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Principal Financial Group Principal Life Insurance Company
Des Moines, Iowa USA 50392.0001
(515) 247-5111
January 26, 1999
Board of Directors
Principal Cash Management Fund, Inc.
Principal Tax-Exempt Cash Management Fund, Inc.
711 High Street
Des Moines, Iowa 50309
RE: Acquisition of Principal Tax-Exempt Cash Management Fund, Inc.
by Principal Cash Management Fund, Inc.
To the Board of Directors and Shareholders:
Principal Cash Management Fund, Inc., intends to acquire all of the assets and
assume all the liabilities of Principal Tax-Exempt Cash Management Fund, Inc., a
Maryland corporation (the "Tax-Exempt Fund"), in a transaction described in
Application for an Order Pursuant to Section 17(b), File No. 812-11390, filed
with the United States Securities and Exchange Commission. You have requested an
opinion regarding the federal income tax consequences of the proposed
transaction.
Principal Cash Management Fund, Inc. (the "Fund") has qualified as a regulated
investment company for purposes of Subchapter M of the United States Internal
Revenue Code of 1986 (the "Code"), as amended, and has elected to be taxed as
such. The Tax-Exempt Fund has made an identical election, as well as qualifying
to pay exempt-interest dividends under section 852(b)(5).
The Fund will acquire all of the assets and assume all of the liabilities of the
Tax-Exempt Fund in exchange for shares of the Fund. The Tax-Exempt Fund will
immediately liquidate and dissolve, distributing the shares of the Fund to
shareholders of the Tax-Exempt Fund in retirement of the shares of that
corporation. Each holder of shares of the Tax-Exempt Fund will as a result of
the transaction own shares of the Fund.
The following representations have been made by an officer of the Tax-Exempt
Fund, the Fund or are contained in the Application filed with the United States
Securities and Exchange Commission:
1. The fair market value of the shares of the Fund to be received by each
shareholder of the Tax-Exempt Fund in the transaction will be equal to
the fair market value of the shares of the Tax-Exempt Fund surrendered
therefor.
2. As set forth in the Application, immediately prior to this transaction
the Tax-Exempt Fund will hold only cash or other securities that are
eligible investments for the Fund (having previously managed its assets
such that the tax-exempt securities once held by the Tax-Exempt Fund
have all matured or otherwise been converted to cash or other eligible
investments).
3. The liabilities, if any, of the Tax-Exempt Fund to be assumed by the
Fund in the transaction were incurred by the Tax-Exempt Fund in the
ordinary course of business and are associated with the assets to be
transferred.
4. There is no intercorporate indebtedness existing between the Fund and
the Tax-Exempt Fund that was issued, acquired, or that will be settled
at a discount.
5. Following the transaction, the Fund will not continue the historic
business of the Tax-Exempt Fund.
In reliance on the representations made by an officer of the Tax-Exempt Fund and
the Fund, and the representations contained in the Application, I am of the
opinion that:
1. The acquisition of all of the assets and liabilities of the Tax-Exempt
Fund in exchange for shares of the Fund followed by the distribution of
those shares to shareholders of the Tax-Exempt Fund in liquidation of
the Tax-Exempt Fund, will constitute a taxable transaction under
section 1001 of the Code and not a reorganization within the meaning of
section 368(a)(1)(B) of the Code. This is due to the lack of continuity
of the historic business of the Tax-Exempt Fund and the lack of
continuity of the historic assets of the Tax-Exempt Fund being used in
the ongoing operations of the Fund. (See Revenue Ruling 87-76, 1987-2
C.B. 84.)
2. Because the Tax-Exempt Fund will not have any unrecognized gains or
losses in the assets transferred to the Fund in this transaction, the
Tax-Exempt Fund will not recognize any gain or loss on the transfer of
all its assets and liabilities to the Fund.
3. The Fund will recognize no gain or loss upon receipt of the assets and
assumption of the liabilities of the Tax-Exempt Fund in exchange for
shares of the Fund. Code Section 1032.
4. Because the Tax-Exempt Fund maintains and has maintained since its
inception a net asset value of $1 per share, and as an open-end
diversified management investment company, shares of its stock are
available for purchase at this same $1 per share and are redeemable
for $1 per share, it is assumed for purposes of this opinion that all
shareholders of the Tax-Exempt Fund have a basis in the shares held of
$1 per share. As a taxable exchange with the Fund, also an open-end
diversified management investment company with shares held at a stable
net asset value of $1 per share, the exchange of shares, although
taxable, will generate no taxable gain or loss to the shareholders of
the Tax-Exempt Fund. (A shareholder's basis in the shares is assumed
to be $1 per share regardless of whether acquired by purchase, gift, or
inheritance. In the unusual case of a shareholder who purchases shares
from another shareholder at a price other than $1.00 per share gain or
loss would be recognized. Such a shareholder should seek the
advice of a tax professional to determine the consequences of
this exchange.)
5. Except for the unusual case described in the parenthethical in
paragraph 4, above, the tax basis of the shares of the Fund acquired in
exchange for shares of the Tax-Exempt Fund will be the same as the tax
basis of the shares of the Tax-Exempt Fund exchanged therefor ($1 per
share). Code Section 1012.
6. Because the exchange of shares is a taxable event, the holding period
of the shares of the Fund acquired in exchange for shares of the
Tax-Exempt Fund will begin with the receipt of the shares of the Fund
and not include any period during which the shares of the Tax-Exempt
Fund were held. Code Section 1223.
7. Because the exchange of shares is a taxable event, the holding period
of the assets of the Tax-Exempt Fund received by the Fund will begin
with the receipt of the assets from the Tax-Exempt Fund and not include
any period such assets were held by the Tax-Exempt Fund. Code Section
1223.
The foregoing opinions are based on the Code, Treasury regulations issued
thereunder, published administrative interpretations thereof and judicial
decisions with respect thereto (collectively the "Tax Law") as of the date
hereof. No assurance can be given that the Tax Laws will not change.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
/s/ Randy L. Bergstrom
Randy L. Bergstrom
Counsel