EXHIBIT NO. 99.12
ROPES & GRAY LLP
ONE INTERNATIONAL PLACE
BOSTON, MA 02110-2624
617-951-7000
November 20, 2006
MFS Government Limited Maturity Fund
500 Boylston Street
Boston, MA 02116
MFS Limited Maturity Fund
MFS Series Trust IX
500 Boylston Street
Boston, MA 02116
Ladies and Gentlemen
We have acted as counsel in connection with the Agreement and Plan of
Reorganization (the "Agreement") dated October 25, 2006 between MFS Government
Limited Maturity Fund ("Target Fund") and MFS Series Trust IX (the "Trust"), on
behalf of one of its series, MFS Limited Maturity Fund ("Acquiring Fund"). The
Agreement describes a transaction (the "Transaction") to occur as of the date of
this letter (the "Closing Date"), pursuant to which Acquiring Fund will acquire
substantially all of the assets of Target Fund in exchange for shares of
beneficial interest in Acquiring Fund (the "Acquiring Fund Shares") and the
assumption by Acquiring Fund of all of the liabilities of Target Fund following
which the Acquiring Fund Shares received by Target Fund will be distributed by
Target Fund to its shareholders in liquidation and termination of Target Fund.
This opinion as to certain U.S. federal income tax consequences of the
Transaction is furnished to you pursuant to Section 8.6 of the Agreement.
Capitalized terms not defined herein are used herein as defined in the
Agreement.
Target Fund is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company. Shares
of Target Fund are redeemable at net asset value at each shareholder's option.
Target Fund has elected to be a regulated investment company for federal income
tax purposes under Section 851 of the Internal Revenue Code of 1986, as amended
(the "Code").
Acquiring Fund is a series of the Trust, which is registered under the
1940 Act as an open-end management investment company. Shares of Acquiring Fund
are redeemable at net asset value at each shareholder's option. Acquiring Fund
has elected to be a regulated investment company for federal income tax purposes
under Section 851 of the Code.
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For purposes of this opinion, we have considered the Agreement, the
Combined Prospectus/Proxy Statement dated September 27, 2006, and such other
items as we have deemed necessary to render this opinion. In addition, you have
provided us with letters dated as of the date hereof, representing as to certain
facts, occurrences and information upon which you have indicated that we may
rely in rendering this opinion (whether or not contained or reflected in the
documents and items referred to above).
The facts you have represented as to in paragraph 5 of the letter from
Acquiring Fund and paragraph 6 of the letter from Target Fund, each dated as of
the date hereof, support the conclusion that, following the Transaction,
Acquiring Fund will continue the historic business of Target Fund as an open-end
investment company that seeks to preserve capital and provide high current
income (compared to a portfolio entirely invested in money market instruments).
Various factors demonstrate the similarity between Target Fund and
Acquiring Fund. The two funds have similar investment styles: As of December 31,
2005 (the "comparison date"), a randomly selected date that reflects the funds'
portfolios composed without reference to the Transaction, Morningstar
categorized the Target Fund as a "Short Government" fund and Acquiring Fund as a
"Short-Term Bond" fund.(1) For purposes of the Morningstar Style Box, both
funds' investment style was characterized as "Short-Duration-High Quality." As
one would expect from bond funds, as of the comparison date each fund invested
at least 65.0% of its net assets in bonds and the remaining portion (35.0% for
Target Fund and 20.1% for Acquiring Fund) in cash. Neither fund invested in
stocks or other assets.
A comparison of the funds' portfolios indicates that, consistent with
the funds' shared goals and strategies, the funds hold securities with similar
characteristics. First, as of March 31, 2006, the funds had similar overall
yields(2) (3.8% for Target Fund and 4.1% for Acquiring Fund) and very similar
average yields to maturity ("YTM") (5.2% for Target Fund and 5.5% for Acquiring
Fund).(3) The fact that the funds have similar YTMs shows the similarity between
the funds' bond portfolios with
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(1) Unless otherwise noted, all data was obtained from Morningstar. Because of
the timing of the "continuity of business enterprise" analysis for the
Transaction, the Morningstar data with respect to the characteristics of the
portfolios of the Acquiring Fund and the Target Fund was available for two
separate time periods. The majority of the relevant data was available only
as of, or for the period ended, December 31, 2005 and, as such, that date was
chosen as the "comparison date." The Morningstar data with respect to the
overall yield for and the risk profiles of the Acquiring Fund and Target
Fund, however, were available only as of March 31, 2006. Where figures were
only available as of March 31, 2006, such circumstance is explicitly noted in
the text of the representations contained herein.
(2) Yield, expressed as a percentage, represents a fund's income return on
capital investment for the past 12 months. This figure refers only to
interest distributions from fixed-income securities, dividends from stocks,
and realized gains from currency transactions. Monies generated from the sale
of securities or from options and futures transactions are considered capital
gains, not income. Return of capital is also not considered income.
Morningstar computes yield by dividing the sum of the fund's income
distributions for the past 12 months by the previous month's net asset value
(adjusted upward for any capital gains distributed over the same time
period).
3 Yield to maturity is a method of measuring the total yield of a bond that
takes into account both coupon payments and amortization or accretion from
the time of purchase until maturity (i.e., the average rate of return that
will be
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respect to annual coupon payments and number of years to maturity. As of the
comparison date, the average coupons of the funds' portfolios were extremely
similar at 4.4% for Target Fund and 4.8% for Acquiring Fund.
With respect to maturity, the funds' portfolios are also similar. As
of the comparison date, the funds had similar average maturities: 7.5 years for
Target Fund and 9.4 years for Acquiring Fund. When compared in terms of the
percentage of net assets that each fund invested in securities of varying
maturities, there was a total overlap of 75.0%. That overlap consisted of 21.4%
in securities with maturities of 1-3 years, 20.4% in securities with maturities
of 3-5 years, no overlap in securities with maturities of 5-7 years, 1.2% in
securities with maturities of 7-10 years, 15.4% in securities with maturities of
10-20 years, 13.8% in securities with maturities of 20-30 years, and 2.7% in
securities with maturities of 30 years and over.
Next, the funds' portfolios are similar in terms of duration and
credit quality. As of the comparison date, the average effective durations of
the funds were almost identical (1.5 years for Target Fund and 1.6 years for
Acquiring Fund), placing both funds within the Morningstar short-term category
for bond funds.(4) As of the comparison date, the average credit rating of
Target Fund was AAA, while that of Acquiring Fund was AA.(5) Looking at each
separate rating category, the credit ratings of the funds' individual
investments overlapped by a total of 46.7%. Specifically, there was an overlap
of 46.7% in AAA-rated investments. Given Target Fund's focus on government bonds
and highest credit quality fixed-income securities, there was no overlap in
investments rated AA or below. However, the largest percentage of both funds'
portfolios was held in AAA-rated investments (100.0% for Target Fund and 46.7%
for Acquiring Fund), demonstrating the funds' shared focus on securities with
superior credit ratings.
The funds' portfolios are also similar in terms of diversification
among different kinds of fixed-income securities. As of the comparison date, the
funds shared a total overlap of 42.5%
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earned on a bond if held to maturity). Technically speaking, YTM is the interest
rate that makes the present value of a bond's payments equal to its price. Zvi
Bodie, et al, Investments 417 (1999). It may be calculated using the following
equation: c(1 + r)-1 + c(1 + r)-2 +...+ c(1 + r)-n + B(1 + r)-n = P, where c =
annual coupon payment (in dollars, not a percent) n = number of years to
maturity B = par value P = purchase price
The YTM figures were provided by Target Fund and Acquiring Fund, respectively.
These figures were available only as of March 31, 2006.
(4) When stated in terms of duration, the Morningstar bond classifications are
as follows: (1) funds with bonds having an average effective duration of less
than 3.5 years qualify as short term; (2) funds with bonds having an average
effective duration between 3.5 and 6 years qualify as intermediate term; and
(3) funds with bonds having an average effective duration greater than 6
years are long term.
(5) Morningstar defines funds with an average credit rating of AAA as "high
quality." Funds with an average credit rating of A are "medium quality," with
A being the highest rating within the category.
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over the fixed-income classes, consisting of 2.4% in U.S. Government securities,
19.6% in mortgage-backed assets and collateralized mortgage obligations, 0.4% in
U.S. corporate, asset-backed, convertible and municipal securities, and 20.1% in
cash.
Consistent with the similarity of investment strategies, the funds
bear similar risk profiles. As of March 31, 2006 the funds had the same
correlation with their standard benchmark, the Lehman Brothers Aggregate Index,
with a ten-year beta of .37 for the Target Fund and the Acquiring Fund.(6) In
addition, as of March 31, 2006, Target Fund and Acquiring Fund correlated with
their respective "best fit" indices (the Lehman Brothers One- to Three-Year
Government Bond Index and the Lehman Brothers One- to Three-Year
Government/Credit Index) to a similar degree, with ten-year betas of .96 and .90
respectively.
The specific characteristics described above (the relative figures and
percentages in terms of asset allocation, yield, yield to maturity, maturity,
credit quality, duration, sector diversification, and risk profile) do not
constitute fixed aspects of Target Fund and Acquiring Fund's investment
strategies. Rather, they reflect the fact that the funds' similar investment
strategies have led them to react similarly (by choosing similar portfolios) to
the market conditions in place up until the comparison date.
Consistent with the similarity of the funds, on the date of the
Transaction, at least 33 1/3% of Target Fund's portfolio assets as they existed
prior to any realignment occurring in connection with the Transaction will not
be required to be sold by virtue of the investment objectives, strategies,
policies, risks or restrictions of Acquiring Fund, and the Target Fund will not
have realigned its portfolio prior to the Transaction in order for this to be
true. Acquiring Fund has no plan or intention to change any of its investment
objectives, strategies, policies, risks or restrictions after the Transaction.
After the Transaction, Acquiring Fund will invest all assets acquired from
Target Fund in a manner consistent with the funds' shared investment strategies,
as described above and reflected by the aforementioned portfolio data.
Based on the foregoing representations and assumptions and our review
of the documents and items referred to above, we are of the opinion that,
generally, subject to the final paragraphs hereof, for U S federal income tax
purposes:
(i) The Transaction will constitute a reorganization within the
meaning of Section 368(a) of the Code, and Acquiring Fund and
Target Fund each will be a "party to a reorganization" within
the meaning of Section 368(b) of the Code;
(ii) Under Section 1032 of the Code, no gain or loss will be
recognized by Acquiring Fund upon the receipt of the assets
of Target Fund in exchange for Acquiring Fund Shares and the
assumption by Acquiring Fund of the liabilities of Target
Fund;
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(6) Beta is the statistical measure of the degree of variance between a security
or fund and a specifically defined market, such as the Lehman Brothers
Aggregate Index.
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(iii) Under Section 362(b) of the Code, the basis in the hands of
Acquiring Fund of the assets of Target Fund transferred to
Acquiring Fund in the Transaction will be the same as the
basis of such assets in the hands of Target Fund immediately
prior to the transfer;
(iv) Under Section 1223(2) of the Code, the holding periods of the
assets of Target Fund in the hands of Acquiring Fund will
include the periods during which such assets were held by
Target Fund;
(v) Under Section 361 of the Code, no gain or loss will be
recognized by Target Fund upon the transfer of Target Fund's
assets to Acquiring Fund in exchange for Acquiring Fund
Shares and the assumption by Acquiring Fund of the
liabilities of Target Fund, or upon the distribution of
Acquiring Fund Shares by Target Fund to its shareholders in
liquidation;
(vi) Under Section 354 of the Code, no gain or loss will be
recognized by Target Fund shareholders upon the exchange of
their Target Fund shares for Acquiring Fund Shares;
(vii) Under Section 358 of the Code, the aggregate basis of
Acquiring Fund Shares a Target Fund shareholder receives in
connection with the Transaction will be the same as the
aggregate basis of his or her Target Fund shares exchanged
therefore;
(viii) Under Section 1223(1) of the Code, a Target Fund
shareholder's holding period for his or her Acquiring Fund
Shares will be determined by including the period for which
he or she held the Target Fund shares exchanged therefor,
provided that he or she held such Target Fund shares as
capital assets; and
(ix) Acquiring Fund will succeed to and take into account the
items of Target Fund described in Section 381(c) of the Code,
subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 of the Code and the
Regulations thereunder.
We express no view with respect to the effect of the reorganization on any
transferred asset as to which any unrealized gain or loss is required to be
recognized at the end of a taxable year (or on the termination or transfer
thereof) under federal income tax principles.
In connection with this opinion, we call your attention to Revenue
Ruling 87-76, 1987-2 C.B.84, published by the Internal Revenue Service (the
"IRS"). In that ruling, the IRS held that the so-called "continuity of business
enterprise" requirement necessary for tax-free reorganization treatment was not
met in the case of an acquisition of an investment company which invested in
corporate stocks and bonds by an investment company which invested in municipal
bonds. Specifically, the IRS based its ruling on its conclusion that the
business of investing in corporate
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stocks and bonds is not the same line of business as investing in municipal
bonds. We believe that the IRS's conclusion in this ruling has always been
questionable. In addition, a series of private letter rulings issued in July
2005 suggests that the IRS `s position on this issue is evolving: the IRS relied
upon historic business representations to conclude that the reorganization
satisfied the continuity of business enterprise requirement. However, even if
the IRS's 1987 revenue ruling were a correct statement of law, the facts of this
Transaction are distinguishable from those in the ruling.
We believe that Acquiring Fund and Target Fund are both engaged in the
same line of business: each is an open-end management investment company that
seeks to preserve capital and provide high current income (compared to a
portfolio entirely invested in money market instruments). The funds' portfolios
are substantially similar in terms of asset allocation, yield, effective
duration, maturity, diversification, and risk profile. After the Transaction,
Acquiring Fund will continue that line of business for the benefit of the
stockholders of both Target and Acquiring Funds. Although Acquiring Fund will
dispose of securities formerly held by Target Fund, these dispositions will be
fully consistent with the shared historic investment policies of both Funds and
all proceeds generated by such dispositions will be reinvested in a manner fully
consistent with such policies. In these circumstances, we are of the opinion
that Acquiring Fund will have continued the historic business of Target Fund for
the benefit of, among others, the historic stockholders of Target Fund, and that
the continuity of business enterprise doctrine should, as a result, be
fulfilled. Because Revenue Ruling 87-76 is the only ruling on which taxpayers
can rely (i.e., the only ruling that is not a private letter ruling) dealing
specifically with the application of the "continuity of business enterprise"
requirement to a reorganization involving investment companies, however, our
opinion cannot be free from doubt. No ruling has been or will be obtained from
the IRS as to the subject matter of this opinion and there can be no assurance
that the IRS or a court of law will concur with the opinion set forth above
Our opinion is based on the Internal Revenue Code of 1986, as amended,
Treasury Regulations, Internal Revenue Service rulings, judicial decisions, and
other applicable authority, all as in effect on the date of this opinion. The
legal authorities on which this opinion is based may be changed at any time. Any
such changes may be retroactively applied and could modify the opinions
expressed above
Very truly yours,
ROPES & GRAY LLP
Ropes & Gray LLP