EXHIBIT 8.1
[LETTERHEAD OF QUARLES OF BRADY]
September 24, 1996
Interstate Forging Industries, Inc.
4051 North 27th Street
Milwaukee, WI 53216-1883
RE: OPINION WITH RESPECT TO THE MERGER OF CITATION FORGING CORPORATION, A
SUBSIDIARY OF CITATION CORPORATION, INTO INTERSTATE FORGING
INDUSTRIES, INC.
Ladies and Gentlemen:
At your request, we are rendering our opinion with respect to certain
federal income tax consequences to the Interstate shareholders of the proposed
merger of Citation Forging Corporation ("Sub"), a wholly owned subsidiary of
Citation Corporation ("Citation") with and into Interstate Forging Industries,
Inc. ("Interstate"). We do not express any opinion in this letter pertaining to
state, local or foreign taxes. Further, we do not express any opinion in this
letter regarding the federal income tax consequences applicable to special
classes of Interstate shareholders, including for example, financial
institutions, life insurance companies, tax exempt organizations, foreign
persons, Interstate shareholders who acquired their shares of Interstate common
stock through the exercise of stock options or otherwise as compensation or to
Interstate shareholders that own or will own shares of Citation.
We have examined the Agreement and Plan of Merger by and among Citation,
Sub and Interstate, dated as of May 16, 1996 (the "Merger Agreement") and the
form of the Interstate Articles of Merger, including the Plan of Merger between
Sub and Interstate, which set forth the terms of the proposed transaction, the
Proxy Statement-Prospectus which will be included in the Registration Statement
on Form S-4 filed on the date hereof with the Securities and Exchange Commission
and such other materials as we have deemed necessary or appropriate as a basis
for this opinion. Terms that are defined in the Merger Agreement shall have the
same meaning when used in this letter.
OPINION
On the basis of the foregoing information and assuming the transaction is
consummated in a manner consistent with the terms of such information it is our
opinion that the material federal income tax consequences and considerations to
the Interstate shareholders of the proposed merger of Sub into Interstate are as
follows:
Interstate Forging Industries, Inc.
September 25, 1996
Page 2
A. GENERAL. The receipt of cash and the right to Contingent Payments in
exchange for shares of Interstate Common Stock pursuant to the terms of the
Merger Agreement (or the receipt of cash pursuant to the exercise of dissenters'
rights) will be a taxable transaction to the Interstate shareholders for federal
income tax purposes, and may also be a taxable transaction under applicable
state, local, foreign and other tax laws.
B. SHAREHOLDERS THAT DO NOT ELECT OUT OF INSTALLMENT REPORTING. If an
Interstate shareholder does not elect out of installment reporting, Treasury
Regulations governing contingent debt instruments will require the shareholder
to allocate in equal annual increments the basis of his or her shares of
Interstate Common Stock to the taxable years in which payments (including the
Company Stock Price and Contingent Payments) may be received. Because the
Company Stock Price will be received in 1996 and Contingent Payments, if any,
may be received in each of the years 1997, 1998 and 1999, twenty-five percent
(25%) of the shareholder's basis would be allocated to each of the years 1996
through 1999. Gain will be recognized to the extent that the Company Stock
Price or principal component of a Contingent Payment (computed as described
below) received in a taxable year exceeds the basis allocated to that year. If
in 1997 or 1998 no Contingent Payment is received or if the principal component
of such payment is less than the basis allocated to that year, the unrecovered
portion of basis allocated to that year will be carried forward to the next
year. No loss will be allowed until 1999, the final taxable year in which a
Contingent Payment may be received (or, if earlier, the taxable year in which it
is determined that the right to Contingent Payments is worthless). As a result
of the basis allocation rules, unless an Interstate shareholder elects out of
installment reporting, the shareholder will generally be able to offset only
twenty-five (25%) of the shareholder's basis in shares of Interstate Common
Stock against the payment of the Company Stock Price received in 1996, even
though that payment could well be the majority of total payments to be received
by the shareholder pursuant to the Merger. Therefore, a shareholder may wish to
consider electing out of installment reporting with respect to the Merger.
Pursuant to temporary Treasury Regulation Section 15A.453-1(c)(7), a
taxpayer may request a private letter ruling from the IRS to use an alternative
method of basis recovery if the taxpayer is able to demonstrate, prior to the
due date of the return (including extensions) for the taxable year in which the
first payment is received (1996), that application of the normal
Interstate Forging Industries, Inc.
September 25, 1996
Page 3
basis recovery rule described above will substantially and inappropriately defer
recovery of basis. To meet this test the taxpayer must show (1) that the
alternative method is a reasonable method of ratably recovering basis, and (ii)
that, under such method, it is reasonable to conclude over time the taxpayer
likely will recover basis twice as fast as the taxpayer would under the
otherwise applicable normal basis recovery rule. The request must be filed
before the due date for filing the return. The taxpayer must receive the ruling
prior to using the alternative method of basis recovery.
A shareholder that does not elect out of installment reporting may be
required to pay interest on the deferred tax. Section 453A of the Code
generally requires that interest be paid on the deferred tax with respect to an
obligation arising from the installment sale of property if (i) the sales price
is over $150,000 and (ii) the face amount of all such obligations that arose
during the taxable year and that are outstanding as of the close of the taxable
year exceeds $5 million. If interest must be paid with respect to an obligation
that arises during a year, interest must also be paid for any subsequent year if
any part of that obligation remains outstanding at the end of that subsequent
year. It is not clear how the interest charge will be computed when the
installment obligation involves rights such as rights to the Contingent
Payments.
C. SHAREHOLDERS THAT ELECT OUT OF INSTALLMENT REPORTING. If an
Interstate shareholder elects out of installment reporting of the receipt of the
Company Stock Price and Contingent Payments, it is likely that at the Effective
Time the shareholder will recognize capital gain or loss for federal income tax
purposes equal to the difference between (i) the tax basis of the shares of
Interstate Common Stock converted in the Merger and (ii) the sum of the Company
Stock Price plus the fair market value at the Effective Time of the right to
Contingent Payments for such shares. To elect out of installment reporting, a
shareholder should report the full amount of the gain or loss on a timely filed
federal tax return (including extensions). Generally, once a taxpayer reports a
gain under the installment method, the taxpayer cannot later elect out of
installment reporting. However, if the original federal tax return of the
taxpayer was filed on time, the taxpayer may make the election on an amended
return filed no more than six months after the due date of the return, excluding
extensions.
If an Interstate shareholder elects out of installment reporting, the
shareholder will recognize additional gain if the
Interstate Forging Industries, Inc.
September 25, 1996
Page 4
total of the principal components of the Contingent Payments (computed as
described below) exceeds the fair market value of the right to Contingent
Payments at the Effective Time. Such a shareholder will recognize a capital
loss in 1999 (the last year in which a Contingent Payment could be received) if
the total of the principal components of such actual Contingent Payments is less
than such fair market value.
On occasion, taxpayers have argued that if installment reporting does not
apply to the sale or exchange of an asset (e.g., because the taxpayer elects out
of installment reporting), the taxpayer should be permitted to postpone taxation
of the contingent portion of the sale price until the contingent portion is
actually paid. Under this method, the so-called "open transaction method,"
taxpayers have argued that they are entitled to recover tax basis before
reporting any gain. However, temporary Treasury Regulation Section 15A.453-1(d)
severely limits the availability of the open transaction method. The Regulation
provides that if a taxpayer elects not to report on the installment method, then
"[r]eceipt of an installment obligation shall be treated as the receipt of
property, in an amount equal to the fair market value of the installment
obligation, whether or not such obligation is the equivalent of cash. An
installment obligation is considered to be property and is subject to
valuation... without regard to whether the obligation is embodied in a note, an
executory contract, or other instrument..." The Regulation also states that if
a taxpayer elects out the installment method "[t]he fair market value of a
contingent payment obligation may be ascertained from, and in no event shall be
considered to be less than, the fair market value of the property sold (less the
amount of any other consideration received in the sale). Only in those rare and
extraordinary cases involving sales for a contingent payment obligation in which
the fair market value of the obligation (determinable under the preceding
sentences) cannot reasonably be ascertained will the taxpayer be entitled to
assert that the transaction is 'open.'" Thus, it is likely that the IRS would
challenge any attempt to use the open transaction method, and no assurance can
be given that the IRS would not be successful in such a challenge.
D. DISSENTING SHAREHOLDERS. A shareholder that exercises dissenters'
rights will recognize gain or loss equal to the difference between the basis of
the shares of Interstate Common Stock held by the shareholder and the amount of
cash received pursuant to the exercise of such rights.
Interstate Forging Industries, Inc.
September 25, 1996
Page 5
E. CAPITAL LOSS LIMITATION. If an individual recognizes a capital loss
in a taxable year, such a loss is deductible only to the extent of capital gains
recognized in that taxable year plus $3,000 ($1,500 for a married individual
filing a separate return). Any excess capital loss may be carried forward
indefinitely until exhausted under the rules of the preceding sentence, but may
not be carried back. Thus, as an example of the effect of the basis allocation
rules discussed above, an Interstate shareholder that does not elect out of
installment reporting could have a capital gain in 1996 and a capital loss in
1999, which loss could not be used to offset the capital gain. A corporation
may deduct a capital loss only to the extent of capital gains. A corporation
may generally carry a capital loss back three years and forward five years.
F. COMPUTATION OF PRINCIPAL AND INTEREST COMPONENTS OF CONTINGENT
PAYMENTS. A certain portion of any cash received by a former Interstate
shareholder in connection with a subsequent cash payment made by Citation as a
Contingent Payment will constitute interest income to the shareholder. The
amount of any Contingent Payment that will be characterized as interest income
is a function of the amount of cash actually received by the former Interstate
shareholder and the applicable federal interest rate. The Merger Agreement
provides that the applicable federal interest rate shall be the applicable
federal mid-term rate, compounded semi-annually. In effect, any cash received
as a Contingent Payment will be discounted by the applicable rate to determine
both a principal component and an interest component. The interest component
will be taxed as interest income, while the principal component will be taxed in
accordance with the provisions of the Code described above.
Our opinion is based upon the existing provisions of the Code, the Treasury
Regulations thereunder, published revenue rulings, procedures and releases of
the Internal Revenue Service, and existing court decisions, any of which could
be changed at any time. Any such changes may be retroactive with respect to
transactions entered into prior to the date of such changes and could modify our
opinion retroactively. The Internal Revenue Service is not bound by our opinion
and is not precluded from asserting positions contrary to our opinion. Further,
our opinion is based upon our best interpretations of existing sources of law
and express what, based on these sources, we believe a court would likely
conclude if presented with these issues. No assurance can be given however that
such interpretations would be followed if the transaction becomes the subject of
judicial or administrative proceedings.
Interstate Forging Industries, Inc.
September 25, 1996
Page 6
No opinion is expressed regarding the tax treatment of the transaction under
any other provision of the Internal Revenue Code or Treasury Regulations. In
addition, no opinion is expressed regarding the tax treatment of any conditions
existing at the time of or effects resulting from the proposed transaction that
are not specifically covered by the above statements.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement of Citation on Form S-4, to be filed under the Securities
Act of 1993, as amended (the "Act"), and to the use of our name under the
captions "SUMMARY -- The Proposed Merger -- Certain Federal Income Tax
Consequences" and "THE PROPOSED MERGER -- Certain Federal Income Tax
Consequences" in the Proxy Statement-Prospectus in connection with the proposed
transaction. In giving this consent, we do not admit that we are experts within
the meaning of Section 11 of the Act or within the category of persons whose
consent is required by Section 7 of the Act.
This opinion has been furnished solely for the benefit of the shareholders
of Interstate, and it may not be relied upon or used by any other person or for
any other purpose without our express written consent.
Very truly yours,
QUARLES & BRADY
/s/ Quarles & Brady