Exhibit 5.2
[Mayer, Brown & Platt letterhead]
July 15, 1999
To the Persons Listed on
Schedule A Attached Hereto
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")
intend to issue and to offer, pursuant to an offering circular dated July 15,
1999 (the "Offering Circular"), $71,000,000 aggregate principal amount of 12
1/4% Senior Secured Notes, due 2006 (the "Notes"). In addition, Peninsula Gaming
Partners, LLC ("PGP") intends to issue and to offer pursuant to the Offering
Circular 500,000 convertible preferred membership interests (the "Preferred
Membership Interests"). The Notes and the Preferred Membership Interests will be
issued as component parts of 71,000 units (the "Units"), each consisting of (a)
Notes having a $1,000 aggregate principal amount, and (b) 7.042 Preferred
Membership Interests. In connection with the issuance of the Units, you have
requested our opinions as to whether, for U.S. federal income tax purposes, (i)
the Notes will be classified as indebtedness, (ii) neither PGCL nor PGP will be
classified as an association or publicly traded partnership taxable as a
corporation, and (iii) each of PGCL and PGP will be classified as a partnership.
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;
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(b) the Amended and Restated Operating Agreement of PGCL (the
"PGCL Operating Agreement"), made as of July 15, 1999, among [PGCL 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
PGCL (the "PGCL Members");
(c) 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
(the "PGP Members"); and
(d) 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, N.A. , as trustee (the "Trustee").
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 all
representations and warranties made by all parties in and pursuant to the
agreements enumerated above are and will continue to be accurate (including
representations made by purchasers and transferees, if any, of the Preferred
Membership Interests and other membership interests in PGP), that all parties to
such agreements will perform in accordance with the terms of such agreements
(including such purchasers and transferees), and that there are no agreements or
understandings other than those of which we have been informed that would affect
our opinions set forth herein.
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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 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 Greater Dubuque Riverboat
Entertainment Company, L.C. ("GDREC") which, prior to the consummation of the
Acquisition, owned and operated the Diamond Jo and its casino business. 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 will raise $3 million 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 will receive a $6
million capital contribution from the common members of PGP, bringing PGP's
total equity capitalization to $9 million. PGP will contribute such $9 million
to the capital of PGCL concurrently with the sale of the Units.
PGCL, which is expected to raise approximately $70 million from
issuance of the Notes comprising a part of the Units, will effect 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
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(1/) All capitalized terms not defined herein have the same meanings
ascribed to them in the Offering Circular.
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redeemable preferred membership interests. A substantial portion of the
remaining proceeds of sale of the Units will be used by PGCL for working capital
and other similar purposes.
SEVERABILITY OF THE UNITS. The Notes and the Preferred Membership
Interests will be 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) will be 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 and will be 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, subsequent to the issuance of the Notes, 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 will assign 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 will be unconditionally and irrevocably
guaranteed, jointly and severally, by all future subsidiaries of PGCL. On the
Issue Date, PGCL will have no subsidiaries other than PGC.
Interest on the Notes will be 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 will
bear interest at 12 1/4% per annum from the date of original issuance. The Notes
are expected to be issued at an issue price of 98.847% to produce a
yield-to-maturity on the Notes of 12.5%. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
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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 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
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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.
THE PGP MEMBERSHIP INTERESTS. In addition to the non-voting Preferred
Membership Interests, PGP has two classes of common equity interests (voting and
non-voting). Preferred Membership Interests will initially be convertible at any
time at the option of the holder thereof into one non-voting common membership
interest of PGP, subject to certain adjustments. Voting and non-voting common
membership interests of PGP are entitled to identical rights and privileges,
except with respect to voting and certain required regulatory redemptions. Upon
issuance of the Units, holders of voting common membership interests will
contribute $6 million to the capital of PGP in exchange for such interests,
while the portion of the purchase price of Units allocated to the Preferred
Membership Interests, and thus contributed to the capital of PGP by holders of
Preferred Membership Interests, will be $3 million. No non-voting common
membership interests will be outstanding until any conversion of Preferred
Membership Interests.
Profits and losses of PGP will be allocated for U.S. federal income tax
purposes to each holder of membership interests, whether common or preferred,
PRO RATA according to the percentage of membership interests held by such
holder. The common membership interests of PGP will be allocated two thirds of
the profits and losses of PGP, and the Preferred Membership Interests will be
allocated one third of the profits and losses of PGP (subject to ratable
adjustment thereafter for conversions of Preferred Membership Interests into
non-voting common membership interests of PGP). Therefore, the common membership
interests of PGP will represent essentially two thirds of the total interest in
the capital and profits of PGP, and the Preferred Membership Interests will
represent one third of the total interest in capital and profits of PGP. Thus,
it is reasonable to assume that on issuance a unit of
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Preferred Membership Interests will have approximately the same value as a unit
of common membership interests of PGP having the same percentage of membership
interests.
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.
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
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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.
Thin capitalization has been viewed as evidence that a instrument that was debt
in form constituted a contribution to the debtor's capital where (1) the
debt-to-equity ratio was high at on 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("2/) in recent years, and courts have expressly
stated that thin capitalization alone will not control the character of the
transaction.(3/) For example, notwithstanding a debt-to-equity ratio of
225 to 1,
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(2/) SEE TYLER, SUPRA, at 848.
(3/) 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). 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,
(continued...)
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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).
We recognize, however, that a high debt-to-equity ratio has been
considered more indicative of equity when there is an identity of interest
between equity owners and creditors,(4/) and that the Holders, who will
purchase 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.(5/) 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.(6/)
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(3/) (...continued)
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.
(4/) SEE LAIDLAW TRANSPORTATION, INC. V. COMM'R, T.C. Memo 1998-232 (1998).
(5/) SEE GENERALLY BORIS I. BITTKER & JAMES S. EUSTICE, FEDERAL INCOME TAXATION
OF CORPORATIONS AND SHAREHOLDERS, PARA. 4.04[2] (6th ed. 1998) and the
authorities cited therein.
(6/) 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
(continued...)
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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 represent one-third of the capital and
profits interests of PGP, will be 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 are being purchased for a price substantially equivalent to
fair market value. Accordingly, it is a reasonable economic presumption that a
typical unrelated creditor would be 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 will be
classified as debt for U.S. federal income tax purposes.
2. 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).
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(6/) (...continued)
owned 75% of the stock rendering the high debt-to-equity ratio
determinative to the conclusion that the bonds represented equity).
Moreover, here, the Units are immediately separable and thus no Holder will
be 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.
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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 and PGP would not constitute business entities
that are 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 "Independent Committee). Under section 16.2 of the PGP Operating
Agreement, the "tax matters partner" of PGP may not make an election under
Treasury regulations section 301.7701-3(c) to treat PGP as an association
taxable as a corporation for U.S. federal income tax purposes without the
consent of all the members of PGP. In addition, section 10.6 of the PGCL
Operating Agreement and section 16.6 of the PGP Operating Agreement provide that
no officer or manager of either PGCL or PGP, respectively, and not less than all
members of PGCL or PGP, respectively, shall have the power to make such
election. For purposes of this opinion, we have assumed that neither the members
of PGCL nor the members of PGP will make such election.
Based on the foregoing, neither PGCL nor PGP will be 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
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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 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, pursuant to section 11.16 of the PGP Operating
Agreement, neither PGP nor the members of PGP 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 PGP 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 and
section 16.5 of the PGP Operating Agreement, each PGCL Member and PGP Member
represents and warrants that such member has not acquired nor will such member
transfer any membership interest in PGCL or PGP, as the case may be, or cause
any membership interest in PGCL or PGP, 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. Purchasers of PGP membership interests have also made such
representations in representation letters delivered to the Transfer Agent, and
any transfers of membership interests of PGP will be void AB INITIO and of no
effect unless, prior to the effectiveness of such transfer, the transferee
delivers to the Transfer Agent a representation letter containing such
representations.
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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. Treasury
regulations section 1.7704-1(f) provides that a transfer of an interest pursuant
to a redemption and repurchase agreement described in Treasury regulations
section 1.7704-1(e)(3) and meeting the requirements of Treasury regulations
section 1.7704-1(f) ("Paragraph (f) Transfers") will be disregarded in
determining whether interests in the partnership are readily tradable on a
secondary market or the substantial equivalent thereof. 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. Finally, Treasury regulations section 1.7704-1(j) provides
that interests in a partnership are not readily tradable on a secondary market
or the substantial equivalent thereof if the sum of the percentage interests in
partnership capital or profits transferred during the taxable year of the
partnership, other than in transfers constituting Paragraph (e) Transfers,
Paragraph (f) Transfers or Paragraph (g) Transfers, does not exceed 2 percent of
the total interests in the partnership capital or profits (such transfers,
"Paragraph (j) Transfers").
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
The Persons Listed on
Schedule A Attached Hereto
July 15, 1999
Page 14
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.
However, the PGCL Operating Agreement further provides 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
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.(7/)
Section 11.16 of the PGP Operating Agreement provides that any
transfers of membership interests by members of PGP will be null and void AB
INITIO and of no effect, and PGP shall not recognize the transferee as a direct
or indirect holder or owner of a membership interest in PGCL, and the Transfer
Agent may not register the transfer of any membership interest in PGP, if the
member has not first delivered to the managing member of PGP an opinion of
counsel reasonably satisfactory to such managing member and a majority of the
members of the Independent Committee to the effect that such transfer will not
result in PGP 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, provided, however, that the member will not be
required to deliver such opinion if, in the determination of the managing member
of PGP, and subject to a concurring determination by a majority of the members
of the Independent Committee, the proposed Transfer constitutes a Paragraph (e)
Transfer, a
- --------
(7/) 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. Treasury regulation section
1.7704-1(a)(2)(iii).
The Persons Listed on
Schedule A Attached Hereto
July 15, 1999
Page 15
Paragraph (f) Transfer, a Paragraph (g) Transfer, or a Paragraph (j) Transfer.
M. Brent Stevens (who effectively controls the Board of Managers of PGP) has
represented to us that the Board of Managers of PGP will not make any
determination as to whether any particular transfer of interests in PGP
constitutes a Paragraph (e) Transfer, Paragraph (f) Transfer, Paragraph (g)
Transfer, or Paragraph (j) 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 the Board of
Managers of PGP will so consult with tax counsel and that, on that basis, any
transfers of PGP membership interests made without delivery of the opinion
referred to in this paragraph will in fact constitute Paragraph (e) Transfers,
Paragraph (f) Transfers, Paragraph (g) Transfers or Paragraph (j) Transfers.
Based on the foregoing, no membership interest in either PGCL or PGP
will be considered traded on an established securities market, or readily
tradable on a secondary market or the substantial equivalent thereof. Therefore,
neither PGCL nor PGP will 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 will be classified as indebtedness, (ii)
neither PGCL nor PGP will be treated as an association or publicly traded
partnership taxable as corporation, and (iii) each of PGCL and PGP is and will
be classified as a partnership (until such time as it no longer has at least two
members).
We further confirm that the statements made in the sections of the
Offering Circular under the headings "CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS" and "RISK FACTORS--Publicly Traded Partnership Classification",
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 are furnishing this opinion to the persons listed on Schedule A
hereto solely in connection with the issuance of the Units upon the
understanding that we are not hereby assuming professional responsibility to any
other person whatsoever. This opinion is not to be used, circulated, quoted, in
whole or in part, relied upon, or
The Persons Listed on
Schedule A Attached Hereto
July 15, 1999
Page 16
otherwise referred to or used by you or any other person for any purpose without
our prior written approval in each instance.
Very truly yours,
/s/ Mayer, Brown & Platt
Schedule A
Jeffries & Company, Inc.
11100 Santa Monica Boulevard
10th Floor
Los Angeles, CA 90025
Peninsula Gaming Company, LLC
Peninsula Gaming Partners, LLC