Exhibit 12(c)
October 5, 2012
Legg Mason Western Asset Global Inflation Management Fund
c/o Legg Mason Partners Income Trust
55 Water Street
New York, NY 10041
Western Asset Inflation Indexed Plus Bond Fund
c/o Western Asset Funds, Inc.
100 International Drive
Baltimore, Maryland 21202
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of Reorganization (the “Agreement”) dated October 5, 2012, by and among Legg Mason Partners Income Trust, a Maryland statutory trust (the “Trust”), on behalf of its series Legg Mason Western Asset Global Inflation Management Fund (the “Target Fund”) and Western Asset Funds, Inc., a Maryland corporation (the “Corporation”), on behalf of its series Western Asset Inflation Indexed Plus Bond Fund (the “Acquiring Fund,” together with Target Fund, the “Funds”), and, solely for purposes of paragraph 10.2 thereof, Legg Mason Partners Fund Advisor, LLC (“LMPFA”). The Agreement describes a proposed transaction (the “Reorganization”) to occur as of the date of this letter (the “Closing Date”), pursuant to which Acquiring Fund will acquire substantially all of the assets of Target Fund in exchange for shares of beneficial interest in Acquiring Fund (the “Acquiring Fund Shares”) and the assumption by Acquiring Fund of all of the liabilities of Target Fund following which the Acquiring Fund Shares received by Target Fund will be distributed by Target Fund to its shareholders in liquidation and termination of Target Fund. This opinion as to certain U.S. federal income tax consequences of the Reorganization is furnished to you pursuant to Section 8.5 of the Agreement. Capitalized terms not defined herein are used herein as defined in the Agreement.
Target Fund is a series of the Trust, which is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Shares of Target Fund are redeemable at net asset value at each shareholder’s option. Target Fund has elected to be a regulated investment company for federal income tax purposes under Section 851 of the Internal Revenue Code of 1986, as amended (the “Code”).
Acquiring Fund is a series of the Corporation, which is registered under the 1940 Act as an open-end management investment company. Shares of Acquiring Fund are redeemable at net asset value at each shareholder’s option.Acquiring Fund has elected to be a regulated investment company for federal income tax purposes under Section 851 of the Code.
Legg Mason Western Asset Global Inflation Management Fund Western Asset Inflation Indexed Plus Bond Fund | October 5, 2012 |
For purposes of this opinion, we have considered the Agreement, the Proxy Statement dated June 1, 2012, and such other items as we have deemed necessary to render this opinion. In addition, each of Target Fund and Acquiring Fund has provided us with a letter dated as of the date hereof (collectively, the “Representation Letters”) representing as to certain facts, occurrences and information upon which each of Target Fund and Acquiring Fund has indicated that we may rely in rendering this opinion (whether or not contained or reflected in the documents and items referred to above).
In reviewing the foregoing materials, we have assumed, with your permission, the authenticity of original documents, the accuracy of copies, the genuineness of signatures, the legal capacity of signatories, and the proper execution of documents. We have further assumed that (i) all parties to the Agreement and any other documents examined by us have acted, and will act, in accordance with the terms of such Agreement and documents, and that the Reorganization will be consummated pursuant to the terms and conditions set forth in the Agreement without the waiver or modification of any such terms and conditions; and (ii) all representations contained in the Agreement, as well as those representations contained in the Representation Letters, are true and complete.
Based on and subject to the foregoing and subject to the final paragraphs hereof, we are of the opinion that, for U.S. federal income tax purposes:
| (i) | The Reorganization will constitute a “reorganization” within the meaning of Section 368(a) of the Code, and Acquiring Fund and Target Fund each will be “a party to a reorganization” within the meaning of Section 368(b) of the Code; |
| (ii) | Under Sections 361 and 357(a) of the Code, Target Fund will not recognize gain or loss upon the transfer of its assets to Acquiring Fund in exchange for Acquiring Fund Shares and the assumption by Acquiring Fund of the liabilities of Target Fund, or upon the distribution of Acquiring Fund Shares by Target Fund to its shareholders in liquidation, except for (A) any gain or loss that may be recognized on “section 1256 contracts” as defined in Section 1256(b) of the Code as a result of the closing of the tax year of Target Fund, (B) any gain that may be recognized on the transfer of stock in a “passive foreign investment company” as defined in Section 1297(a) of the Code, and (C) any other gain or loss that may be required to be recognized (1) as a result of the closing of the tax year of Target Fund, (2) upon the termination of a position, or (3) upon the transfer of an asset regardless of whether such a transfer would otherwise be a nontaxable transaction; |
| (iii) | Under Section 354 of the Code, Target Fund shareholders will not recognize any gain or loss upon the exchange of their Target Fund shares for Acquiring Fund Shares pursuant to the Reorganization; |
-2-
Legg Mason Western Asset Global Inflation Management Fund Western Asset Inflation Indexed Plus Bond Fund | October 5, 2012 |
| (iv) | Under Section 358 of the Code, the aggregate tax basis of Acquiring Fund Shares a Target Fund shareholder receives in the Reorganization will be the same as the aggregate tax basis of the Target Fund shares exchanged therefor; |
| (v) | Under Section 1223(1) of the Code, a Target Fund shareholder’s holding period for the Acquiring Fund Shares received in the Reorganization will include the shareholder’s holding period for the Target Fund shares exchanged therefor, provided that the shareholder held those Target Fund shares as capital assets; |
| (vi) | Under Section 1032 of the Code, Acquiring Fund will not recognize any gain or loss upon the receipt of the assets of Target Fund in exchange for Acquiring Fund Shares and the assumption by Acquiring Fund of the liabilities of Target Fund; |
| (vii) | Under Section 362(b) of the Code, Acquiring Fund’s tax basis in the assets of Target Fund transferred to Acquiring Fund in the Reorganization will be the same as Target Fund’s tax basis immediately prior to the transfer, increased by any gain or decreased by any loss required to be recognized as described in (ii) above; |
| (viii) | Under Section 1223(2) of the Code, the holding period in the hands of Acquiring Fund of each Target Fund asset transferred to Acquiring Fund in the Reorganization, other than any asset with respect to which gain or loss is required to be recognized as described in (ii) above, will include the period during which such asset was held or treated for federal income tax purposes as held by Target Fund; and |
| (ix) | Acquiring Fund will succeed to and take into account the items of Target Fund described in Section 381(c) of the Code, subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and the Regulations thereunder. |
In connection with this opinion, we call your attention to Revenue Ruling 87-76, 1987-2 C.B. 84, published by the Internal Revenue Service (“IRS”). In that ruling, the IRS held that the so-called “continuity of business enterprise” requirement necessary for tax-free reorganization treatment was not met in the case of an acquisition of an investment company which invested in corporate stocks and bonds by an investment company which invested in municipal bonds. Specifically, the IRS based its ruling on its conclusion that the business of investing in corporate stocks and bonds is not the same line of business as investing in municipal bonds. We believe that the IRS’s conclusion in this ruling has always been questionable. In addition, a series of private letter rulings issued in July 2005 and subsequent private letter rulings (that indicate the IRS’s view on these issues but on which, as a matter of law, we are not permitted to rely under Code Section 6110(k)(3)) suggest that the IRS’s position on this issue is evolving: in each of these rulings, the IRS relied upon historic business representations to conclude that the reorganization satisfied the continuity of business enterprise requirement. However, even if the IRS’s 1987 revenue ruling were a correct statement of law, the facts of the Reorganization would be distinguishable from those in the ruling.
-3-
Legg Mason Western Asset Global Inflation Management Fund Western Asset Inflation Indexed Plus Bond Fund | October 5, 2012 |
We believe that Acquiring Fund will continue Target Fund’s historic business, within the meaning of Treas. Reg. § 1.368-1(d), as an open-end management investment company that seeks to achieve its investment objective by investing in instruments that provide some degree of inflation protection. Although Acquiring Fund will dispose of securities formerly held by Target Fund, these dispositions will be in the normal course of operations (which include redemptions) and fully consistent with Acquiring Fund’s investment objectives and strategies, including those objectives and strategies it shares with Target Fund, and all proceeds generated by such dispositions not distributed, including in redemption, will be reinvested in a manner fully consistent with such policies. Based upon all the facts and circumstances including those recited above, we are of the opinion that Acquiring Fund will continue the historic business of Target Fund for the benefit of, among others, the historic stockholders of Target Fund, and that, as a result, the continuity of business enterprise doctrine is fulfilled. We call to your attention the fact that there is no case law, and Revenue Ruling 87-76 is the only ruling on which taxpayers can rely (i.e., the only ruling that is not a private letter ruling), dealing specifically with the application of the “continuity of business enterprise” requirement to a reorganization involving two or more investment companies.
We note that, pursuant to and all as more fully set forth in the Agreement, following the Closing Date, Target Fund will retain title to, but none of the beneficial interest in, certain assets (the “Arrangement”). Target Fund and Acquiring Fund will use reasonable best efforts, and take such actions as may be required, in order to complete the transfer of title in such assets to Acquiring Fund unless, in the case of any such asset, the cost of taking such actions is significant and either (a) Target Fund and Acquiring Fund deem such asset to have no value, or (b) such asset is in the process of being sold pursuant to a transaction in which the Target Fund and a third party purchaser have reached agreement on the economic terms of sale but with respect to which final documentation (including that relating to transfer of title) has not yet been completed. We call to your attention the absence of legal authority on the impact of retaining such bare legal title on the Code Section 368(a) requirement that Target Fund distribute all its properties as part of the plan of reorganization. We believe that the Arrangement is consistent with that requirement.
[Remainder of page intentionally left blank.]
-4-
Legg Mason Western Asset Global Inflation Management Fund Western Asset Inflation Indexed Plus Bond Fund | October 5, 2012 |
No ruling has been or will be obtained from the IRS as to the subject matter of this opinion and there can be no assurance that the IRS or a court of law will concur with the opinion set forth above. Our opinion is based on the Code, Treasury Regulations, IRS rulings, judicial decisions, and other applicable authority, all as in effect on the date of this opinion. The legal authorities on which this opinion is based may be changed at any time. Any such changes may be retroactively applied and could modify the opinions expressed above.
Very truly yours,
/s/ Ropes & Gray LLP
-5-