Form of Tax Opinion
[PIF Equity Income Fund, PIF Tax-Exempt Bond Fund]
June _____, 2005
Board of Directors
PIF Equity Income Fund
680 8th Street
Des Moines, IA 50392-0200
RE: Acquisition of Principal Equity Income Fund, Inc.
By PIF Equity Income Fund
To the Board of Directors:
PIF Equity Income 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 Equity Income 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.
Acquiring is a newly formed series that will qualify as a regulated investment
company for purposes of Subchapter M of the United States Internal Revenue Code
of 1986, as amended (the "Code"), and will elect to be taxed as such.
Target 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, more than 50 percent of the total combined
voting power of all classes of shares of Acquiring entitled to vote, and
more 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 has elected to be taxed as a RIC under section 851 of the Code, and
for all of its taxable periods and has qualified for the special tax
treatment afforded RICs under the Code. After the Reorganization, Acquiring
intends 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.
26. Following the Effective Date, Acquiring will continue the historic business
of Target in a substantially unchanged manner and use Target's historic
business assets in this business. Acquiring's investment objectives and
policies will be identical to the investment objectives and policies of
Target, and Acquiring will not dispose of assets received from Target
except in the ordinary course of its business as an investment company.
There is no plan or intention to liquidate Acquiring or to merge Acquiring
into any other corporation or business trust.
27. Acquiring was newly organized for the purpose of the Reorganization and
will not engage in any business prior to consummation of the Reorganization
other than that required by the Plan. Prior to the Reorganization,
Acquiring will have no assets.
28. Immediately following consummation of the Reorganization, all of the
outstanding shares of Acquiring will be owned by the former shareholders of
Target, who will own such shares solely by reason of their ownership of
shares of Target immediately prior to the Reorganization.
29. Immediately following consummation of the Reorganization, Acquiring will
possess the same assets and liabilities, except for assets used to pay
dissenters to the transaction and assets used to pay expenses incurred in
connection with the transaction, as those possessed by Target immediately
prior to the Reorganization. Assets used to pay expenses, assets used to
pay dissenters to the transaction, and all redemptions and distributions
(except for regular, normal dividends) made by Target immediately preceding
the transaction will, in the aggregate, constitute less than one percent of
the net assets of Target. Dissenting holders of shares will own less than
one percent of Target shares.
30. Target has not sold or otherwise disposed of any of its assets (other than
in the ordinary course of business or to the extent necessary to maintain
its status as a RIC) prior to the Reorganization.
31. Acquiring has no plan or intention to issue additional Acquiring shares
following the Reorganization, other than in the ordinary course of its
operation as a series of an open-end investment company.
32. Acquiring, for the entire taxable year that will include the date of the
Reorganization, will qualify and elect to be treated as a regulated
investment company, as defined in section 851 of the Code and intends for
that taxable year to compute its federal income tax under section 852 of
the Code.
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)(F) 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' 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).
8. The taxable year of Target will not end as a result of the Reorganization.
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,
Randy Bergstrom
Assistant Tax Counsel to Acquiring