June 8, 1999
Board of Directors
JADE FINANCIAL CORP.
213 West Street Road
Feasterville, Pennsylvania 19053
Re: Contribution of JADE FINANCIAL CORP. Stock to the IGA
Charitable Foundation
Gentlemen:
You have requested our opinion as to certain federal income
tax consequences of the proposed charitable contribution by JADE
FINANCIAL CORP. ("JADE") of cash and shares of the common stock
of JADE (the "Stock Gift" and, together with the cash, the "Total
Foundation Gift") to a private foundation to be organized by IGA
Federal Savings ("IGA") and JADE under Pennsylvania law (the
"Foundation"). We understand that JADE is a Pennsylvania
corporation formed for the purpose of becoming a holding company
for IGA in connection with the conversion of IGA from mutual to
stock form.
In providing this opinion, we have reviewed and relied upon:
(a) the facts, representations and assumptions
summarized below; and
(b) the Plan of Conversion of IGA adopted by IGA's
Board of Directors on May 26, 1999 (the "Plan").
Facts
Pursuant to the Plan, JADE will contribute to the
Foundation, as a charitable contribution, cash and shares of the
common stock of JADE having an aggregate value up to, but not in
excess of, 5% of the total value of the shares of the common
stock of JADE sold in the offerings under the Plan (the
"Offerings"). It is our understanding, and we have assumed, that
the percentage of JADE common stock that will be owned by the
Foundation immediately after the stock gift will be less than
3.5% of the voting common stock of JADE that will be issued and
outstanding immediately after the Offerings contemplated in the
Plan, that there will be no other classes of the stock of JADE
then issued or outstanding, and that the Foundation will be
organized and classified as a private foundation under
Section 509 of the Internal Revenue Code of 1986, as amended (the
"Code").
<PAGE 1>
For purposes of characterizing the Total Foundation Gift as
a charitable contribution, and not as a cost of the transactions
contemplated by the Plan, you have represented to us, and we have
assumed, that the Total Foundation Gift will be a voluntary
contribution by JADE that: (a) is not (i) induced or required by
any governmental or regulatory agency or authority that has
jurisdiction over JADE, IGA or the transactions contemplated by
the Plan, or (ii) a cost JADE or IGA will incur to obtain
approval or achieve consummation of the transactions contemplated
by the Plan; but, instead, (b) is motivated, solely and
exclusively, to (iii) complement IGA's existing community
activities, and (iv) provide funding to support the charitable
purposes of JADE and IGA -- including, by way of example,
community development grants, affordable housing activities,
nonprofit community groups and other charitable purposes within
and beyond the communities now served by IGA; and (c) will be
made within 12 months following completion of the conversion and
the Offerings contemplated by the Plan, provided the members of
IGA approve the proposed contribution separately and
independently of their approval of the Plan.
Issues
1. Is the Total Foundation Gift deductible by JADE for
federal income tax purposes and, if so, are there
limits on the amount potentially allowable as a
deduction in any taxable year?
2. If the Stock Gift is deductible by JADE for federal
income tax purposes, will the amount of the Stock Gift
be determined by the fair market value of the stock at
the time of the contribution?
Law and Analysis
A. Allowance of Deduction.
Pursuant to Code Section 170, JADE will be allowed to
deduct, as a charitable contribution, an amount equal to the sum
of the cash and the fair market value of the Stock Gift, which
together comprise the Total Foundation Gift, subject to (a) the
limitations based upon JADE's taxable income, computed as
adjusted and otherwise provided in Section 170(b)(2) of the Code
for the taxable year of the contribution and, to the extent
applicable, each of the five (5) succeeding years, and (b) the
limitations on excess carryovers provided in Section 170(d)(2) of
the Code. If, as expected, JADE is the parent of a consolidated
group and elects to report the income and deductions of the
members of the group on a consolidated federal income tax return,
<PAGE 2> the deduction for the charitable contribution of the
Total Foundation Gift will be determined on a consolidated basis,
pursuant to Treasury regulations Section 1.1502-24.
Code Section 170 provides the general rules for, and the
general limitations on, the deduction of charitable
contributions. Under Code Section 170(a), the fair market value
of property (other than money) contributed to charity is the
starting point from which the deductible amount attributable to
such property is determined after the application of various
limitations. In general, "fair market value" is the price at
which the property would change hands between a willing buyer and
a willing seller, neither being under any compulsion to buy or
sell and both having reasonable knowledge of the relevant facts.
The Treasury regulations provide that if a contribution is made
in property of the type which the taxpayer sells in the course of
its business, the fair market value is the price the taxpayer
would have received had the taxpayer sold the property in the
usual market in which the taxpayer customarily sells at the time
and place of the contribution, and in the case of goods in
quantity, in the quantity contributed. While the Stock Gift may
not be a contribution of property of the type "which the taxpayer
sells in the course of its business," as contemplated by the
Treasury regulations, it is possible that the Internal Revenue
Service will assert, and in the event of litigation that the
courts will agree, that the fair market value of the Stock Gift
should be determined as if the shares were sold as a block.
Under Code Section 170(e)(1), the amount of a charitable
contribution of property (other than money) otherwise deductible
is reduced by (a) the amount of gain which would not have been
long term capital gain if the property contributed had been sold
by the taxpayer at its fair market value determined at the time
of the contribution (the "Section 170(e)(1)(A) Rule"), and
(b) the amount of gain which would have been long term capital
gain if the property contributed had been sold by the taxpayer at
its fair market value determined at the time of the contribution
(the "Section 170(e)(1)(B) Rule"). The Section 170(e)(1)(B) Rule
applies only in the case of a charitable contribution to a
private foundation of the kind or class which includes the
Foundation.
After the taxpayer has determined the amount of its
charitable contribution pursuant to the principles described
above, the taxpayer determines the amount of the charitable
contribution that will be allowable as a deduction for the year
of the contribution and, if applicable, each of the five (5)
succeeding taxable years, by applying the limitations set forth
in Code Section 170(b)(2) and, if the taxpayer is a member of a
<PAGE 3> consolidated group that files consolidated returns for
such taxable years, by applying the limitations set forth in
Treasury regulation Section 1.1502-24.
Under Code Section 170(b)(2), a corporation's total
deductions for charitable contributions for any taxable year
shall not exceed ". . . 10 percent of the taxpayer's taxable
income computed without regard to -- (A) this section [meaning
Code Section 170], (B) part VIII (except Section 248) [meaning
the special deductions for corporations in Sections 241 through
247 and 249], (C) any net operating loss carryback to the taxable
year under Section 172, and (D) any capital loss carryback to the
taxable year under Section 1212(a)(1)" (hereinafter the "10%
Limitation").
If, as expected, JADE is a member of a consolidated group
that files a consolidated return for each taxable year for which
JADE is allowed to claim a charitable deduction with respect to
the Total Foundation Gift, the limitations under Treasury
Regulation Section 1.1502-24 will apply, and the consolidated
charitable contribution deduction for a taxable year will be the
lesser of (a) the aggregate of the allowable charitable
contributions deductions of the members of the group (determined
without regard to the 10% Limitation), plus any consolidated
charitable contribution carryover to such year, and (b) 10% of
the group's adjusted consolidated taxable income for such year,
which, for this purpose, is the group's consolidated taxable
income computed without regard to: (i) the consolidated
charitable contributions deduction; (ii) the consolidated
dividends-received deduction; (iii) the 100% dividends-received
deduction; (iv) the consolidated Code Section 247 deduction
(concerning dividends on preferred stock of public utilities);
and (v) the consolidated net operating loss or net capital loss
carrybacks to such year.
If JADE or the consolidated group of which it is a member is
unable to deduct the amount of the charitable contribution
attributable to the Total Foundation Gift in the year of the
contribution (the "Contribution Year"), JADE or the consolidated
group of which it is a member, as the case may be, will be
allowed to carryover the amount not deductible for the
Contribution Year to each of the five (5) succeeding taxable
years, in order of time, but the amount allowable as a deduction
in each such succeeding year will be subject to the limitations
set forth in Code Section 170(d)(2) and, if JADE is a member of a
consolidated group that files consolidated returns for such
years, the amount allowable as a deduction in each such
succeeding year will be subject to the limitations under Treasury
regulation Section 1.1502-24. <PAGE 4>
If JADE or the consolidated group of which it is a member is
subject to the alternative minimum tax on corporations, JADE or
the group, as the case may be, may be required to make
adjustments to its deduction for charitable contributions in
computing its alternative minimum tax or alternative minimum tax
credits.
B. Amount of the Stock Gift; The Section 170(e) Rules.
(1) The Section 170(e)(1)(A) Rule. Under Code
Section 170(e)(1)(A), the amount of a charitable contribution of
property (other than money) otherwise deductible is reduced by
the amount of gain which would not have been long term capital
gain if the property contributed had been sold by the taxpayer at
its fair market value determined at the time of its contribution.
While the issue is not entirely free from doubt, pursuant to the
reasoning set forth in Revenue Ruling 75-348, we believe that the
amount of the charitable contribution attributable to the Stock
Gift should be the fair market value on the date of the gift of
the stock comprising the gift, determined as described above,
without reduction for any amount under the Section 170(e)(1)(A)
Rule.
In Revenue Ruling 75-348, the Internal Revenue Service
held that a corporation that pledges to sell shares of its common
stock at a specified price to an educational organization is
entitled to a charitable contribution deduction, in the taxable
year the pledge is exercised, for the excess of the fair market
value of the shares over the exercise price. The Internal
Revenue Service concluded that the reduction provisions in Code
Section 170(e) were not applicable to the corporation's
charitable contribution that arose under the pledge agreement in
Revenue Ruling 75-348, because: (a) the reduction rules of Code
Section 170(e) apply if the property contributed would have
produced a "recognized gain" had the property been sold at its
fair market value at the time of the contribution; and (b) Code
Section 1032 provides that no gain or loss shall be recognized to
a corporation on the receipt of money or other property in
exchange for its stock.
While the facts of the transaction addressed by the
Internal Revenue Service in Revenue Ruling 75-348 are
distinguishable from the Stock Gift contemplated by JADE, we
believe that the nonrecognition provisions of Code Section 1032
avoid any reduction in the amount of the Stock Gift under Code
Section 170(e)(1)(A).
(2) The Section 170(e)(1)(B) Rule. Under Code
Section 170(e)(1)(B)(ii), in the case of a charitable <PAGE 5>
contribution to a private foundation, the amount of a charitable
contribution of property (other than money) otherwise deductible
is reduced by the amount of gain which would have been long term
capital gain if the property contributed had been sold by the
taxpayer at its fair market value determined at the time of the
contribution. While the issue is not entirely free from doubt,
pursuant to the reasoning set forth in Revenue Ruling 75-348,
described above, we believe that the amount of the charitable
contribution attributable to the Stock Gift should be the fair
market value on the date of the gift of the stock comprising the
gift, determined as described above, without reduction for any
amount under the Section 170(e)(1)(B) Rule.
_____________________________________
We call to your attention that in 1992, in the case known as
Indopco v. Commissioner, 92-1 USTC Para. 50,113 (S. Ct. 1992),
the United States Supreme Court held that certain costs incurred
to facilitate a capital transaction must be capitalized (the
"Indopco Rule"), and that the scope of the Court's opinion and
the Indopco Rule are neither clear nor well defined under
existing law. Accordingly, it is possible that the Internal
Revenue Service could assert, and in the event of litigation the
courts could agree, that the Total Foundation Gift should be
classified as a cost incurred to facilitate the transactions
contemplated by the Plan that must be capitalized and may not be
deducted under Code Section 170.
Except as set forth above, we express no other opinion as to
the tax consequences of the Total Foundation Gift or the Stock
Gift, or to any entity or person under federal, state, local or
foreign laws. In preparing our opinion, we have considered and
relied solely upon the facts and assumptions summarized above,
our understanding that the transactions contemplated by the Plan
will be consummated in accordance with the Plan, applicable
provisions of the Code, the Treasury regulations now in effect or
proposed under the Code, current interpretive rulings and
practice of the Internal Revenue Service and such other
authorities as we have deemed relevant, all of which are subject
to change, which change may be made with retroactive effect.
We consent to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to us under the
hearing "LEGAL AND TAX OPINIONS" in the related Prospectus. In
giving this consent, we do not thereby admit that we come within
the category of persons whose consent is required under Section 7
<PAGE 6> of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
STEVENS & LEE
/s/ Stevens & Lee <PAGE 7>