EXHIBIT 5.3
[MAYER, BROWN & PLATT LETTERHEAD]
, 2000
Peninsula Gaming Company, LLC
Peninsula Gaming Corp.
3rd Street Ice Harbor
P.O. Box 1750
Dubuque, Iowa 52004-1683
Re: Peninsula Gaming Company, LLC
Peninsula Gaming Partners, LLC
Certain U.S. Federal Income Tax Consequences
Ladies and Gentlemen:
I. INTRODUCTION.
Peninsula Gaming Company, LLC ("PGCL") and its wholly-owned subsidiary,
Peninsula Gaming Corp. ("PGC", and together with PGCL, the "Note Issuers")
previously issued and offered for sale to investors, pursuant to an offering
circular dated July 15, 1999 (the "Offering Circular"), $71,000,000 aggregate
principal amount of Series A 12 1/4% Senior Secured Notes, due 2006 (the
"Series A Notes"). The Series A Notes were issued as component parts of 71,000
units (the "Units"), each consisting of (a) Series A Notes having a $1,000
aggregate principal amount, and (b) 7.042 convertible preferred membership
interests (the "Preferred Membership Interests") of Peninsula Gaming Partners,
LLC ("PGP"). PGCL now intends to offer to exchange (the "Exchange Offer")
Series A Notes for newly-issued Series B 12 1/4% Senior Secured Notes, due 2006
of the Note Issuers for which a registration statement under the Securities Act
of 1933, as amended (the "Securities Act"), is being filed and will be made
effective (the "Series B Notes" and together with any outstanding Series A
Notes, the "Notes"). In connection with the Exchange Offer, you have requested
our opinions as to whether, for U.S. federal income tax purposes, (i) the Notes
will be classified as indebtedness, (ii) an exchange of Series A Notes for
Series B Notes pursuant to the Exchange Offer will be treated as a taxable
exchange, and (iii) PGCL will be classified as an association or publicly traded
partnership taxable as a corporation.
In connection with rendering our opinions herein, we have examined originals
or copies, certified or otherwise identified to our satisfaction, of the
following documents:
(a) the Offering Circular dated July 15, 1999 for the offering of the Units;
(b) the Registration Statement (the "Registration Statement") on Form S-4
(File No. 333-88829) as filed with the Securities and Exchange Commission
on October 12, 1999, as amended, including the prospectus for the
Exchange Offer (the "Prospectus") forming a part thereof;
(c) the Amended and Restated Operating Agreement of PGCL (the "PGCL
Operating Agreement"), made as of July 15, 1999, among PGP, Greater
Dubuque Riverboat Entertainment Company, L.C. ("GDREC"), and such other
persons as may from time to time be admitted as members of PGCL;
(d) the Amended and Restated Operating Agreement of PGP (the "PGP Operating
Agreement"), made as of July 15, 1999, among PGP and the persons
identified as Members on Exhibit A attached thereto and such other
persons as may from time to time be admitted as members of PGP;
(e) the Indenture governing the Notes (the "Indenture"), dated as of
July 15, 1999, among the Note Issuers, any future subsidiaries of PGCL
required to be guarantors of the Notes (the "Subsidiary Guarantors") and
Firstar Bank of Minnesota, N.A. , as trustee (the "Trustee"); and
(f) the Registration Rights Agreement (the "Registration Rights Agreement")
dated July 15, 1999, among the Note Issuers and Jefferies &
Company, Inc.
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In addition, we have examined originals or copies, identified to our
satisfaction, of such other documents as in our discretion we have deemed
necessary, appropriate or relevant as a basis for the opinions set forth below.
In such examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity with originals of all documents
submitted to us as copies thereof, and the authenticity of the originals of such
copies. We have not made an independent investigation of the facts set forth
either in the Offering Circular or the other documents that we have examined. We
have consequently assumed in rendering this opinion that the information
presented in such documents or otherwise furnished to us accurately and
completely describes, in all material respects, all facts relevant to PGP, the
Note Issuers and their respective activities. We have further assumed that (i)
none of the agreements enumerated above has been amended on or prior to the date
hereof, (ii) all representations and warranties made by all parties in and
pursuant to such agreements are and will continue to be accurate, (iii) all
parties to such agreements will perform in accordance with the terms of such
agreements (including such purchasers and transferees), and (iv) there are no
agreements or understandings other than those of which we have been informed
that would affect our opinions set forth herein.
Our opinions set forth herein are based upon applicable provisions of the
Code, 1 the Treasury regulations promulgated and proposed thereunder, current
positions of the Internal Revenue Service contained in published Revenue Rulings
and Revenue Procedures, current administrative positions of the Internal Revenue
Service, and existing judicial decisions, all of the foregoing of which are
subject to change or revocation, possibly with retroactive effect. We express no
opinion as to the laws of any jurisdiction other than the federal laws of the
United States of America. No rulings have been or will be sought from the
Internal Revenue Service with respect to any of the matters discussed herein.
Any change occurring after the date hereof in, or a variation from, any of the
foregoing bases for our opinions could affect the conclusions expressed below.
II. BACKGROUND
GENERAL. PGP and PGCL are limited liability companies organized under
Delaware law. PGCL was formed for the purpose of acquiring the assets comprising
the "Diamond Jo" riverboat casino (the "Diamond Jo") in Dubuque, Iowa, and
related real property (the "Acquisition") from GDREC which, prior to the
consummation of the Acquisition, owned and operated the Diamond Jo and its
casino business. As described below, the Acquisition was effected
contemporaneously with the issuance of the Notes. All of the outstanding common
membership interests of PGCL are held by PGP. PGC, a Delaware corporation, is a
wholly-owned subsidiary of PGCL. PGC was incorporated solely for the purpose of
serving as a co-issuer of the Notes and will have no operations, assets or
revenues.
PGP raised $3 million of equity capital contributed through sale of the
Preferred Membership Interests comprising a part of the Units. In addition,
concurrently with the issuance of the Preferred Membership Interests, PGP
received a $6 million equity capital contribution from the common members of
PGP, bringing PGP=s total equity capitalization at the time of the issuance of
the Notes to $9 million. PGP contributed such $9 million to the capital of PGCL
concurrently with the sale of the Units.
PGCL, which raised approximately $70 million from issuance of the Series A
Notes comprising a part of the Units, effected the Acquisition immediately
following issuance of the Units for $70 million of cash consideration and the
issuance to GDREC of $7 million face amount of PGCL=s redeemable preferred
membership interests. A substantial portion of the remaining proceeds of sale of
the Units and the contributions to PGCL=s equity capital was thereafter
available to PGCL for working capital and other similar purposes.
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1 All capitalized terms not defined herein have the same meanings ascribed to
them in the Prospectus.
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SEVERABILITY OF THE UNITS. The Series A Notes and the Preferred Membership
Interests became separately transferable immediately upon their issuance. The
membership interests of PGP (including the Preferred Membership Interests and
the non-voting common membership interests of PGP receivable upon conversion
thereof) are subject to certain contractual restrictions on transfer, including
transfers described below intended to prevent PGP from being treated as a
"publicly traded partnership" under the Code.
THE NOTES. The Notes will mature on July 1, 2006. The Series B Notes are
identical in all respects to the Series A Notes (except for references to series
and restrictive legends), provided, however, that the Series B Notes will be
registered under the Securities Act and thus may be transferred in transactions
not otherwise exempt from the registration requirements of the Securities Act.
The Notes are senior secured obligations of the Note Issuers ranking senior in
right of payment to all existing and future subordinated indebtedness of the
Note Issuers and PARI PASSU in right of payment with all existing and future
senior indebtedness of the Note Issuers. However, PGCL is expected to enter into
a $10 million credit facility for working capital and construction financing for
a hotel to be constructed by PGCL adjacent to the Diamond Jo. Under a provision
of the Indenture customary for issues of senior secured debt such as the Notes,
PGCL will be permitted to enter into an intercreditor agreement (the
"Intercreditor Agreement") granting the lender under such facility a lien senior
to that of the Trustee. PGCL assigned as collateral (the "Collateral") to the
Trustee, for the benefit of the Trustee and the holders, as security for the
Note Issuers' obligations with respect to the Notes, all of its interest in
(i) the riverboat and land-based facility comprising the Diamond Jo, including
all leased property; (ii) all real property and any additions or improvements
thereon and (iii) substantially all of its furniture, fixtures and equipment,
inventory, accounts, contract rights and other general intangibles, trademarks
and trade names. Subject to certain exceptions, the repayment of the Notes is
unconditionally and irrevocably guaranteed, jointly and severally, by all future
subsidiaries of PGCL. PGCL currently has no subsidiaries other than PGC.
Interest on the Notes is payable semiannually on July 1 and January 1 of
each year, commencing on January 1, 2000, to Holders of record on the
immediately preceding June 15 and December 15, respectively. The Notes bear
interest at 12 1/4% per annum from the date of original issuance. The Notes were
issued at an issue price of 98.847% to produce a yield-to-maturity on the Notes
of 12.5%. Interest on the Notes is computed on the basis of a 360-day year
comprised of twelve 30-day months.
Prior to July 1, 2002, the Note Issuers may redeem, at their option, up to
35% of the aggregate principal amount of the Notes then outstanding at a
redemption price of 112.25% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, through the applicable date of redemption, with
the net cash proceeds of one or more equity offerings; PROVIDED, that (i) such
redemption shall occur within 60 days of the date of closing of such equity
offering and (ii) at least 65% of the aggregate principal amount of Notes issued
on or after the Issue Date remains outstanding immediately after giving effect
to each such redemption. The Notes are not otherwise redeemable at the Issuers'
option prior to July 1, 2003. Thereafter, the Notes will be subject to
redemption at the option of the Issuers, in whole or in part, at specified
percentages of principal amount thereof (108.00%, 105.33% and 100% during each
12-month period beginning on July 1, 2003, July 1, 2004, and July 1, 2005,
respectively), plus accrued and unpaid interest thereon, if any, to the
applicable date of redemption. The Notes may also be redeemed pursuant to
certain required regulatory redemptions. In addition, upon a Change of Control
with respect to PGP or PGCL, the Holders will be given the opportunity to sell
to the Note Issuers all or part of their Notes at 101% of their Notes' face
amount, plus interest. The Issuers will also be required to make an offer to all
Holders to purchase the maximum principal amount of Notes that is an integral
multiple of $1,000 that may be purchased with 50% of the Excess Cash Flow for
each Hotel Operating Year (essentially, each successive four
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consecutive quarterly period commencing immediately after the date that a hotel
to be constructed by PGCL or a Subsidiary of PGCL and which is expected to be
contiguous to the Diamond Jo first becomes Operating), at a purchase price equal
to 101% of the principal amount of the Notes to be purchased, plus accrued and
unpaid interest to the date fixed for the closing of the offer.
The Indenture governing the Notes contains customary limitations on the
ability of PGCL to (i) incur indebtedness, (ii) pay dividends, redeem stock, or
make other distributions to equity holders, (iii) incur liens, or (iv) sell
assets.
Events of Default under the Indenture include (i) a default for 30 days in
the payment of interest on the Notes when due; (ii) a default in the payment of
principal (or premium, if any) on the Notes when due at maturity, redemption, by
acceleration or otherwise; (iii) a default in the performance or breach of
certain covenants in the Indenture (including covenants prohibiting certain
dividend payments or other restricted payments and certain asset sales); (iv)
failure by the Issuers or any Subsidiary Guarantor for 60 days after notice to
comply with any other agreements in the Indenture or the Notes, (v) cross
default, (vi) the cessation of substantially all gaming operations of the
Company for more than 60 days, except as a result of an Event of Loss,
(vii) any revocation, suspension, expiration (without previous or concurrent
renewal or loss of any Gaming License of the Company for more than 90 days, and
(viii) certain events of bankruptcy or insolvency with respect to the Note
Issuers or any of the Subsidiary Guarantors. If an Event of Default occurs and
is continuing, the Trustee or the Holders of at least 25% in principal amount of
the then outstanding Notes may declare all the Notes to be due and payable
immediately. Upon the occurrence of an Event of Default arising from certain
events of bankruptcy or insolvency, all Notes shall be automatically due and
payable without further action or notice. Subject to certain limitations,
Holders of a majority in principal amount of the then outstanding Notes may
direct the Trustee in its exercise of any trust or power. If an Event of Default
occurs and is continuing, subject to the terms of the Intercreditor Agreement
described above, the Trustee may take such action as it deems advisable to
protect and enforce its rights in the Collateral, including the institution of
sale or foreclosure proceedings.
III. ANALYSIS AND OPINIONS.
1. CHARACTERIZATION OF THE NOTES AS DEBT.
Whether an instrument represents indebtedness or an equity investment for
U.S. federal income tax purposes is a question of fact, the resolution of which
is based primarily upon the substance of the instrument and the transaction
pursuant to which it is issued, rather than merely upon the form of the
transaction or the manner in which the instrument is labeled; all of the facts
and circumstances of the particular situation must be considered in the
determination and no one factor is determinative. SEE JOHN KELLEY CO. V.
COMMISSIONER, 326 U.S. 521 (1943); Rev. Rul. 68-54, 1968-1 C.B. 69. The
following 13 factors have been identified in relevant case law as factors to be
analyzed in the determination of whether an instrument is properly classified as
indebtedness or equity for U.S. federal income tax purposes:
(1) the name given to the certificate evidencing the indebtedness;
(2) the presence or absence of a maturity date; (3) the source of the
payments; (4) the right to enforce payment of principal and interest;
(5) participation in management flowing as a result; (6) the status of
the contribution in relation to regular corporate creditors; (7) the
intent of the parties; (8) "thin" or adequate capitalization;
(9) identity of interest between creditor and stockholder; (10) source of
interest payments; (11) the ability of the corporation to obtain loans
from outside lending institutions; (12) the extent to which the advance
was used to acquire capital assets; and (13) the failure of the debtor to
repay on the due date or to seek a postponement.
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SEE, E.G., ESTATE OF MIXON V. UNITED STATES, 464 F.2d 394 (5th Cir. 1972).
The analysis of these factors serves to determine in effect whether the economic
reality of the holder's investment in the instrument is consistent with risk
capital subject solely to the performance of the corporation's business, or is a
bona fide loan, repayment of which is expected, and may be compelled, to be made
in full.
An analysis of these factors demonstrates that the Notes are debt for U.S.
federal income tax purposes. The Notes are denominated as debt, have a fixed
maturity date of less than seven years and, thus, must be repaid within a
reasonable period of time, and the parties intend that the Notes will be treated
as debt. The Notes have stated interest rates that are not contingent on the
profits or cash flow of the Note Issuers. The Notes have covenants consistent
with indebtedness, including restrictions on payment of dividends, creation of
liens, and sales of assets. The Notes also have Events of Default that are
customary for debt instruments (including default upon insolvency of the Note
Issuers, on the non-payment of interest when due for 30 days, on the non-payment
of principal on the stated maturity date of the instrument, or in the
performance or breach of the covenants in the Indenture), as well as usual
creditors rights on the occurrence of such Events of Default, including the
acceleration of principal and related remedies and the right to foreclose on the
Collateral. In addition, the Trustee, on behalf of Holders of the Notes, has a
perfected security interest in substantial assets of the Issuers (subject to the
lien that may be created under the Intercreditor Agreement), and will rank
senior in right of payment to all existing and future subordinated indebtedness
of the Note Issuers and to any equity interests in the Note Issuers. The Holders
have no right to participate in the success of the business operations of PGCL,
as any earnings of PGCL will inure to the benefit of the holders of the
membership interests of PGCL, nor are the Holders entitled to vote or otherwise
participate in the management of the Note Issuers.
We recognize, however, that certain features of the Notes and of PGCL are
not entirely consistent with debt characterization. For example, PGCL might be
viewed as thinly capitalized given its relatively high debt-to-equity ratio on
the Issue Date.2 Thin capitalization has been viewed as evidence that an
instrument that was debt in form constituted a contribution to the debtor's
capital where (1) the debt-to-equity ratio was high at time the debt was
incurred, (2) the parties understood that it would likely go higher, and (3)
substantial portions of the funds borrowed were used for the purchase of capital
assets and for meeting expenses needed to commence operations. SEE TYLER V.
TOMLINSON, 414 F.2d 844 (5th Cir. 1969). However, the concept of adequate
capitalization has been more "coolly and modestly applied"3 in recent years, and
courts have expressly stated that thin capitalization alone will not control the
character of the transaction.4 For example, notwithstanding a debt-to-equity
ratio of 225 to 1, advances to a debtor were not recharacterized as capital
contributions where no other significant characteristics indicating equity
listed above were present. PIEDMONT MINERALS CO., INC. V. UNITED STATES, 294 F.
Supp. 1040 (M.D.N. Car. 1969).5
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2 For federal income tax purposes, the determination as to whether an
instrument represents indebtedness or an equity investment is made at the time
of issuance of the instrument. Because, as we conclude in Part III.2, below, the
Series B Notes represent a continuation of the Series A Notes exchanged therefor
and not newly-issued instruments, our discussion in this Part III.1 refers to
the facts and circumstances in existence on the Issue Date.
3 SEE TYLER, SUPRA, AT 848.
4 SEE, E.G., BAKER COMMODITIES, INC. V. COMMISSIONER, 48 T.C. 374 (1967) (the
existence of thin capitalization alone will not transform an otherwise valid
indebtedness into equity capital).
5 A high debt-equity ratio is considered more significant in cases where there
are other equity characteristics, such as subordination to other indebtedness.
SEE ROWAN V. U.S., 219 F.2d 51, 55 (5th Cir. 1955); Tyler, supra, at 848; and
LEACH CORP. V. COMMISSIONER, 30 T.C. 563 (1958). The Notes, however, rank senior
to all existing and future subordinated indebtedness of the Note Issuers (other
than the $10 million working capital facility, an exception customary for senior
secured debt issuances such as the Notes) and pari passu with all existing and
future senior indebtedness of the Note Issuers.
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A high debt-to-equity ratio has, however, been considered more indicative of
equity when there is an identity of interest between equity owners and
creditors,6 and we recognize that the Holders of the Series A Notes, who
purchased proportionate interests in the Preferred Membership Interests, may be
viewed, at least indirectly, as equity owners of PGCL. The Holders will not,
however, hold proportionate interests in Notes and the equity of PGCL. Rather,
holders of Preferred Membership Interests will hold an indirect interest in
approximately 33% of the entire equity interest in the Note Issuers. It is not
reasonable to presume that a Holder having such a minority interest would
forbear from exercising its creditor remedies to any greater degree than a
creditor who did not own any equity interest.7 Accordingly, the cases have
typically required a high level of proportionality to call into question the
true debt characterization of a debt instrument based on the status of the
creditor as a shareholder.8 In addition, the Units were immediately separable
and thus no Holder is required to hold Notes and equity interests of PGP (or,
indirectly, PGCL), and thus there is no requirement that Holders are also
indirect equity owners of the Note Issuers.
Moreover, where creditors are also shareholders of the debtor, courts have
generally considered the deciding factor whether a third-party investor would
have advanced funds on terms similar to those agreed to by the shareholder. SEE
SCRIPTOMATIC, INC. V. U.S., 555 F.2d. 364 (3d Cir. 1977). The Preferred
Membership Interests, which represented at issuance one-third of the capital and
profits interests of PGP, were purchased for $3,000,000, or the same price per
unit of membership interest as the price paid by holders of common membership
interests of PGP per unit of membership interest. Thus, the Preferred Membership
Interests were purchased for a price substantially equivalent to fair market
value. Accordingly, it is a reasonable economic presumption that a typical
unrelated creditor would have been willing to purchase Notes on substantially
the same terms as the purchasers of Units even if the purchaser were not also
purchasing Preferred Membership Interests.
On balance, we believe the Notes exhibit characteristics that are consistent
with bona fide debt which is expected or may be compelled to be repaid in full.
Accordingly, we are of the opinion that the Notes are and will be classified as
debt for U.S. federal income tax purposes.
2. EXCHANGES OF SERIES A NOTES FOR SERIES B NOTES PURSUANT TO THE EXCHANGE
OFFER.
Section 1001 of the Code and Treasury regulations section 1.1001-1(a)
promulgated thereunder provide a general rule that gain or loss from the
exchange of property for other property differing materially either in kind or
in extent must be recognized for federal income tax purposes as taxable income
or loss. Treasury regulations section 1.1001-3 prescribes rules pursuant to
which a modification of the terms of a debt instrument (a "Modification") is
treated as a taxable exchange of the debt instrument for a "new" debt instrument
for purposes of Treasury regulations section 1.1001-1(a). In general, under
Treasury regulations section 1.1001-3, a Modification occurs if there is any
alteration of a legal right or obligation of the issuer or holder of the debt
instrument (an "Alteration").9 The regulations further provide, however, that an
Alteration that occurs by operation of the terms of the debt instrument will not
be treated as a Modification (except in certain limited circumstances not here
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6 SEE LAIDLAW TRANSPORTATION, INC. V. COMM'R, T.C. Memo 1998-232 (1998).
7 See generally Boris I. Bittker & James S. Eustice, Federal Income Taxation
of Corporations and Shareholders, ? 4.04[2] (6th ed. 1998) and the authorities
cited therein.
8 SEE LEACH, SUPRA note 3, at 579 ("The sharply disproportionate ratio between
ownership of stock and bonds goes far to overcome the high debt-to-equity
ratio... The bondholders owned only 48% of the stock. The situation would have
been different had all the stock and bonds been owned by the same interests in
substantially the same proportion."). CF. RIALTO REALTY CO., INC. V. U.S., 366
F. Supp. 253 (E.D. Pa. 1973) (unlike in LEACH, the bondholders owned 75% of the
stock rendering the high debt-to-equity ratio determinative to the conclusion
that the bonds represented equity).
9 SEE Treas. Reg. Section 1.1001-3(c)(1)(i).
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relevant).10 For this purpose, an Alteration will be deemed to occur by
operation of the terms of the debt instrument if the Alteration occurs as a
result of the exercise of a "unilateral" option that, if exercisable by the
holder of the debt instrument, does not result in a deferral of, or a reduction
in, any scheduled payment of interest or principal.11 An option will be treated
as "unilateral" for this purpose if, under the terms of the instrument or under
applicable law, (i) there does not exist a right of the other party to alter or
terminate the instrument or put the instrument to certain related persons, (ii)
the exercise of the option does not require the consent or approval of the other
party, certain persons related to that party, or a court or arbitrator, and
(iii) subject to certain exceptions (not here relevant), the exercise of the
option does not require consideration other than incidental costs and expenses
relating to the exercise of the option.12
As stated above, the Series B Notes are identical in all respects to the
Series A Notes (except for references to series and restrictive legends),
provided, however, that the Series B Notes will be registered under the
Securities Act. Thus a Holder will be permitted to transfer a Series B Note in a
transaction that would not otherwise be exempt from the registration
requirements of the Securities Act. Although not entirely clear, we do not
believe that the alteration of the legal rights of a Holder that results from
the filing and effectiveness of a registration statement would be viewed as an
Alteration resulting in a "modification of the TERMS" of the Notes (emphasis
added). Rather, the Treasury regulations' reference to an alteration of legal
rights or obligations of an issuer or holder of a debt instrument refers to an
alteration of legal rights or obligations that occurs on account of the
agreement of the parties to alter the actual terms of the instrument, rather
than an extrinsic alteration of the law otherwise applicable to instrument.13
Even if, however, the registration of Series B Notes under the Securities
Act were viewed as an Alteration of the Series A Notes, we do not believe that
such Alteration would be treated as a Modification. Under the Registration
Rights Agreement, PGCL is obligated to file a registration statement for the
Series B Notes with the Securities and Exchange Commission ("SEC"), to use its
best efforts to cause such registration statement to be declared effective by
the SEC, and, generally, to effect the Exchange Offer. Section 2.6(h) of the
Indenture, in turn, provides that outstanding Series A Notes may be exchanged
for Series B Notes pursuant to the terms of the Exchange Offer. PGCL does not
have any right at the time or as a result of an exchange of Series A Notes for
Series B Notes to alter or terminate the Notes.14 In addition, the exchange of
Series A Notes for Series B Notes does not require the consent of any person or
the payment of consideration by the Holders. Thus, the exchange of Series A
Notes for Series B Notes pursuant to the Exchange Offer, if an Alteration,
constitutes an Alteration that occurs as a result of the exercise of the
"unilateral" option. Finally, Series A Notes and Series B Notes have identical
terms for payment of principal and interest, and thus an exchange of
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10 SEE Treas. Reg. Section 1.1001-3(c)(1)(ii).
11 SEE Treas. Reg. SectionSection 1.1001-3(c)(1)(ii) & 1.1001-3(c)(1)(iii).
12 SEE Treas. Reg. Section 1.1001-3(c)(3).
13 SEE Treas. Reg. Section 1.1001-3(a)(1) describing the effect of a
"modification of the TERMS of a debt instrument" (emphasis added), and Treas.
Reg. Section 1.1001-3(c)(1)(i) which uses the heading "ALTERATION OF TERMS"
(italics in original; underlining added) to preface the definition of a
?modification? of a debt instrument as (generally) an alteration of the legal
rights or obligations of the issuer or holder of the instrument. Thus, it does
not appear to us, for example, that the enactment of an enforceable statute
prohibiting the transfer of an outstanding debt instrument would, without more,
be treated as a modification of the terms of the instrument, notwithstanding
that the rights of the holder of the instrument would thereby be altered.
14 Treas. Reg. Section 1.1001-3(c)(3) also provides that an option is not
unilateral if, at the time the option is exercised, or as a result of the
exercise, the other party has a right to put the instrument to certain related
persons. Although this provision appears to apply only to an option of the
issuer of the debt instrument, to the extent it could be viewed to mean, with
respect to an option of a holder, a right of the issuer to have a related person
ASSUME its obligations under the instrument, such provision would not apply
because an exchange of Series A Notes for Series B Notes pursuant to the
Exchange Offer will not give the Note Issuers such right.
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Series A Notes for Series B Notes will not result in any deferral of or
reduction in any scheduled payment of interest or principal. Therefore, an
exchange of Series A Notes for Series B Notes pursuant to the Exchange Offer
will not result in a Modification, and thus will not be treated as a taxable
exchange for federal income tax purposes.
3. TREATMENT AS AN ASSOCIATION OR PUBLICLY TRADED PARTNERSHIP TAXABLE AS A
CORPORATION.
THE ENTITY CLASSIFICATION REGULATIONS. Treasury regulations sections
301.7701-2 through 301.7701-4 classify organizations based on their
characteristics and the rights and obligations of their owners. Treasury
regulations sections 301.7701-2 and 301.7701-3 provide for the classification of
"business entities" for federal tax purposes. Treasury regulations section
301.7701-2 provides generally that "a BUSINESS ENTITY is any entity recognized
for U.S. federal tax purposes...................................................
that is not
properly classified as a trust under [the entity classification regulations] or
otherwise subject to special treatment under the Internal Revenue Code."
(italics in original).
Certain types of business entities are treated as corporations for U.S.
federal income tax purposes. Under Treasury regulations section 301.7701-2(b),
those entities include business entities organized under a Federal or State
statute that refers to the entity as incorporated or as a corporation, body
corporate or body politic. PGCL would not constitute a business entity that is
required to be treated as a corporation under Treasury regulations section
301.7701-2(b).
If a business entity is not treated as a corporation under Treasury
regulations section 301.7701-2(b), the business entity is treated as an
"eligible entity" within the meaning of Treasury regulations section
301.7701-3(a). An eligible entity that is created or organized in the United
States or under the law of the United States or any State will be treated as a
partnership if it has more than one member, or will be disregarded as an entity
separate from its owner if it has a single owner, but will not be treated as a
separate corporation unless an affirmative election is made pursuant to Treasury
regulations section 301.7701-3(c). Under section 10.2 of the PGCL Operating
Agreement, the "tax matters partner" of PGCL may not make an election under
Treasury regulations section 301.7701-3(c) to treat PGCL as an association
taxable as a corporation without the consent of all of the members of PGCL and
the approval of a majority of the members of a committee of independent managers
of PGP (the AIndependent Committee). In addition, section 10.6 of the PGCL
Operating Agreement provides that no officer or manager of PGCL, and not less
than all members of PGCL, shall have the power to make such election. For
purposes of this opinion, we have assumed that the members of PGCL have not and
will not make such election.
Based on the foregoing, PGCL is not treated as an association taxable as a
corporation for U.S. federal income tax purposes.
PUBLICLY TRADED PARTNERSHIPS. If a business entity is classified as a
partnership under Treasury regulations section 301.7701-3(b), the business
entity will nonetheless be treated as a corporation for U.S. federal income tax
purposes if it is a "publicly traded partnership" within the meaning of section
7704 of the Code (unless it qualifies for an exception for partnerships with
specified amounts of gross income from certain passive sources). Section
7704(b) of the Code defines a "publicly traded partnership" as any partnership
if interests in such partnership are (i) traded on an established securities
market or (ii) readily tradable on a secondary market (or the substantial
equivalent thereof). Treasury regulations section 1.7704-1(d) provides that, for
purposes of Section 7704(b) of the Code and the regulations thereunder,
interests in a partnership are not traded on an established securities market or
on a secondary market or the substantial equivalent thereof unless (i) the
partnership participates in the establishment of the market or the inclusion of
its interests thereon, or (ii) the partnership recognizes any transfers made on
the market by (x) redeeming the transferor partner or (y) admitting the
transferee as a partner or otherwise recognizing any rights of the transferee,
such as a right of the
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transferee to receive partnership distributions or to acquire an interest in the
capital or profits of the partnership.
Pursuant to section 12.7 of the PGCL Operating Agreement, neither PGCL nor
the members of PGCL may participate in the establishment of an "established
securities market" or a "secondary market or the substantial equivalent thereof"
within the meaning of section 7704 of the Code for the transfer of any
membership interest in PGCL or recognize any transfers made thereon, and any
transfer or purported transfer thereon shall be null and void AB INITIO and of
no effect. In addition, under section 10.5 of the PGCL Operating Agreement, each
PGCL Member represented and warranted that such member did not acquire nor will
such member transfer any membership interest in PGCL, or cause any membership
interest in PGCL to be marketed on or through, an "established securities
market" or a "secondary market (or the substantial equivalent thereof)" within
the meaning of section 7704(b) of the Code or the regulations thereunder,
including, without limitation, an over-the-counter market or an interdealer
quotation system that regularly disseminates firm buy or sell quotations.
Treasury regulations section 1.7704-1(e) provides "safe harbors" for certain
private transfers ("Paragraph (e) Transfers") which are disregarded in
determining whether interests in a partnership are readily tradable on a
secondary market or the substantial equivalent thereof. These transfers include
(i) transfers in which the basis of the partnership interest in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor or is determined under section 732 of the Code; (ii)
transfers at death; (iii) transfers between members of a family as described in
section 267(c)(4) of the Code; (iv) transfers involving the issuance of
interests by (or on behalf of) the partnership in exchange for cash, property or
services; (v) transfers involving distributions from a retirement plan qualified
under section 401(a) of the Code or an individual retirement account;
(vi) block transfers whereby a partner and any related persons in one or more
transactions during any 30 calendar day period transfers partnership interests
representing in the aggregate more than 2% of the total interests in partnership
capital or profits; (vii) transfers pursuant to a redemption or repurchase
agreement described in Treasury regulations section
1.7704-1(e)(1)(vii) exercisable only upon the death, disability or mental
incompetence of a partner or upon the retirement or termination of services of
an individual who actively participated in the management of, or performed
services on a full-time basis for, the partnership; (viii) transfers by one or
more partners of interests representing in the aggregate 50% or more of the
total interests in the partnership capital and profits in one transaction or a
series of related transactions. In addition, Treasury regulations section
1.7704-1(g) provides that the transfer of an interest in a "qualified matching
service" as defined in such section (a "Paragraph (g) Transfer") will also be
disregarded in determining whether interests in the partnership are readily
tradable on a secondary market or the substantial equivalent thereof.
Section 12.7 of the PGCL Operating Agreement provides that any transfers of
membership interests by members of PGCL will be null and void AB INITIO and of
no effect, and PGCL shall not recognize the transferee as a direct or indirect
holder or owner of a membership interest in PGCL, unless prior to the
effectiveness of such transfer, the member provides the managing member with an
opinion of counsel reasonably satisfactory to the managing member and a majority
of the members of an independent committee to the effect that such transfer will
not result in PGCL being treated as a "publicly traded partnership" under
section 7704 of the Code, the regulations thereunder and any administrative
rulings or notices with respect thereto. The PGCL Operating Agreement further
provides, however, that such opinion delivery requirement will not apply to any
transfers of PGCL membership interests which, in the determination of the
managing member of PGCL, and subject to a concurring determination by a majority
of the members of the Independent Committee, constitute Paragraph (e) Transfers
listed in the preceding paragraph or to Paragraph (g) Transfers. PGP, as
managing member of PGCL, has represented to us that PGP will not make any
determination as to
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Page 10
whether any particular transfer of interests in PGCL constitutes a Paragraph
(e) Transfer or Paragraph (g) Transfer without first consulting with independent
tax counsel nationally recognized in such matters as to whether such transfer so
qualifies. For purposes of this opinion, we have assumed that PGP will so
consult with tax counsel and that, on that basis, any transfers of PGCL
membership interests made without delivery of the opinion referred to in this
paragraph will in fact constitute Paragraph (e) Transfers or Paragraph
(g) Transfers. 15
Based on the foregoing, no membership interest in PGCL has been or will be
considered traded on an established securities market, or readily tradable on a
secondary market or the substantial equivalent thereof. Therefore, PGCL is not
and will not be treated as a publicly traded partnership (taxable as a
corporation) within the meaning of section 7704(b) of the Code for U.S. federal
income tax purposes.
3. OPINIONS.
Based on the foregoing, we are of the opinion that, for U.S. federal income
tax purposes, (i) the Notes are and will be classified as indebtedness, (ii) an
exchange of Series A Notes for Series B Notes pursuant to the Exchange Offer
will not be treated as a taxable exchange, and (iii) PGCL is not and will not be
classified as an association or publicly traded partnership taxable as
corporation.
We further confirm that the statements made in the sections of the
Prospectus under the headings "RISK FACTORS--Publicly Traded Partnership
Classification" and "SPECIFIC FEDERAL INCOME TAX CONSIDERATIONS", to the extent
that they describe matters of law or legal conclusions, are correct in all
material respects.
Except as set forth above, we express no other opinion as to any U.S.
federal, state, local or foreign tax consequences of the transactions described
herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and any amendments thereto, and to the reference to this
firm in the Prospectus under the captions "RISK FACTORS--Publicly Traded
Partnership Classification" and "SPECIFIC FEDERAL INCOME TAX CONSIDERATIONS".
Very truly yours,
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15 Transfers of interests in PGP will not be treated as indirect transfers of
interests in PGCL, and thus would not be required to be taken into account for
purposes of determining whether interests in PGCL are traded on an established
securities market or a secondary market or the substantial equivalent thereof.
SEE Treasury regulation section 1.7704-1(a)(2)(iii).