Exhibit 8
---------
[XXXXXXX, XXXXX, XXXXXXXXX, XXXX & XXXXXXXXX, P.C. LETTERHEAD]
July 24, 1997
Extended Family Care Corporation, Inc.
Xxx Xxx Xxxxxxx Xxxx
Xxxxx 000
Xxxxx Xxxxx, XX 00000
T.P.C. Home Care Services, Inc.
Xxx Xxx Xxxxxxx Xxxx
Xxxxx 000
Xxxxx Xxxxx, XX 00000
Re: Plan and Agreement of Merger of T.P.C. Home Care
Services, Inc. with and into Extended Family Care
Corporation, Dated as of March 18, 1997
--------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to the shareholders of Extended Family Care
Corporation, a New York corporation ("EFCC"), in connection with the proposed
merger (the "TPC Merger") of T.P.C. Home Care Services, Inc. ("TPC") with and
into EFCC, pursuant to the Plan and Agreement of Merger of TPC with and into
EFCC dated as of March 18, 1997 (the "TPC Merger Agreement").
In so acting, we have participated in the preparation of the TPC Merger
Agreement and the preparation and filing with the Securities and Exchange
Commission of a Joint Proxy Statement of TPC and EFCC relating to the proposed
TPC Merger and to the shares of common stock, par value $.01 per share, of EFCC
to be issued to TPC shareholders in the TPC Merger pursuant to the TPC Merger
Agreement (the "Joint Proxy Statement").
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 2
As required by Article V of the TPC Merger Agreement, you have
requested that we render the opinion set forth below. In rendering such opinion,
we have made inquiry as to the underlying facts which we consider to be relevant
to the conclusions set forth in this opinion. We have also examined and relied
upon the accuracy as of the date hereof and as of the date of the closing of the
TPC Merger of the representations and warranties as to factual matters set forth
in the documents referred to above and the letter of representation, dated as of
the date hereof, that EFCC has provided to us, a copy of which is attached
hereto (the "Letter of Representation"). Our opinion is expressly predicated on
the continuing validity of the Letter of Representation. We have no reason to
believe that these representations and facts are not true, but have not
attempted to verify them independently and expressly disclaim an opinion as to
their validity and accuracy.
For purposes of this opinion, we have also reviewed such documents and
materials as in our judgment are necessary or appropriate to enable us to render
the opinions set forth below. We have not, however, undertaken any independent
investigation of any factual matter set forth in any of the foregoing. In our
examination, we have assumed the genuineness of all signatures, the capacity of
each party executing a document to execute such document, the authenticity of
all documents submitted to us as originals and the conformity to original
documents of all documents submitted to us as certified or photostatic copies.
Capitalized terms used but not specifically defined herein shall have the
meanings as defined in the TPC Merger Agreement.
This discussion is based on the provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), final, temporary and proposed Treasury
regulations promulgated thereunder (the "Regulations") and administrative and
judicial interpretations thereof, all as in effect as of the date hereof and all
of which are subject to change (possibly on a retroactive basis). Moreover, it
is not possible to know whether any such changes will be made or court decisions
or interpretations will be issued, or the effect, if any, that such changes or
court decisions will have on our opinion. Any such change may adversely affect
our conclusions. No ruling from the Internal Revenue Service (the "IRS") has
been or will be sought on any of the issues discussed below, and there can be no
assurance that the IRS will not take a contrary view as to the federal income
tax consequences discussed below.
This opinion does not address all of the federal income tax
consequences that may be applicable to any particular holder subject to special
treatment under United States federal income tax law or to any particular holder
in light of such holder's
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 3
particular facts and circumstances. Certain holders may be subject to special
and/or different rules not discussed below. In addition, this opinion does not
address any aspect of state, local or foreign taxation.
This opinion is limited solely to the federal law of the United States
as in effect on the date hereof and the relevant facts that exist as of the date
hereof. No assurance can be given that the law or facts will not change, and we
have not undertaken to advise you or any other person with respect to any event
subsequent to the date hereof.
We are delivering this opinion to you, the Board of Directors and
shareholders, without our prior written consent, no other persons
are entitled to rely on this opinion. We hereby
consent to the filing of this opinion as an exhibit to the Joint Proxy Statement
and to the use of our name under the captions "The TPC Merger - Certain Federal
Income Tax Consequences" and "Legal Matters" in the Joint Proxy Statement. In
giving such consent, we do not thereby concede that we are within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the Rules and Regulations of the Securities and Exchange Commission
thereunder.
Facts
-----
EFCC is a New York public holding corporation with 32,000,225 shares of
common stock issued and outstanding. Xxxx Holding Corp. ("Xxxx") owns 12,749,658
(39.84%) of such shares, Arbor Home Healthcare Holdings, LLC ("Arbor") owns
13,000,000 (40.63%) of such shares and public shareholders own 6,250,568
(19.53%). Arbor acquired its shares for $1,300,000 on August 21, 1996 and
October 31, 1996 through the exercise of options granted on October 31, 1995.
On January 21, 1997, when EFCC had minimal current earnings and
profits, EFCC distributed to all of its shareholders with respect to their
shares $750,000 of cash in the aggregate (the "EFCC Dividend"). Such
distribution reduced the EFCC shareholders' basis in their EFCC shares, but not
below zero. EFCC's only remaining assets are approximately $160,000 in cash,
$150,000 in other current assets, 83% of the stock of TPC and $610,000 in
intercompany debt from TPC. The other 17% of TPC is owned by many different
shareholders.
On December 6, 1996, TPC sold the assets, subject to liabilities, of
its Jersey City, New Jersey division in a fully taxable transaction to Public
Services, Inc. ("Buyer") for $175,000, evidenced by a promissory note, plus an
amount equal to
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 4
12% of the gross revenues of Buyer in excess of $90,000 per month for a 24 month
period. Xxxxx is owned 100% by Xxxx Xxxxxx, who is the husband of a shareholder
of Xxxx, the voting trustee of Xxxx' shares in EFCC and owner of 25,000 shares
of EFCC, but does not otherwise own any direct or indirect interest in TPC and
is unrelated to all of the other shareholders of TPC and EFCC.
In order to effect desired operating efficiencies in the corporate
structure of EFCC by simplifying the current two-tiered structure, which no
longer serves any business purpose and entails a substantial cost to maintain
due to dual financial reporting, disclosure and administrative burdens, and to
make it more attractive to potential purchasers, subsequent to the sale of TPC's
Jersey City division and subsequent to the EFCC Dividend, TPC will merge into
EFCC pursuant to the Business Corporation Law of the State of New York, with
EFCC as the surviving entity (the "TPC Merger"). The shareholders of TPC (other
than EFCC) will receive solely 6,554,264 EFCC shares in the TPC Merger, which
represents 17% of all outstanding EFCC shares after such issuance.
Representations
---------------
In connection with the proposed transaction, the following
representations are being made by EFCC to us, as set forth in the Letter of
Representation:
(a) The TPC Merger will be effected in accordance with the Plan and
Agreement of Merger of TPC with and into EFCC dated as of March 18, 1997 and
pursuant to New York State law.
(b) The fair market value of the EFCC common stock received by each TPC
shareholder will be approximately equal to the fair market value of the TPC
stock surrendered in the exchange.
(c) The minority shareholders of TPC acquired their TPC stock before
the formulation of any plan in connection with the TPC Merger and not in
contemplation of EFCC's subsequent acquisition of TPC.
(d) As of the Effective Time, there will be no binding commitment or
preconceived plan or arrangement on the part of the shareholders of TPC to sell,
exchange or otherwise dispose of any of their EFCC stock received in the TPC
Merger (including EFCC shares held prior to the TPC Merger), other than pursuant
to the Star Merger.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 5
(e) EFCC has no plan or intention to reacquire any of its
stock issued in the TPC Merger.
(f) EFCC has no plan or intention to sell or otherwise dispose of any
of the assets or stock of TPC acquired in the TPC Merger, except pursuant to the
Star Merger.
(g) The liabilities of TPC assumed by EFCC and the liabilities to which
the transferred assets of TPC are subject were incurred by TPC in the ordinary
course of its business and are associated with the business of TPC.
(h) EFCC and the shareholders of TPC will pay their respective
expenses, if any, incurred in connection with the TPC Merger and will not pay
any of the expenses of the other in connection with the TPC Merger. EFCC will
pay or assume only those expenses of TPC that are solely and directly related to
the TPC Merger in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(i) There is no intercorporate indebtedness existing between EFCC and
TPC that was issued, acquired or will be settled at a discount.
(j) EFCC and TPC are not investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(k) As of the Effective Time, TPC will not be under the jurisdiction of
a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
(l) The fair market value of the assets of TPC transferred to EFCC will
equal or exceed the sum of the liabilities assumed by EFCC plus the amount of
liabilities, if any, to which the transferred assets are subject.
(m) No cash will be paid to any of the shareholders of TPC pursuant to
the TPC Merger other than cash payments to dissenting shareholders.
(n) None of the compensation received by any shareholder- employees of
TPC will be separate consideration for, or allocable to, any of their shares of
TPC stock; none of the shares of EFCC stock received by any
shareholder-employees of TPC will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employee will be for
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 6
services actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
(o) TPC and EFCC intend to complete the TPC Merger whether or not the
Star Merger is finalized. The Star Merger is not a requirement for the
occurrence of the TPC Merger. TPC and EFCC do not have a binding commitment with
Star to exchange the stock of EFCC for the stock of Star prior to the TPC
Merger. There are valid business, non-tax reasons for the TPC Merger, such as to
effect desired operating efficiencies in the corporate structure of EFCC.
Conclusion
----------
Subject to the foregoing and to the qualifications and limitations set
forth herein, we are of the following opinion that, more likely than not:
1. Assuming that the TPC Merger is consummated strictly in
accordance with the TPC Merger Agreement and assuming that TPC is merged into
EFCC pursuant to New York State law, the TPC Merger will be treated for United
States federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code.
2. EFCC and TPC will each be a party to the
reorganization within the meaning of Section 368(b) of the Code.
3. No gain or loss will be recognized by TPC shareholders as a
result of the exchange of TPC common stock solely for EFCC common stock pursuant
to the TPC Merger.
4. Each shareholder of TPC who elects to dissent from the TPC
Merger and receive cash in exchange for his shares of TPC common stock will be
treated as receiving such payment in complete redemption of his shares of TPC,
provided such shareholder does not actually or constructively own any TPC common
stock after the exchange under the provisions and limitations of Code Section
302.
5. The tax basis of the EFCC common stock received by TPC
common stockholders will be the same as the basis of the TPC common stock
surrendered in exchange therefor.
6. The holding period of the EFCC common stock received by the
TPC common stockholders will include the period during which the TPC common
stock surrendered in exchange therefor was held,
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 7
provided that the TPC common stock is held as a capital asset in the hands of
the TPC stockholders on the effective date of the TPC Merger.
7. No gain or loss will be recognized by TPC on the
transfer of all of its assets to EFCC pursuant to the plan of
reorganization.
8. No gain or loss will be recognized by EFCC in the TPC
Merger.
9. The tax basis of TPC's assets in the hands of EFCC will be
the same as the basis of those assets in the hands of TPC immediately prior to
the TPC Merger. The tax basis of TPC's assets in the hands of EFCC will not be
increased by any cash paid to dissenters.
10. The holding period of the assets of TPC in the hands of
EFCC will include the period during which such assets were held by TPC.
We express no opinion other than as stated above, and any such opinion
is not intended to imply or be an opinion on any other matter. This opinion
represents only counsel's best legal judgment as to the likely outcome of an
issue if properly presented to a court (and assuming the court determines all
facts to be consistent with the facts stated in counsel's opinion). However, the
opinion has no binding effect or official status of any kind, and the
conclusions stated herein are not free from doubt. The IRS or a court may
disagree with any or all of our conclusions and, accordingly, there can be no
assurance that the IRS will not successfully contest this opinion in the courts
or otherwise.
DISCUSSION
----------
1. GENERAL
Section 354(a)(1) of the Code addresses the effects of corporate
reorganizations on shareholders, providing in general that no gain or loss shall
be recognized if stock or securities in a corporation a party to a
reorganization are, in pursuance of the plan of reorganization, exchanged solely
for stock or securities in such corporation or in another corporation a party to
the reorganization.
For purposes of Code Section 354, the term "reorganization" is defined
in Code Section 368(a). Code Section 368(a)(1)(A) states that the term
reorganization includes a statutory merger or
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 8
consolidation. Regulation Section 1.368-2(b)(1) states that in order for a
transaction to qualify as a reorganization under Code Section 368(a)(1)(A), the
transaction must be a merger or consolidation effected pursuant to the
corporation laws of the United States, a State, territory or the District of
Columbia.
The Regulations under Code Section 368 require as a part of a
reorganization a continuity of the business enterprise under the modified
corporate form, a bona fide business purpose for the reorganization and a
"continuity of interest" therein on the part of those persons who, directly or
indirectly, were owners of the enterprise prior to the reorganization.
Regulation Section 1.368- 1(d)(2) states that the continuity of business
enterprise requirement is met if the acquiring corporation either continues the
acquired corporation's historic business or uses a significant portion of the
acquired corporation's business assets in the operation of a trade or business.
Regulation section 1.368-2(g) indicates that in addition to coming
within the scope of the specific language of Code Section 368(a), a
reorganization must also be "undertaken for reasons germane to the continuance
of the business of a corporation a party to the reorganization." If the
transaction or series of transactions has no business or corporate purpose, then
the plan is not a reorganization pursuant to Code Section 368(a). Regulation
section 1.368-1(c).
The continuity of interest requirement mandates that the historic
shareholders of the acquired corporation must acquire a definite and substantial
interest in the continuing corporation, and stock must represent a material part
of the consideration transferred.The Supreme Court, in Xxxxxx Co. x. Xxxxxxxxx,-
296 U.S. 374 (1935), held that equity equal to 38% of the entire consideration
constituted a definite and substantial interest in the purchasing corporation.
The percentage relates to the proportion of the equity consideration received by
the target shareholders in the aggregate to the total consideration paid by the
acquiror for target's assets or stock. An historic shareholder is a person who
owned the target corporation's stock before the acquisition of target commenced
and who purchased such target corporation stock before the formulation of the
transaction not in contemplation of the acquiring corporation's subsequent
acquisition of the target. It is not necessary that all historic shareholders of
the acquired corporation have a proprietary interest in the surviving
corporation after the acquisition. The IRS has announced that it considers a 50
percent continuity-of-equity interest by
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 9
value to be sufficient.1 Nevertheless, pursuant to the Xxxxxx case, a 40 percent
continuity of interest by value on the part of the former historic shareholders
of the target should be sufficient.
In addition to meeting the continuity of interest requirement
immediately after the reorganization, the former shareholders of the acquired
corporation must retain their interest in the acquiring corporation for some
unspecified time after the reorganization. The courts have ruled that the
tax-free nature of the reorganization may be retroactively invalidated if the
continuity of interest is not maintained either because, at the time of the
reorganization, the shareholders intended to dispose of the proprietary interest
soon after the reorganization2 or because a shareholder disposes of stock
immediately following the reorganization in accordance with a pre-existing
commitment to sell.3
In Rev. Rul. 66-23, 1966-1 C.B. 67, the IRS held that the target
shareholders must not have a preconceived plan or arrangement for disposing of
their acquiring corporation stock; if such plan or arrangement exists, any
post-reorganization dispositions of the stock of the acquiring corporation may
be stepped together with the initial receipt of such stock in the
reorganization. The consequence of applying step transaction principles4 to the
subsequent stock disposition is to treat the selling shareholder as having
received the sales proceeds on the date of the reorganization for purposes of
testing continuity of interest. Nevertheless, target shareholders are free to
dispose of their acquiring corporation stock at any time following the
reorganization, as long as the disposition results from circumstances existing
after the reorganization and not from a
--------
1 Rev. Proc. 77-37, 1977-2 C.B. 568. This is merely a
guideline established by the IRS for purposes of
obtaining a private letter ruling, and is not a
requirement of substantive law.
2 XxXxxxxx'x Restaurants of Illinois, Inc. v.
Commissioner, 688 F.2d 520 (7th Cir. 1982).
3 American Wire Fabrics Corp. v. Commissioner, 16 T.C. 607
(1951).
4 See infra notes 11-13 and accompanying text.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 10
preexisting plan.5 During the period of ownership of the acquiring corporation
stock, the target shareholders must have unrestricted rights of ownership for an
unspecified period of time sufficient to warrant the conclusion that such
ownership is definite and substantial.6
For purposes of Code Section 354, the term "party to a reorganization"
is defined in Code Section 368(b), which provides that the term "party to a
reorganization" includes both corporations in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another. In the case of a reorganization qualifying under Code Section
368(a)(1)(A) by reason of Code Section 368(a)(2)(D), the term "party to a
reorganization" includes the corporation which is in control of the acquiring
corporation.
Code Section 356(a)(1) provides that if Code Section 354 would apply
to an exchange but for the fact that the property received in the exchange
consists not only of property permitted to be received under Code Section 354
without the recognition of gain but also of other property or money then the
gain, if any, to the recipient shall be recognized but not in excess of the sum
of money and the fair market value of such other property. Code Section 356(c)
states that no loss from the exchange may be recognized by the shareholder.
--------
5 Rev. Rul. 66-23. See also Xxxxxx v. Commissioner, 88 T.C. 1415 (1987);
Estate of Xxxxxxxxx x. Commissioner, 57 T.C.M. (CCH) 1231 (1989). Under
Proposed Regulation Section 1.368-1(e), the IRS states that stock
dispositions of the acquiring corporation by a former target
shareholder generally are not considered for determining continuity of
interest. However, under the Proposed Regulations, if the acquiring
corporation or a related party purchases the acquiring corporation
stock shortly after the reorganization, the facts and circumstances may
indicate that the transaction should be recast to treat the acquiring
corporation as furnishing cash in the reorganization and not satisfying
the continuity of interest requirement. Proposed regulations do not
become law until adopted as final regulations, and generally are
applied prospectively once adopted. Therefore, Proposed Regulation
Section 1.368-1(e) is inapplicable to this transaction. See also infra
note 23 and accompanying text.
6 Id.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 11
The IRS, in Rev. Rul. 74-515, 1974-2 C.B. 118 and Rev. Rul. 74-516,
1974-2 C.B. 121, treated the distribution of cash as part of a reorganization
and in a transaction subject to Code Section 356 (including cash payments made
to dissenting shareholders of the acquired corporation) by applying the
redemption principles under Code Section 302. Code Section 302 provides, in
part, that a redemption will be treated as a distribution in part or full
payment in exchange for stock if it can meet the tests of that section. The
Supreme Court in Xxxxx x. Commissioner., 489 U.S. 726 (1989), applied the tests
of Code Section 302 by viewing the exchange involving cash or other property as
a "hypothetical post-reorganization redemption." The Court viewed the exchange
as first an exchange of solely stock of the acquiring corporation for the
acquired company stock, followed by an exchange by the shareholder of the newly
acquired stock for cash from the acquiring corporation. The Code Section 302
tests are applied to the second hypothetical exchange.
One of the tests of Code Section 302 provides that where there is a
complete redemption of all of a shareholder's stock in a corporation (after
consideration of the constructive ownership rules of Code Section 302(c)), the
redemption payment is treated as made entirely in exchange for the shareholder's
stock in the corporation. Code Section 302(b)(3). The constructive ownership
rules of Code Section 302(c) are generally contained in Code Section 318 and
provide that an individual or entity is treated as owning the stock owned by
certain other related individuals and entities. Where there is a complete
termination of the shareholder's interest, the constructive ownership rules may
be waived if certain conditions are met.
In Rev. Rul. 66-365, 1966-2 C.B. 116, the IRS announced that in a
transaction qualifying as a reorganization under Section 368(a)(1)(A) of the
Code where a cash payment is made by the acquiring corporation in lieu of
fractional shares and is not separately bargained for, such cash payment will be
treated under Section 302 of the Code as in redemption of fractional share
interests. Therefore, each shareholder's redemption will be treated as a
distribution in full payment in exchange for his or her fractional share
interest under Section 302(a) of the Code and accorded capital gain or loss
treatment provided the redemption is not essentially equivalent to a dividend
and that the fractional shares redeemed constitute a capital asset in the hands
of the holder as discussed below. In Rev. Proc. 77-41, 1977-2 C.B. 574, the IRS
stated that "a ruling will usually be issued under Section 302(a) of the Code
that cash to be distributed to shareholders in lieu of fractional share
interests arising in corporate reorganizations will be treated as having been
received in part or
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 12
in full payment in exchange for the stock redeemed if the cash distribution is
undertaken solely for the purpose of saving the corporation the expense and
inconvenience of issuing and transferring fractional shares, and is not
separately bargained-for consideration."
Under Code Section 358(a)(1), in the case of an exchange to which Code
Section 354 or Code Section 356 applies, the basis of property which is
permitted to be received under such sections without the recognition of gain or
loss shall be the same as that of the property exchanged, decreased by the
amount of any money received by the recipient and the amount of loss recognized
by the recipient as a result of the exchange and increased by the amount which
was treated as a dividend and the amount of other gain recognized by the
recipient as a result of the transaction.
As described above, where cash is received in lieu of fractional
shares, the substance of the transaction is that of a hypothetical receipt of
the fractional shares and then a redemption of such shares. Therefore, the basis
that is to be allocated to the stock of the acquiring corporation received must
be allocated to the shares retained and the fractional shares hypothetically
received. The gain or loss attributable to the receipt of cash in lieu of
fractional shares is measured by comparing the cash received with the basis
allocated to the fractional shares that are hypothetically received, and such
gain or loss is recognized as discussed earlier pursuant to Rev. Rul. 66-365.
Code Section 361(a) states that, as a general rule, no gain or loss is
to be recognized by a corporation if such corporation is a party to a
reorganization and exchanges property, in pursuance of the plan or
reorganization, solely for stock or securities in another corporation a party to
the reorganization. Code Section 361(b) states that if Code Section 361(a) would
apply to an exchange but for the fact that the property received in the exchange
consists not only of stock or securities afforded nonrecognition treatment under
Code Section 361(a), but also of other property or money, then provided the
corporation receiving such other property or money distributes it in pursuance
of the plan of reorganization, no gain to the corporation shall be recognized
from the exchange. Code Section 361(c) states that as a general rule no gain or
loss shall be recognized by a corporation a party to a reorganization on the
distribution to its shareholders of any stock in another corporation which is a
party to the reorganization if such stock was received by the distributing
corporation in the exchange.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 13
Code Section 1032(a) states that no gain or loss shall be recognized to
a corporation on the receipt of money or other property in exchange for such
corporation's stock, including treasury stock.
Code Section 362(a) states that the basis of property received by the
acquiring corporation in a reorganization is the same as it would be in the
hands of the transferor of the assets, increased by any gain recognized by the
transferor. The transferors for purposes of the preceding sentence in the
instant case is TPC and EFCC.
Code Section 1221 defines a capital asset as property held by the
taxpayer which is not inventory or other property held by the taxpayer primarily
for sale to customers in the ordinary course of a trade or business, property
used in the taxpayer's trade or business subject to the allowance for
depreciation under Code Section 167, a copyright, literary, musical or artistic
composition, a letter or memorandum, or similar property created by the personal
efforts of the taxpayer, accounts or notes receivable acquired in the ordinary
course of a trade or business for services rendered or from the sale of
inventory or other property held by the taxpayer primarily for sale to customers
in the ordinary course of business, or a publication of the United States
Government which is received from the United States Government or any agency
thereof other than by purchase at the price at which it is offered for sale to
the public.
Code Section 1223(1) states that in determining the period for which a
taxpayer has held property received in an exchange, there shall be included the
period for which he or she held the property exchanged if the property has, for
the purpose of determining gain or loss from a sale or exchange, the same basis
as the property exchanged and the property exchanged was a capital asset as
defined in Code Section 1221 as of the date of the exchange. Code Section
1223(2) states that for determining the period for which the taxpayer has held
property however acquired there shall be included the period for which such
property was held by another person if the property has the same basis in whole
or in part in his hands as it would have had in the hands of such other person.
2. THE TPC MERGER
Code Section 332 provides that under certain conditions a parent
corporation will not recognize gain or loss on the receipt of property
distributed in complete liquidation of an 80 percent or greater controlled
subsidiary. Code Section 337 provides that such subsidiary does not recognize
gain or loss on such distributions.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 14
Minority shareholders participating in a Code Section 332 liquidation, who
receive stock of the parent in a statutory merger of the subsidiary into the
parent, may avoid recognition of gain or loss if the transaction also qualifies
as a reorganization under Code Section 368(a).
If the parent's stock interest in the subsidiary is "old and cold,"
there should be continuity of interest to support tax-free reorganization
treatment for the minority shareholders on the receipt of the stock of the
parent in a statutory merger of the subsidiary into the parent. The last
sentence of Section 332(b) of the Code provides, in effect, that the transfer of
a subsidiary's property to a parent corporation is not disqualified as a
complete liquidation merely because it involves a transfer to the parent of
property not attributable to shares owned by the parent, in an exchange
described in Code Section 361, and involves the complete cancellation or
redemption of minority shares not owned by the parent as a result of exchanges
described in Section 354 of the Code.
Regulation Section 1.332-2(d) provides, in effect, that a complete
liquidation otherwise meeting the requirements of Section 332 of the Code is not
disqualified from the application of Code Section 332 even though, for purposes
of the corporate reorganization provisions, the parent receives property
attributable to minority shares not owned by it, and the minority shares are
canceled as a result of a tax-free exchange described in Section 354 of the
Code. The regulatory example illustrating these rules does not, however,
describe the tax consequences to the minority shareholders. See Regulations
Section 1.332-2(e).
There appears to be no judicial decision holding that a merger of a
subsidiary into its parent qualifying under Section 332 of the Code is also a
Code Section 368(a)(1)(A) tax-free reorganization as to the minority
shareholders. In Rev. Rul. 58-93, 1958-1 C.B. 188, however, the IRS ruled that a
merger of a 79% owned subsidiary into its parent (which could not have qualified
as a Code Section 332 liquidation) qualified as a tax-free Code Section
368(a)(1)(A) reorganization both as to the corporate entities and as to the
minority shareholders who received stock of the parent.7
--------
7 On the facts of this ruling, the merger would not have qualified under
Code Section 332 even if the parent had owned 80% of the subsidiary's
stock because, immediately prior to the merger, the subsidiary
transferred all of its operating assets to its new wholly owned
subsidiary which then became a wholly owned subsidiary of the parent.
Thus, the business of the subsidiary was not liquidated but was
reincorporated in a new subsidiary.
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 15
In Rev. Rul. 69-617, 1969-2 C.B. 57, the IRS ruled that a merger of a
more-than 80% owned subsidiary into its parent, which did not qualify as a
liquidation under Code Section 332 because the assets were dropped into another
subsidiary of the parent, qualified as a tax-free Code Section 368(a)(1)(A)
reorganization as to all parties where the minority shareholders received stock
of the parent in the merger.8
In Priv. Let. Rul. 9351028 (Sept. 28, 1993),9 the IRS ruled that the
merger of Corporation S into Corporation P would qualify under Code Section
332(a), where P owned more than 80% of the stock of S. With regard to the
minority shareholder of S, the IRS, citing its annual "no-ruling" revenue
procedure, did not rule as to whether the transaction would qualify under Code
Section 368(a)(1)(A), but did rule that several of the Code Section 368(a)(1)(A)
requirements would be met. The IRS concluded that if the merger of S into P
otherwise qualified as a Code Section 368(a)(1)(A) reorganization, the minority
shareholder would not recognize gain or loss on the exchange of his minority
interest in S stock for P stock, pursuant to Code Section 354(a)(1). Thus, the
IRS appears to agree that a merger of a subsidiary into a more than 80%
controlling parent may qualify as a reorganization with respect to the minority
shareholders, while being treated as a Code Section 332 liquidation with respect
to the parent.10
Since a sufficiently large portion of the ownership of the stock of TPC
is "old and cold," and since EFCC owns approximately 83 percent of TPC, a
statutory merger of TPC into EFCC should satisfy the continuity of interest
requirement (as well as the other requirements) for a valid Code Section
368(a)(1)(A) reorganization, and the receipt of EFCC's stock by the TPC minority
--------
8 The ruling stated that "the fact that [the parent] owned more than 80%
of the stock of [the subsidiary] does not prevent the transfer of the
assets of [the subsidiary] to [the parent] from qualifying as a
statutory merger, where such assets are transferred to another
subsidiary."
9 Private Letter Rulings may not be relied upon or otherwise cited as
precedent. However, we believe it is appropriate to refer to them in
order to demonstrate an administrative position previously taken by the
Service.
10 See also Priv. Let. Rul. 8825048 (Mar. 23, 1988).
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 16
shareholders should be tax free under Code Section 354. In addition, EFCC and
TPC will not recognize any gain or loss pursuant to Code Sections 332 and 337.
A tax-free transaction in which a target corporation's stock is
transferred to new shareholders followed by a subsequent tax-free reorganization
of the target corporation into another corporation should be respected if such
initial transaction has independent significance and a business purpose.11 Under
the step transaction doctrine, an analysis is made of the separate steps of a
transaction to determine whether each step should be accorded independent legal
significance or whether the steps should be treated as related steps in one
unified transaction and "stepped together" to produce the actual result.12 The
courts have established several tests to determine whether the doctrine is
applicable -- the "end result" test, the "interdependence test" and the "binding
commitment test."13 Although it is generally unclear which of these tests should
be given the greatest weight in any particular case, we believe the
interdependence test is the most relevant to this transaction.
In the instant case, the TPC Merger should be deemed to have
independent significance and a business purpose and, therefore, should be
respected. Under the "end result" test, since the TPC Merger is a separate
transaction grounded in economic and legal reality, its form should be
respected. We believe that the IRS would not have a reasonable justification for
disregarding or otherwise rearranging the steps in a less advantageous manner
for the taxpayers even if a less advantageous structure could be
--------
11 See Xxxxxx v. Commissioner, 51 T.C.M. (CCH) 432 (1986).
Even if the TPC Merger is not respected as a separate
Code Section 368(a)(1)(A) reorganization, it should be
treated as a Code Section 332 liquidation. See Priv.
Let. Rul. 8713033 (Dec. 29, 1986); Priv. Let. Rul.
8425081 (Mar. 21, 1984); Priv. Let. Rul. 8032114 (May,
1980); Priv. Let. Rul. 8024137 (Mar. 20, 1980). See also
infra notes 21-22 and accompanying text.
12 King Enterprises, Inc. v. U.S., 418 F.2d 511 (Ct. Cl.
------------------------------
1969).
13 Id; McDonald's Restaurant of Illinois, Inc. v.
Commissioner, 688 F.2d 520 (7th Cir. 1982); Redding v.
Commissioner, 630 F.2d 1169 (7th Cir. 1980) cert. denied
450 U.S. 913 (1981); Commissioner x. Xxxxxx, 391 U.S. 83
(1968).
Extended Family Care Corporation
T.P.C. Home Care Services, Inc.
July 24, 1997
Page 17
construed. Under the "binding commitment test", TPC and EFCC do not have a
binding commitment with Star to exchange the stock of EFCC for the stock of Star
prior to the approval and commitment to the TPC Merger. Under the
interdependence test, TPC and EFCC intended to complete the TPC Merger whether
or not the Star Merger was finalized. The Star Merger is not a condition to the
occurrence of the TPC Merger (although the TPC Merger is a condition to the Star
Merger). There is a real possibility that the TPC Merger will occur without the
closing of the Star Merger. The TPC Merger will not be fruitless without the
Star Merger.
There are real legal implications and potential economic consequences
to the TPC Merger; for example, the TPC minority shareholders will acquire
dissenters' rights in the TPC Merger. There are valid business reasons for the
TPC Merger, such as to effect desired operating efficiencies in the corporate
structure of EFCC by simplifying the current two-tiered structure, which no
longer serves any business purpose and entails a substantial cost to maintain
due to dual financial reporting, disclosure and administrative requirements, and
to make it more attractive to Star or any other potential purchaser if the Star
Merger does not close. Thus, the subsequent Star Merger should not disqualify
the TPC Merger as a tax-free reorganization.
Very truly yours,
/s/ Xxxxxxx X. Xxxxxxxxxx
Xxxxxxx, Xxxxx, Xxxxxxxxx, Xxxx
& Xxxxxxxxx, P.C.
Extended Family Care Corporation
Xxx Xxx Xxxxxxx Xxxx
Xxxxx Xxxxx, Xxx Xxxx 00000
July 24, 1997
Xxxxxxx, Xxxxx, Xxxxxxxxx,
Xxxx & Xxxxxxxxx, P.C.
000 Xxxxxx Xxxxxx
Xxxxxxx, XX 00000
Ladies and Gentlemen:
The following facts and representations are being furnished to you in
connection with the preparation of your tax opinion to be provided in connection
with the TPC Merger (as defined below) and we understand that you will be
relying on such facts and representations in delivering your opinion. Unless
otherwise defined herein, capitalized terms shall have the meanings ascribed to
them in the Plan and Agreement of Merger of T.P.C. Home Care Services, Inc. with
and into Extended Family Care Corporation, dated as of March 18, 1997 (the "TPC
Merger Agreement").
(a) The merger of T.P.C. Home Care Services, Inc. ("TPC") with and into
Extended Family Care Corporation ("EFCC") (the "TPC Merger") will be effected in
accordance with the Plan and Agreement of Merger of TPC with and into EFCC dated
as of March 18, 1997 and pursuant to New York State law.
(b) The fair market value of the EFCC common stock received by each TPC
shareholder will be approximately equal to the fair market value of the TPC
stock surrendered in the exchange.
Xxxxxxx, Lippe, et. al.
July 24, 1997
Page 2
(c) The minority shareholders of TPC acquired their TPC stock before
the formulation of any plan in connection with the TPC Merger and not in
contemplation of EFCC's subsequent acquisition of TPC.
(d) As of the Effective Time, there will be no binding commitment or
preconceived plan or arrangement on the part of the shareholders of TPC to sell,
exchange or otherwise dispose of any of their EFCC stock received in the TPC
Merger (including EFCC shares held prior to the TPC Merger), other than pursuant
to the merger of EFCC with and into EFCC Acquisition Corp. (the "Star Merger").
(e) EFCC has no plan or intention to reacquire any of its
stock issued in the TPC Merger.
(f) EFCC has no plan or intention to sell or otherwise dispose of any
of the assets or stock of TPC acquired in the TPC Merger, except pursuant to the
Star Merger.
(g) The liabilities of TPC assumed by EFCC and the liabilities to which
the transferred assets of TPC are subject were incurred by TPC in the ordinary
course of its business and are associated with the business of TPC.
(h) EFCC and the shareholders of TPC will pay their respective
expenses, if any, incurred in connection with the TPC Merger and will not pay
any of the expenses of the other in connection with the TPC Merger. EFCC will
pay or assume only those expenses of TPC that are solely and directly related to
the TPC Merger in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(i) There is no intercorporate indebtedness existing between EFCC and
TPC that was issued, acquired or will be settled at a discount.
(j) EFCC and TPC are not investment companies as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended (the
"Code").
(k) As of the Effective Time, TPC will not be under the jurisdiction of
a court in a title 11 or similar case within the meaning of Section 368(a)(3)(A)
of the Code.
Xxxxxxx, Lippe, et. al.
July 24, 1997
Page 3
(l) The fair market value of the assets of TPC transferred to EFCC will
equal or exceed the sum of the liabilities assumed by EFCC plus the amount of
liabilities, if any, to which the transferred assets are subject.
(m) No cash will be paid to any of the shareholders of TPC pursuant to
the TPC Merger other than cash payments to dissenting shareholders.
(n) None of the compensation received by any shareholder- employees of
TPC will be separate consideration for, or allocable to, any of their shares of
TPC stock; none of the shares of EFCC stock received by any
shareholder-employees of TPC will be separate consideration for, or allocable
to, any employment agreement; and the compensation paid to any
shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services.
(o) TPC and EFCC intend to complete the TPC Merger whether or not the
Star Merger is finalized. The Star Merger is not a requirement for the
occurrence of the TPC Merger. TPC and EFCC do not have a binding commitment with
Star to exchange the stock of EFCC for the stock of Star prior to the TPC
Merger. There are valid business, non-tax reasons for the TPC Merger, such as to
effect desired operating efficiencies in the corporate structure of EFCC.
EFCC acknowledges that your tax opinion may not accurately describe the
effects of the TPC Merger if any of the foregoing facts or representations are
inaccurate.
Very truly yours,
/s/ Xxxxxx Xxxxxx
Extended Family Care
Corporation
