Form of Tax Opinion
[Principal Balanced Fund, Inc., Principal Partners LargeCap Value Fund, Inc.,
Principal Partners LargeCap Blend Fund, Inc., Principal LargeCap Stock Index
Fund, Inc., Principal Partners Equity Growth Fund, Inc., Principal Partners
MidCap Growth Fund, Inc., Principal Partners SmallCap Growth Fund, Inc.,
Principal Real Estate Securities Fund, Inc., Principal Bond Fund, Inc.,
Principal International Fund, Inc., Principal International SmallCap Fund, Inc.]
June ____, 2005
Board of Directors
Principal Bond Fund, Inc.
680 8th Street
Des Moines, IA 50392-0200
RE: Acquisition of Principal Bond Fund, Inc.
By PIF Bond & Mortgage Securities Fund
To the Board of Directors:
PIF Bond & Mortgage Securities Fund, a separate series of Principal Investors
Fund, Inc., a Maryland corporation ("Acquiring"), intends to acquire all of the
assets and assume all of the liabilities of Principal Bond Fund, Inc., a
Maryland corporation ("Target"), in a transaction ("the Reorganization")
described in a Form N-14 Registration Statement, File Number 333-_____, filed
with the United States Securities and Exchange Commission (the "Registration
Statement") on or about March 10, 2005. You have asked for an opinion concerning
the Federal income tax consequences of the proposed transaction.
Continuously since its formation, Acquiring has qualified as a regulated
investment company for purposes of Subchapter M of the United States Internal
Revenue Code of 1986, as amended (the "Code"), and has elected to be taxed as
such.
Target, like Acquiring, has qualified since its inception as a regulated
investment company for purposes of the Code, and has elected to be taxed as
such.
Acquiring and Target are each an open-end management company registered with the
Securities and Exchange Commission and various states.
Acquiring and Target, where applicable, have made the following representations
to the undersigned:
1. On the effective date of the Reorganization ("the Effective Date"),
Acquiring will acquire all of the assets of Target solely in exchange
for Acquiring voting shares ("Acquiring Shares") and the assumption by
Acquiring of all of Target's liabilities. Target will immediately
thereafter completely liquidate and dissolve, distributing the
Acquiring Shares to Target shareholders in retirement of their Target
shares. Each holder of shares of Target will, as a result of the
Reorganization, own shares of Acquiring of equal value to the shares of
Target held by such holder immediately prior to the Reorganization.
2. The business purpose of the Reorganization will be as set forth in the
Registration Statement.
3. The facts relating to the Reorganization, as described in the Agreement
and Plan of Reorganization, as such document may be amended, ("the
Plan), and the representations of Acquiring and Target contained in the
Plan are true, correct and complete.
4. In the Reorganization, Acquiring will acquire all of the assets of
Target solely in exchange for Acquiring Shares and Acquiring's
assumption of all liabilities of the Target.
5. Acquiring will not assume Target's obligation to pay, and will not pay
any dividends or distributions on Target's shares.
6. The fair market value of the Acquiring Shares received by each Target
shareholder will be approximately equal to the fair market value of the
Target stock surrendered in the exchange.
7. A number of full and fractional Acquiring Shares equal in value to the
aggregate net value of Target's assets transferred to Acquiring, will
be issued to Target in exchange for such assets.
8. No cash or property, other than Acquiring Shares, will be directly or
indirectly transferred to Target or distributed by Target to its
shareholders pursuant to the Reorganization.
9. Acquiring will acquire at least 90% of the fair market value of the net
assets and at least 70% of the fair market value of the gross assets
held by Target immediately prior to the Reorganization. For purposes of
this representation, amounts paid by Target to dissenters, amounts used
by Target to pay its reorganization expenses, amounts paid by Target to
shareholders who receive cash or other property, and all redemptions
and distributions (except for regular, normal dividends) made by Target
immediately preceding the transfer will be included as assets of Target
held immediately prior to the Reorganization.
10. Acquiring has no plan or intention to reacquire any of its stock issued
in the Reorganization, except in connection with its legal obligations
under Section 22(e) of the Investment Companies Act of 1940.
11. To the best of Acquiring's and Target's knowledge, there is no plan or
intention by the shareholders of Target who own 5 percent or more of
Target, and there is no plan or intention on the part of the remaining
shareholders of Target, to sell, exchange, redeem or otherwise dispose
of a number of Acquiring Shares received in the Reorganization that
would reduce Target's shareholders' ownership of Acquiring's shares to
a number of shares having a value, as of the Effective Date, of less
than 50 percent of the value of all of the formerly outstanding shares
of Target as of the same date. For purposes of this representation,
shares of Target exchanged for cash or other property or exchanged for
cash in lieu of fractional shares of Acquiring will be treated as
outstanding Target shares on the Effective Date. Moreover, shares of
Target and shares of Acquiring that were held by Target shareholders
and that are otherwise sold, redeemed, or disposed of prior to or
subsequent to the Reorganization will be considered in making this
representation.
12. Immediately following the Effective Date, the former shareholders of
Target will own, in the aggregate, less than 50 percent of the total
combined voting power of all classes of shares of Acquiring entitled to
vote, and less than 50 percent of the total value of all classes of
shares of Acquiring.
13. After the Reorganization, Acquiring will use the assets acquired from
Target in its business, except that these assets may be sold or
otherwise disposed of in the ordinary course of Acquiring's business
as an investment company (i.e. dispositions resulting only from
investment decisions made on the basis of investment considerations
arising after and independent of the Reorganization). Any proceeds
will be invested in accordance with Acquiring's investment objectives.
Acquiring has no plan or intention to sell or otherwise dispose of any
of the assets of Target acquired in the Reorganization, except for
dispositions made in the ordinary course of its business.
14. Following the Reorganization, Acquiring will continue the historic
business of Target and use a significant portion (i.e., least 34
percent) of Target's historic business assets in the continuing
business. Historic business assets are those of Target acquired by it
in the ordinary course of its business and not in contemplation of, or
as part of the Reorganization.
15. The liabilities of Target assumed by Acquiring and any liabilities to
which the transferred assets of Target are subject were incurred by
Target in the ordinary course of its business.
16. Except as provided in the Registration Statement, Target, Acquiring,
and the shareholders of Target will pay their respective expenses, if
any, incurred in connection with the Reorganization.
17. There is no intercorporate indebtedness existing between Acquiring and
Target that was issued, acquired, or will be settled at discount.
18. Neither Target nor Acquiring is 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.
19. Acquiring and Target each meets the requirements of a regulated
investment company ("RIC") under section 368(a)(2)(F) of the Code.
20. The adjusted basis and fair market value of the assets of Target
transferred to Acquiring will equal or exceed the sum of the
liabilities to be assumed by Acquiring, plus the amount of the
liabilities, if any, to which the transferred assets are subject.
21. None of the compensation, if any, to be received by any
shareholder-service provider of Target in respect of services or in
respect of refraining from the performance of services will be
separate consideration for, or allocable to, any of his or her Target
shares. None of the Acquiring Shares to be received by any
shareholder-service provider of Target will be separate consideration
for or allocable to, any employment agreement, consulting agreement,
covenant not to compete, or similar arrangement. Any compensation to
be paid to any shareholder-service provider of Target will be for
services actually rendered and will be commensurate with amounts paid
to third parties bargaining at arm's length for similar services and
has been bargained for independent of the negotiations regarding the
consideration to be issued in exchange for Target shares in the
Reorganization.
22. Target and Acquiring have each elected to be taxed as a RIC under
section 851 of the Code, and for all of their taxable periods
(including Target's last short taxable period ending on the Effective
Date), have qualified for the special tax treatment afforded RICs under
the Code. After the Reorganization, Acquiring intends to continue to so
qualify.
23. There is no plan or intention for Acquiring (the issuing corporation as
defined in Treasury Regulation section 1.368-1(b)) or any person
related (as defined in section 1.368-1(e)(3)) to Acquiring, to acquire
during the five-year period beginning on the date of the
Reorganization, with consideration other than Acquiring stock,
Acquiring stock furnished in exchange for a proprietary interest in
Target in the Reorganization, either directly or through any
transaction, agreement, or arrangement with any other person.
24. During the five-year period ending on the Effective Date of the
Reorganization: (i) neither Acquiring, nor any person related (as
defined in section 1.368-1(e)(3)) to Acquiring, will have acquired
Target stock with consideration other than Acquiring Shares, (ii)
neither Target nor any person related (as defined in section
1.368-1(e)(3)) without regard to section 1.368-1(e)(3)(i)(A)) to
Target, will have acquired Target stock with consideration other than
Acquiring Shares or Target stock, and (iii) no distributions will have
been made with respect to Target stock (other than ordinary, normal,
regular dividend distributions made pursuant to Target's historic
dividend paying practice), either directly or through any transaction,
agreement, or arrangement with any other person, except for (a) cash
paid to dissenters, and (b) distributions described in Code sections
852 and 4982, as required for Target's tax treatment as a RIC or to
avoid Federal excise tax.
25. The aggregate value of the acquisitions, redemptions, and distributions
described in the two immediately preceding paragraphs will not exceed
50 percent of the value (without giving effect to the acquisitions,
redemptions, and distributions) of the proprietary interest in Target
on the Effective Date.
In reliance on the information provided in the Registration Statement, I am of
the opinion that:
1. The acquisition of all of the assets and liabilities of Target by
Acquiring solely in exchange for Acquiring Shares, followed by
distribution of those Acquiring Shares to shareholders of Target in
complete liquidation of Target, will constitute a reorganization within
the meaning of section 368(a)(1) of the Code. Each of Acquiring and
Target will be a "party to a reorganization" within the meaning of
section 368(b) of the Code.
2. Shareholders of Target will recognize no gain or loss as a consequence
of the surrender of their shares of Target solely in exchange for
Acquiring Shares pursuant to the Reorganization. (Code Section 354).
3. The aggregate tax basis and holding period of Acquiring Shares received
solely in exchange for shares of Target will be the same as the
aggregate tax basis and the holding period of the shares of Target
exchanged therefor provided such shares were held as a capital asset on
the Effective Date. (Code Sections 358 and 1223(1))
4. Target will recognize no gain or loss on the transfer of all of its
assets to Acquiring solely in exchange for Acquiring Shares and the
assumption of all of Target's liabilities by Acquiring, and Target will
not recognize gain or loss upon the distribution to its shareholders of
all of the Acquiring Shares in complete liquidation of Target. (Code
Section 361 and 357(a).
5. The tax basis of the assets of Target in the hands of Acquiring will be
the same as the tax basis of those assets in the hands of Target
immediately prior to the Effective Date. (Code Section 362(b)).
6. The holding period of the assets of Target received by Acquiring will
include the period during which such assets were held by Target. (Code
Section 1223(2)).
7. No gain or loss will be recognized by Acquiring upon the receipt of
Target's assets solely in exchange for the Acquiring Shares and the
assumption by Acquiring of all liabilities of Target. (Code Section
1032).
The foregoing opinions are based on the Code, Treasury Regulations issued
thereunder, published administrative, interpretations thereof and judicial
decisions with respect thereto, all as of the date hereof (collectively the "Tax
Law"), including the requirements of section 10.37 of Circular 230. No assurance
can be given that the Tax Laws will not change.
I hereby consent to the use of this letter as an Exhibit to, and reference to it
in, the Registration Statement.
Sincerely yours,
Carolyn Kolks
Assistant Tax Counsel to Target