Fund
000 Xxxxxxxx Xxxxxx Xxxx.
Xxx Xxxxx, XX 00000
Re: AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE 28TH
DAY OF APRIL, 1999 (THE "AGREEMENT"), BY AND BETWEEN FRANKLIN
MUNICIPAL SECURITIES TRUST, A DELAWARE BUSINESS TRUST, ON BEHALF
OF ITS SERIES, FRANKLIN HAWAII MUNICIPAL BOND FUND ("ACQUIRED
FUND") AND FRANKLIN FEDERAL TAX-FREE INCOME FUND, A CALIFORNIA
CORPORATION ("ACQUIRING FUND")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
common stock, no par value, of the Acquiring Fund - Class A ("Acquiring Fund
Class A Shares"), (ii) the distribution of Acquiring Fund Class A Shares to
the shareholders of the Acquired Fund according to their respective
interests, and (iii) the subsequent dissolution of the Acquired Fund as soon
as practicable after the closing (the "Reorganization"), all upon and subject
to the terms and conditions of the Agreement.
In rendering our opinion, we have reviewed and relied upon (a)
the Agreement and Plan of Reorganization, dated as of the 28th day of April,
1999, by and between the Acquiring Fund and Franklin Municipal Securities
Trust on behalf of the Acquired Fund ("Agreement"), (b) the proxy materials
provided to stockholders of the Acquired Fund in connection with the Special
Meeting of Stockholders of the Acquired Fund held on the 23rd day of June,
1999, (c) certain representations concerning the Reorganization made to us by
the Acquiring Fund and Franklin Municipal Securities Trust on behalf of the
Acquired Fund in a letter dated June 24, 1999 (the "Representation Letter"),
(d) all other documents, financial and other reports and corporate minutes
which we deemed relevant or appropriate, and (e) such statutes, regulations,
rulings and decisions as we deemed material to the rendition of this
opinion. All terms used herein, unless otherwise defined, are used as
defined in the Agreement.
For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the States of Delaware and
California, the Agreement and the Representation Letter, it is our opinion
that:
1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Class A Shares pursuant to Section 361(a) and Section 357(a)
of the Code. We express no opinion as to whether any accrued market discount
will be required to be recognized as ordinary income pursuant to Section 1276
of the Code.
3. No gain or loss will be recognized by Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Class A Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Class A Shares (including fractional shares to which they may be
entitled), pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Class A Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Class A Shares
received by the stockholders of Acquired Fund (including fractional shares to
which they may be entitled) will include the holding period of the Acquired
Fund Shares surrendered in exchange therefor, provided that the Acquired Fund
Shares were held as a capital asset on the effective date of the
Reorganization, pursuant to Section 1223(1) of the Code.
9. Acquiring Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Agreement and the
Representation Letter.
This opinion is being rendered to Acquiring Fund and Franklin
Municipal Securities Trust on behalf of Acquired Fund and may be relied upon
only by such funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, XXXXXXX & XXXXX, LLP
By:/s/Xxxxxxx X. Xxxxxxxxx
Xxxxxxx X. Xxxxxxxxx, a Partner
