Exhibit 8.1
FORM OF
FEDERAL TAX OPINION
March __, 2000
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC
Savings Bank of the Finger Lakes
470 Exchange Street
Geneva, New York 14456
Ladies and Gentlemen:
You have requested this firm's opinion regarding certain federal income tax
consequences which will result from the conversion of Finger Lakes Financial
Corporation, MHC, (the "Mutual Holding Company") from the two-tier holding
company structure to the stock holding company form, as effectuated pursuant to
the three integrated transactions described below.
In connection therewith, we have made such investigations as we have deemed
relevant or necessary for the purpose of this opinion. In our examination, we
have assumed the authenticity of original documents, the accuracy of copies and
the genuineness of signatures. We have further assumed the absence of adverse
facts not apparent from the face of the instruments and documents we examined
and have relied upon the accuracy of the factual matters set forth in the Plan
of Conversion and Reorganization (the "Plan") and the Registration Statement
filed by Finger Lakes Bancorp, Inc. (the "Holding Company") with the Securities
and Exchange Commission ("SEC") under the Securities Act of 1933, as amended,
and the Application for Conversion on Form AC filed with the Office of Thrift
Supervision (the "OTS").
Our opinion is based upon the existing provisions of the Internal Revenue
Code of 1986, as amended (the "Code) and regulations thereunder (the "Treasury
Regulations"), and upon current Internal Revenue Service ("IRS") published
rulings and existing court decisions, any of which could be changed at any time.
Any such changes may be retroactive and could significantly modify the
statements and opinions expressed herein. Similarly, any change in the facts and
assumptions stated below, upon which this opinion is based, could modify the
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 2
conclusions. This opinion is as of the date hereof, and we disclaim any
obligation to advise you of any change in any matter considered herein after the
date hereof.
We, of course, opine only as to the matters we expressly set forth, and no
opinions should be inferred as to any other matters or as to the tax treatment
of the transactions that we do not specifically address. We express no opinion
as to other federal laws and regulations, or as to laws and regulations of other
jurisdictions, or as to factual or legal matters other than as set forth herein.
For purposes of this opinion, we are relying on the opinion of FinPro the
appraiser of the Company, to the effect that the subscription rights distributed
to Eligible Account Holders and Supplemental Eligible Account Holders have no
value; and on the representations provided to us by the Mutual Holding Company
and by the Savings Bank of the Finger Lakes, FSB (the "Bank") as described in
the Affidavit of the President of the Mutual Holding Company and the Bank,
incorporated herein by reference.
The Proposed Transactions
Based solely upon our review of the documents described above, and in
reliance upon such documents, we understand that the relevant facts are as
follows. On November 10, 1994, the Savings Bank of the Finger Lakes, a federally
chartered mutual savings bank ("Finger Lakes") reorganized from a mutual savings
bank to become the majority-owned stock subsidiary of the Mutual Holding
Company. To accomplish this transaction, Finger Lakes organized the Bank as a
wholly-owned subsidiary. Finger Lakes then transferred substantially all of its
assets and liabilities, including all of its deposit-taking, lending and other
banking functions and its corporate name to the newly created stock savings bank
called Savings Bank of the Finger Lakes, FSB. Finger Lakes then converted its
charter to a mutual holding company charter to become the Mutual Holding
Company.
In connection with the foregoing transaction, the Bank sold less than 50%
of its outstanding shares of Bank Common Stock to depositors, certain
tax-qualified plans and members of the public (the "Bank Minority
Stockholders"). The remaining shares of Bank Common Stock were held by the
Mutual Holding Company. The reorganization of Finger Lakes into the mutual
holding company form of organization, and the sale to the Bank Minority
Stockholders of stock in the Bank, are sometimes herein collectively referred to
as the "MHC Reorganization." On August 17, 1998, the Bank reorganized into a
two-tier holding company
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 3
form of organization whereby Finger Lakes Financial Corp., a federally-chartered
mutual holding company with the power to issue stock ("Mid-Tier Holding
Company") became the parent of the Bank and the Mid- Tier Holding Company became
the majority owned subsidiary of the Mutual Holding Company. To accomplish this
Transaction, the Bank chartered the Mid-Tier Holding Company as a wholly owned
subsidiary and the Mid-Tier Holding Company chartered an interim ("Interim")
federal stock savings bank as a wholly owned subsidiary. Interim then merged
into the Bank with the Bank's shareholders, including the Mutual Holding
Company, receiving shares of the Mid-Tier Holding Company in exchange for their
shares of Bank Common Stock. The shares of the Mid- Tier Holding Company owned
by the Bank were canceled.
On January 30, 2000, the Mutual Holding Company adopted the Plan of
Conversion and Reorganization ("Plan") providing for the conversion of the
Mutual Holding Company into the capital stock form of organization as Finger
Lakes Bancorp, Inc., (as converted, the "Holding Company").
At the present time, three transactions referred to as the "MHC Merger",
the "Mid-Tier Merger", and the "Bank Merger" are being undertaken. Pursuant to
the Plan, the conversion ("Conversion") will be effected in the following steps,
each of which will be completed contemporaneously.
(i) The Bank will establish the Holding Company as a first-tier Delaware
chartered stock holding company subsidiary.
(ii) The Company will charter an interim federal association ("Interim
Savings Bank").
(iii) The Mutual Holding Company will exchange its charter for an interim
stock savings association charter and will merge with and into the
Mid-Tier Holding Company (the "MHC Merger"), shares of Mid-Tier common
stock ("Mid-Tier Common Stock") held by the Mutual Holding Company
will be canceled and each Eligible Account Holder and Supplemental
Eligible Account Holder will receive an interest in a liquidation
account of the Mid-Tier Holding Company in exchange for such person's
interest in the Mutual Holding Company.
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 4
(iv) The Mid-Tier Holding Company will convert to a federal interim stock
savings association (as converted, the entity shall continue to be
referred to as the "Mid- Tier Holding Company") and will merge with
and into the Bank (the "Mid-Tier Merger") with the Bank as the
resulting entity and (i) Bank Minority Stockholders will
constructively receive shares of Bank Common Stock in exchange for
their Mid-Tier Common Stock and (ii) each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in a
liquidation account ("Liquidation Account") of the Bank in exchange
for such person's interest in the Mid-Tier Holding Company.
(v) Contemporaneously with the Mid-Tier Merger, Interim Savings Bank will
merge with and into the Bank with the Bank as the surviving entity
(the "Bank Merger"). Constructive shareholders of the Bank (i.e., Bank
Minority Stockholders immediately prior to the Conversion) will
exchange the shares of Bank Common Stock that they constructively
received in the Mid-Tier Merger for Holding Company common stock
("Holding Company Common Stock") pursuant to the exchange ratio
("Exchange Ratio").
(vi) Contemporaneously with the Bank Merger, the Holding Company will sell
Holding Company Common Stock in the Offering.
In the MHC Merger, a liquidation account is being established by the
Mid-Tier Holding Company for the benefit of Eligible Account Holders and
Supplemental Account Holders. Pursuant to Section 19 of the Plan, the
liquidation account will be equal to the greater of (a) the sum of (i) the
percentage of the outstanding shares of the common stock of the Mid-Tier Holding
Company owned by the Mutual Holding Company multiplied by the Mid-Tier Holding
Company's total stockholders' equity as reflected in the latest statement of
financial condition contained in the final Prospectus utilized in the
Conversion, and (ii) the restricted retained earnings account that reflects
certain dividends waived by the Mutual Holding Company; or (b) the retained
earnings of the Bank at the time the Bank underwent its mutual holding company
reorganization. In the Mid-Tier Merger, the liquidation account established at
the Mid-Tier Holding Company will become a part of the Liquidation Account at
the Bank.
The Plan complies with the provisions of Subpart A of 12 C.F.R. Part 563b,
which sets forth the OTS regulations for conversion of mutual institutions to
stock form. The Plan also
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 5
complies with the provisions of 12 C.F.R. Section 575.12(a), which is the OTS
regulation governing the conversion of mutual holding companies to stock form.
Upon the date of consummation of the Bank Merger ("the Effective Date"),
Interim Savings Bank will be merged with and into the Bank and Interim Savings
Bank will cease to exist as a legal entity. All of the then outstanding shares
of Bank Common Stock will be converted into and become shares of Holding Company
Common Stock pursuant to the Exchange Ratio that ensures that after the
Conversion and before giving effect to Bank Minority Stockholders' purchases in
the Offering, receipt of cash in lieu of fractional shares, and shares for which
dissenters' rights have been exercised, Bank Minority Stockholders will own the
same aggregate percentage of the Holding Company's Common Stock as they
currently own of the Bank Common Stock. The common stock of the Interim Savings
Bank owned by the Holding Company prior to the Bank Merger will be converted
into and become shares of common stock of the Bank on the Effective Date. The
Holding Company Common Stock held by the Bank immediately prior to the Effective
Date will be canceled on the Effective Date. Immediately following the Bank
Merger, additional shares of Holding Company Common Stock will be sold to
depositors and former shareholders of the Bank and to members of the public in
the Offering.
As a result of the MHC Merger, the Mid-Tier Merger and the Bank Merger, the
Holding Company will be a publicly held corporation, will register the Holding
Company Common Stock under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and will become subject to the rules and
regulations thereunder and file periodic reports and proxy statements with the
SEC. The Bank will become a wholly owned subsidiary of the Holding Company and
will continue to carry on its business and activities as conducted immediately
prior to the Conversion.
The stockholders of the Holding Company will be the former Bank Minority
Stockholders of the Mid-Tier Holding Company immediately prior to the MHC Merger
(i.e., all stockholders of the Bank, excluding the Mutual Holding Company), plus
those persons who purchase shares of Holding Company Common Stock in the
Offering. Nontransferable rights to subscribe for the Holding Company Common
Stock have been granted, in order of priority, to depositors of the Bank who
have account balances of $50.00 or more as of the close of business on December
31, 1998 ("Eligible Account Holders"), the Bank's tax-qualified employee plans
("Employee Plans"), depositors of the Bank who have account balances of $50.00
or more as of the close of business on ____________, 2000 ("Supplemental
Eligible
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 6
Account Holders"), other members of the Bank (other than Eligible Account
Holders and Supplemental Eligible Account Holders) ("Other Members"), and owners
of shares of Bank Common Stock other than the Mutual Holding Company ("Bank
Minority Stockholders"). Subscription rights are nontransferable. The Holding
Company will also offer shares of Holding Company Common Stock not subscribed
for in the subscription offering, if any, for sale in a community offering to
certain members of the general public.
Opinions
Based on the foregoing description of the MHC Merger, the Mid-Tier Merger
and the Bank Merger, and subject to the qualifications and limitations set forth
in this letter, we are of the opinion that:
1. The conversion of the Mutual Holding Company to a federally chartered
interim stock savings association will constitute a mere change in identity,
form or place of organization within the meaning of section 368(a)(1)(F) of the
Code.
2. The MHC Merger qualifies as a tax-free reorganization within the meaning
of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.)
3. The exchange of the members' equity interests in the Mutual Holding
Company for interests in a liquidation account established at the Mid-Tier
Holding Company in the MHC Merger will satisfy the continuity of interest
requirement of Section 1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul.
69-3, 1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
4. The Mutual Holding Company will not recognize any gain or loss on the
transfer of its assets to the Mid-Tier Holding Company in exchange for an
interest in a liquidation account established in the Mid-Tier Holding Company
for the benefit of the Mutual Holding Company's members who remain depositors of
the Bank. (Section 361 of the Code.)
5. No gain or loss will be recognized by the Mid-Tier Holding Company upon
the receipt of the assets of the Mutual Holding Company in the MHC Merger in
exchange for the transfer to the members of the Mutual Holding Company of an
interest in the liquidation account in the Mid-Tier Holding Company. (Section
1032(a) of the Code.)
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 7
6. The basis of the assets of Mutual Holding Company (other than stock in
the Mid- Tier Holding Company) to be received by Mid-Tier Holding Company will
be the same as the basis of such assets in the hands of the Mutual Holding
Company immediately prior to the transfer. (Section 362(b) of the Code.)
7. The holding period of the assets of the Mutual Holding Company (other
than stock in Mid-Tier Holding Company) to be received by Mid-Tier Holding
Company will include the holding period of those assets in the hands of the
Mutual Holding Company. (Section 1223(2) of the Code.)
8. Mutual Holding Company members will recognize no gain or loss upon the
receipt of an interest in the liquidation account in Mid-Tier Holding Company
for their membership interest in Mutual Holding Company. (Section 354(a) of the
Code.)
9. The conversion of the Mid-Tier Holding Company to a federally chartered
interim stock savings association will constitute a mere change in identity,
form or place of organization within the meaning of Section 368(a)(1)(F) of the
Code.
10. The Mid-Tier Merger qualifies as a tax-free reorganization within the
meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code.)
11. The exchange of the interest in the Mid-Tier Holding Company's
liquidation account for interests in a Liquidation Account established at the
Bank in the Mid-Tier Merger will satisfy the continuity of interest requirement
of Section 1.368-1(b) of the Income Tax Regulations (cf. Rev. Rul. 69-3, 1969-1
C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
12. The Mid-Tier Holding Company will not recognize any gain or loss on the
transfer of its assets to the Bank in exchange for an interest in a Liquidation
Account established in the Bank for the benefit of those persons who remain
depositors of the Bank and the Bank's assumption of the Mid-Tier Holding
Company's liabilities, if any. (Section 361 of the Code.)
13. No gain or loss will be recognized by the Bank upon the receipt of the
assets of the Mid-Tier Holding Company in the Mid-Tier Merger (Section 1032(a)
of the Code).
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 8
14. The basis of the assets of the Mid-Tier Holding Company (other than
stock in the Bank) to be received by Bank will be the same as the basis of such
assets in the hands of the Mid- Tier Holding Company immediately prior to the
transfer. (Section 362(b) of the Code.)
15. The holding period of the assets of the Mid-Tier Holding Company (other
than stock in Bank) to be received by Bank will include the holding period of
those assets in the hands of the Mid-Tier Holding Company immediately prior to
the transfer. (Section 1223(2) of the Code.)
16. Persons who have an interest in the liquidation account established in
the Mid -Tier Holding Company (i.e., former members of the Mutual Holding
Company) will recognize no gain or loss upon the receipt of an interest in the
Liquidation Account in the Bank in exchange for their interest in the Mid-Tier
Holding Company liquidation account. (Section 354(a) of the Code).
17. The Mid-Tier Holding Company shareholders will not recognize any gain
or loss upon their constructive exchange of Mid-Tier Holding Company Common
Stock for Bank Common Stock.
In addition, we are of the opinion that, based on the foregoing:
18. The Bank Merger qualifies as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code.
For these purposes, each of the Bank, the holding Company and Interim Savings
Bank are "a party to the reorganization within the meaning of Section 368(b) of
the Code.
19. Interests in the liquidation account established at the Bank, and the
shares of Bank Common Stock held by Mid-Tier Holding Company prior to
consummation of the Mid-Tier Merger, will be disregarded for the purpose of
determining that an amount of stock in the Bank which constitutes "control" of
such corporation was acquired by the Holding Company in exchange for shares of
common stock of the Holding Company pursuant to the Bank Merger (Code Section
368(c)).
20. The exchange of shares of Holding Company Common Stock for the shares
of the Bank Common Stock in the Bank Merger, following consummation of the
Mid-Tier
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 9
Merger, will satisfy the continuity of interest requirement of Income Tax
Regulation Section 1.368-1(b) in the Bank Merger.
21. Interim Savings Bank will not recognize any gain or loss on the
transfer of its assets to Bank in exchange for Bank Common Stock and the
assumption by Bank of the liabilities, if any, of Interim Savings Bank. (Section
361(a) and 357(a) of the Code.)
22. Bank will not recognize any gain or loss on the receipt of the assets
of Interim Savings Bank in exchange for Bank Common Stock. (Section 1032(a) of
the Code.)
23. Bank's basis in the assets received from Interim Savings Bank in the
proposed transaction will, in each case, be the same as the basis of such assets
in the hands of Interim Savings Bank immediately prior to the transaction.
(Section 362(b) of the Code.)
24. Bank's holding period for the assets received from Interim Savings Bank
in the proposed transaction will, in each instance, include the period during
which such assets were held by Interim Savings Bank. (Section 1223(2) of the
Code.)
25. The Holding Company will not recognize any gain or loss upon its
receipt of Bank Common Stock in exchange for Interim Savings Bank stock.
(Section 354(a) of the Code.)
26. Bank shareholders will not recognize any gain or loss upon their
exchange of Bank Common Stock solely for shares of Holding Company Common Stock.
(Section 354(a) of the Code.)
27. Each Bank shareholder's aggregate basis in his or her Holding Company
Common Stock received in the exchange will be the same as the aggregate basis of
the Bank Common Stock surrendered in exchange therefor. (Section 358(a) of the
Code.)
28. Each Bank shareholder's holding period in his or her Holding Company
Common Stock received in the exchange will include the period during which the
Bank Common Stock surrendered was held, provided that the Bank Common Stock
surrendered is a capital asset in the hands of the Bank shareholder on the date
of the exchange. (Section 1223(1) of the Code.)
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 10
29. No gain or loss will be recognized by Eligible Account Holders and
Supplemental Eligible Account Holders upon distribution to them of subscription
rights to purchase shares of Holding Company Common Stock, provided that the
amount to be paid for the Holding Company Common Stock is equal to the fair
market value of the Holding Company Common Stock.
Analysis
Section 368(a)(1)(A) of the Code defines the term "reorganization" to
include a "statutory merger or consolidation" of corporations such as the MHC
Merger and the Mid-Tier Merger. Section 368(a)(2)(E) of the Code provides that a
transaction otherwise qualifying as a merger under Section 368(a)(1)(A), such as
the Bank Merger, shall not be disqualified by reason of the fact that common
stock of a corporation (referred to in the Code as the "controlling
corporation") (i.e., the Holding Company) which before the merger was in control
of the merged corporation is used in the transaction if:
(i) after the transaction, the corporation surviving the merger (the Bank)
holds substantially all of its properties and the properties of the
merged corporation (Interim Savings Bank) (other than common stock of
the controlling corporation (the Holding Company) distributed in the
transaction); and
(ii) in the transaction, former stockholders of the surviving corporation
(the Bank stockholders) exchanged, for an amount of voting common
stock of the controlling corporation, an amount of common stock in the
surviving corporation which constitutes control of such corporation.
Section 1.368-2(b)(1) of the Treasury Regulations provides that, in order
to qualify as a reorganization under Section 368(a)(1)(A), a transaction must be
a merger or consolidation effected pursuant to the corporation laws of the
United States or a state. The Plan provides that the MHC Merger, the Mid-Tier
Merger and the Bank Merger will be accomplished in accordance with applicable
state and federal law.
Treasury Regulations and case law require that, in addition to the
existence of statutory authority for a merger, certain other conditions must be
satisfied in order to qualify a proposed transaction as a reorganization within
the meaning of Section 368(a)(1)(A) of the Code. The "business purpose test,"
which requires a proposed merger to have a bona fide business
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 11
purpose, must be satisfied. See 26 C.F.R. Section 1.368-1(c). We believe that
the MHC Merger, the Mid- tier Merger and the Bank Merger satisfy the business
purpose test for the reasons set forth in the Prospectus under the caption "The
Conversion--Reasons for the Conversion." The "continuity of business enterprise
test" requires an acquiring corporation either to continue an acquired
corporation's historic business or use a significant portion of its historic
assets in a business. See 26 C.F.R. Section 1.368-1(d). We believe that the
business conducted by the Bank prior to the MHC Merger, the Mid-Tier Merger and
the Bank Merger will be unaffected by the transactions.
The "continuity of interest doctrine" requires that the continuing common
stock interest of the former owners of an acquired corporation, considered in
the aggregate, represent a "substantial part" of the value of their former
interest, and provide them with a "definite and substantial interest" in the
affairs of the acquiring corporation or a corporation in control of the
acquiring corporation. Paulsen v. Comm'r., 469 U.S. 131 (1985); Helvering v.
Minnesota Tea Co., 296 U.S. 378 (1935); John A. Nelson Co. v. Helvering, 296
U.S. 374 (1935); Southwest Natural Gas Co. v. Comm'r., 189 F.2d 332 (5th Cir.
1951), cert. denied, 342 U.S. 860 (1951). We believe that the MHC Merger
satisfies the continuity of interest doctrine based on the information set forth
in the Company's Registration Statement and based on Revenue Rulings 69- 646,
1969-2 C.B. 54 and 69-3, 1965-1 C.B. 103. The Mutual Holding Company, as a
federally- chartered mutual holding company, does not have stockholders and has
no authority to issue capital stock. Instead, the Mutual Holding Company has
members who are accorded a variety of proprietary rights such as voting rights
and certain rights in the unlikely event of liquidation. Prior to the MHC
Merger, certain depositors of the Bank have both a deposit account in the Bank
and a proprietary interest in the net worth of the Mutual Holding Company based
upon the balance in his account in the Bank, an interest which may only be
realized in the event of a liquidation of the Mutual Holding Company. In
accordance with the Plan, the members will receive an interest in a liquidation
account in the Stock Holding Company in exchange for their proprietary rights in
the Mutual Holding Company. This interest in the liquidation account in the
Stock Holding Company will be exchanged for an interest in a Liquidation Account
in the Bank in connection with the Mid-Tier Merger. Although the Liquidation
Account in the Stock Holding Company and the subsequent Liquidation Account in
the Bank would not allow the former Mutual Holding Company members the right to
vote or the right to pro rata distributions of earnings, they would be entitled
to share in the distribution of assets upon the liquidation of the Stock Holding
Company following the MHC Merger, or the Bank following the Mid-Tier Merger.
Therefore, it would seem that the exchange of the members proprietary interests
in the Mutual Holding Company for liquidation accounts in the Stock Holding
Company followed by the
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 12
exchange of such Stock Holding Company liquidation accounts for Liquidation
Accounts in the Bank should not violate the continuity of interest requirement
of Section 1.368-1(b) of the Treasury Regulations. In PLR 9510044, the IRS held
on similar facts that the exchange of equity interests in a mutual holding
company for a liquidation account in a stock bank satisfied the continuity of
interest doctrine. Although a private letter ruling cannot be cited as
precedent, it is illustrative of the IRS' position on an issue.
We believe that the Mid-Tier Merger satisfies the continuity of interest
doctrine based on representations received from the Bank in connection with the
preparation of this opinion, to the effect that, to the best knowledge of the
management of the Mid-Tier Holding Company and the Bank, former shareholders of
the Mid-Tier Holding Company (disregarding the Mutual Holding Company) owning
50% or more of all the outstanding stock of the Mid-Tier Holding Company
immediately prior to the Mid-Tier Merger, would continue to own shares of the
Bank immediately after the Mid-Tier Merger or, following the Bank Merger which
occurs immediately after the Mid-Tier Merger, shares of the Company, the will
own 100% of the Bank. In addition, we believe other applicable requirements of
the Treasury Regulations and case law which are preconditions to qualification
of the MHC Merger, the Mid-Tier Merger and the Bank Merger as a reorganization,
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, are
satisfied on the basis of the information contained in the Plan and the
Prospectus.
One of the requirements of Section 368(a)(2)(E) of the Code is that
subsequent to the transaction, the corporation surviving the merger must hold
substantially all of its properties and the properties of the merged
corporation. The Bank has represented that, following the Bank Merger, it will
hold 90% of the fair market value of its net assets and at least 70%of the fair
market value of its gross assets, and at least 90% of the fair market value of
Interim Savings Bank's net assets and at least 70% of the fair market value of
Interim Savings Bank's gross assets held immediately prior to the Bank Merger.
Based upon representations, the Bank will clearly satisfy this requirement of
Code Section 368(a)(2)(E).
Pursuant to Code Section 368(a)(2)(E), the Company must also acquire
control of the Bank in the Bank Merger. Control is defined as at least 80% of
the total combined voting power of all classes of stock entitled to vote, and at
least 80% of the total number of shares. Subsequent to the Bank Merger, the
Holding Company will hold all of the Bank Common Stock. However, there is an
issue as to whether the Bank liquidation accounts must be taken into account for
purposes of this "control" test. In PLR 9510044, on facts substantially similar
to those in the present case, the IRS ruled that the liquidation interests in
the bank were to be
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 13
disregarded in determining whether control of the bank was obtained by the
holding company in accordance with Section 368(c) of the Code. We believe that
the position taken by the IRS in PLR 9510044, while not binding on the IRS with
respect to this taxpayer, is appropriate and should be followed.
In December 1994, the IRS published Revenue Procedure 94-76 which states
that the IRS will not issue private letter rulings with respect to a transaction
in which one corporation owns stock in a second corporation, the first
corporation is not the 80 percent distributee of the second corporation and the
two corporations are merged. The IRS has assumed this "no-rule" position on such
downstream mergers which it is concerned may circumvent the purpose behind the
repeal of General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935).
Although the IRS has assumed a "no-rule" position on such downstream mergers,
the IRS has not specifically rescinded its prior position with respect to such
mergers, and therefore, at the time that this transaction is consummated, the
law prior to the publication of Rev. Proc. 94-76, as reflected in the Code,
Treasury Regulations, case law and rulings, continues to control the
transaction. Under such law, we believe that the MHC Merger qualifies as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code.
Section 354 of the Code provides that no gain or loss shall be recognized
by stockholders who exchange common stock in a corporation, which is a party to
a reorganization, solely for common stock in another corporation which is a
party to the reorganization. Section 356 of the Code provides that stockholders
shall recognize gain to the extent they receive money as part of a
reorganization, such as cash received in lieu of fractional shares. Section 358
of the Code provides that, with certain adjustments for money received in a
reorganization, such as cash received in lieu of fractional shares, a
stockholder's basis in the common stock he or she receives in a reorganization
shall equal the basis of the common stock which he or she surrendered in the
transaction. Section 1223(1) states that, where a stockholder receives property
in an exchange which has the same basis as the property surrendered, he or she
shall be deemed to have held the property received for the same period as the
property exchanged, provided that the property exchanged had been held as a
capital asset.
Section 361 of the Code provides that no gain or loss shall be recognized
to a corporation which is a party to a reorganization on any transfer of
property pursuant to a plan of reorganization such as the Plan. Section 362 of
the Code provides that if property is acquired by a corporation in connection
with a reorganization, then the basis of such property shall be the same as it
would be in the hands of the transferor immediately prior to the transfer.
Boards of Directors
Finger Lakes Bancorp, Inc.
Finger Lakes Financial Corp.
Finger Lakes Financial Corporation, MHC.
Savings Bank of the Finger Lakes, FSB
_____________, 2000
Page 14
Section 1223(2) of the Code states that where a corporation will have a
carryover basis in property received from another corporation which is a party
to a reorganization, the holding period of such assets in the hands of the
acquiring corporation shall include the period for which such assets were held
by the transferor, provided that the property transferred had been held as a
capital asset. Section 1032 of the Code states that no gain or loss shall be
recognizes to a corporation on the receipt of property in exchange for common
stock.
We hereby consent to the filing of the opinion as an exhibit to the MHC's
Application for Approval for Conversion filed with the Commissioner and to the
Company's Registration Statement on Form S-1 as filed with the SEC. We also
consent to the references to our firm in the Prospectus contained in the
Application for Approval of Conversion and S-1 under the captions "The
Conversion-Tax Aspects" and "Legal Opinions."
Very truly yours,
LUSE LEHMAN GORMAN POMERENK &
SCHICK, A PROFESSIONAL CORPORATION
By:_______________________________