Xxxxxxxx Ronon
Xxxxxxx & Xxxxx LLP
0000 Xxx Xxxxxxxx Xxxxxx
Xxxxxxxxxxxx, XX 00000-0000
Telephone (000) 000-0000
Fax (000) 000-0000
August 26, 1999
Board of Trustees
Franklin Municipal Securities Trust,
Xxxxxxxx Xxxxxxxxxx Municipal Bond Fund
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 IT
SERIES, XXXXXXXX XXXXXXXXXX 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 that 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
Shares"), (ii) the distribution of Acquiring Fund 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 August 26, 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 State of California and the
State of Delaware, 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 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 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 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 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 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
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Xxxxxxx X. Xxxxxxxxx, a Partner
