Exhibit 8
December 8, 1995
Private
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Board of Directors Board of Directors
National Bankshares, Inc. Bank of Tazewell County
Blacksburg, Virginia Tazewell, Virginia
Board Members:
You have requested the opinion of KPMG Peat Marwick LLP (KPMG) regarding
the merger of NBI Interim Bank (Interim), a wholly owned bank subsidiary of
National Bankshares, Inc. (NBI), with and into Bank of Tazewell County
(BTC). Specifically, you have requested us to opine that the form and
substance of the merger of Interim with and into BTC will constitute a tax-
free reorganization under sections 368(a)(1)(A) and 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended, (hereinafter all section
references are to the Internal Revenue Code unless otherwise indicated) and
that no gain or loss will be recognized by the shareholders of BTC upon the
receipt of NBI common stock in exchange for their BTC common stock upon
consummation of the merger.
Our opinion as to the tax-free reorganization treatment of the merger of
Interim with and into BTC does not include BTC common shareholders who
exercise their statutory dissenters' rights against the merger and receive
cash payments.
FACTS
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NBI, a Virginia corporation, is a bank holding company with its principal
executive offices located in Blacksburg, Virginia. NBI has a 100% owned
subsidiary, The National Bank of Blacksburg (NBB), a national banking
association. NBB has a 100% owned inactive subsidiary, NB Operating, Inc.
NBI and its subsidiaries file a consolidated federal income tax return.
NBI has 5,000,000 authorized shares of common stock, par value $2.50, of
which 1,714,152 were issued and outstanding as of July 31, 1995. Each
share of NBI common stock has one vote. NBI has 5,000,000 authorized
shares of preferred stock, no par value, of which none were outstanding as
of July 31, 1995. Trading of NBI common stock is reflected on the Over the
Counter Electronic Bulletin Board of the National Association of Securities
Dealers (NASD Bulletin Board).
BTC is a Virginia banking corporation with its principal executive offices
located in Tazewell, Virginia. BTC has 6,000,000 authorized shares of
common stock, par value $1.00, of which 1,888,209 were issued and
outstanding as of July 31, 1995. Trading of BTC common stock is reflected
on the NASD Bulletin Board. BTC has no other class of stock authorized or
outstanding.
For what have been represented to KPMG to be valid business purposes, NBI
and BTC want to combine their businesses. In order to reach that result,
the following transaction is proposed:
1. Pursuant to an agreement and plan of merger (the Plan) dated August 28,
1995 between NBI and BTC, NBI will, prior to the merger effective date,
form a Virginia banking corporation which shall be named and become NBI
Interim Bank (Interim). Interim will have 50,000 authorized common shares,
$1.00 par value, of which 1,000 shares shall be subscribed for by NBI
pending consummation of the Plan.
2. In connection with the consummation of the Plan, NBI shall declare a share
dividend totaling 190,768 shares of NBI common stock to be issued pro rata
to and among the holders of NBI common stock. The record date of this
dividend shall be prior to the merger effective date.
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3. Also pursuant to the agreement and plan of merger, Interim will merge with
and into BTC in accordance with Virginia state law, with BTC surviving the
merger
4. The actual merger will entail the following:
(a) On the effective date of the merger, each share of NBI Interim Bank
common stock issued and outstanding as of the merger effective date
shall be converted automatically into 1,888.209 shares of BTC. This
shall represent all of the issued and outstanding shares of BTC.
(b) Each share of BTC issued and outstanding immediately prior to the
merger effective date shall become and be converted into the right to
receive one share of NBI common stock, taking into account the share
dividends to be declared by NBI as set forth in "2" above.
(c) On the merger effective date, holders of BTC common stock shall cease
to be, and shall have no rights as, shareholders of BTC other than to
receive NBI common stock as described in "4(b)" above or cash in lieu
of fractional shares as described in "4(d)" below.
(d) No fractional shares of NBI common stock will be issued in the merger,
but rather NBI will pay cash in lieu thereof with the amount of cash to
be paid to be determined based upon the closing price per share of BTC
common stock as reflected on the NASD Bulletin Board on the last day
such stock has traded prior to the merger effective date.
5. Each BTC shareholder has the right to dissent from the merger in accordance
with the Virginia Stock Corporation Act. Each shareholder validly
exercising and perfecting dissenter's rights will be entitled to receive
from NBI the fair market value of his or her shares in cash
REPRESENTATIONS
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The following representations have been made to KPMG. These representations form
an integral part of the opinion rendered by KPMG. It is understood that KPMG has
not independently verified any representation:
(a) The fair market value of the NBI common stock or cash to be received by
each of the BTC shareholders in the merger will be approximately equal, in
each instance, to the fair market value of the BTC common stock surrendered
in the exchange.
(b) There is no plan or intention by the BTC shareholders to sell or otherwise
dispose of any NBI common stock received by them in the transaction which
would reduce their ownership of NBI common stock to a number of shares
having, in the aggregate, a fair market value as of the date of the
transaction of less than 50 percent of the fair market value of all of the
formerly outstanding stock of BTC as of the date of the transaction. For
purposes of this representation, shares of BTC surrendered by dissenters or
exchanged for cash in lieu of fractional shares will be treated as
outstanding stock of BTC on the date of the transaction. Moreover, the
sale, redemption or other disposition of stock occurring prior or
subsequent to the exchange which is part of the reorganization will be
considered in determining whether there will be a 50 percent continuing
interest through stock ownership as of the effective date of the
reorganization.
(c) Following the transaction, BTC will hold at least 90 percent of the fair
market value of its net assets and at least 70 percent of the fair market
value of its gross assets. In addition, BTC will hold at least 90 percent
of the fair market value of Interim's net assets and at least 70 percent of
the fair market value of Interim's gross assets it held immediately prior
to the transaction. For purposes of this representation, amounts paid by
BTC or Interim to dissenters or shareholders who receive cash in lieu of
fractional shares, amounts used
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by BTC or Interim to pay reorganization expenses and all redemptions and
distributions (except for regular, normal dividends) made by BTC will be
included as assets of BTC or Interim, respectively, immediately prior to
the transaction.
(d) Prior to the transaction, NBI will be in control of Interim within the
meaning of section 368(c) of the Code.
(e) Following the transaction, BTC will not issue additional shares of its
stock that would result in NBI losing control of BTC within the meaning of
section 368(c) of the Code
(f) NBI has no plan or intention to reacquire any of its stock to be issued in
the proposed merger.
(g) NBI has no plan or intention to liquidate BTC, to merge BTC with or into
another corporation, to sell or otherwise dispose of the stock of BTC, or
to cause BTC to sell or otherwise dispose of any of its assets, except for
dispositions made in the ordinary course of business, dispositions in
arm's-length transactions to avoid duplicative facilities or possible
regulatory objections, or transfers of assets to a corporation controlled
by BTC.
(h) The liabilities of Interim assumed by BTC and the liabilities to which the
transferred assets of Interim are subject were incurred by Interim in the
ordinary course of its business.
(i) Following the transaction, BTC will continue its historic business or use a
significant portion of its historic business assets in a business.
(j) NBI, Interim, BTC and the shareholders of BTC will each pay their own fees
and expenses incurred in connection with the merger, except that printing
expenses for the prospectus and proxy statement will be shared equally by
NBI and BTC.
(k) There is no intercorporate debt existing between NBI and BTC or between
Interim and BTC that was issued, acquired, settled or will be settled at a
discount.
(l) In the merger, shares of BTC stock representing control of BTC, as defined
in section 368(c) of the Code, will be exchanged solely for voting stock of
NBI. For purposes of this representation, shares of BTC stock exchanged
for cash furnished by NBI will be treated as outstanding BTC stock on the
date of the transaction.
(m) At the time of the transaction, BTC will not have outstanding any warrants,
options, convertible securities, or any other type of right pursuant to
which any person could acquire stock in BTC that, if exercised or
converted, would effect NBI's acquisition or retention of control of BTC,
as defined in section 368(c) of the Code.
(n) NBI does not own, nor has it owned during the past five years (except with
respect to shares owned in a fiduciary capacity), any shares of stock of
BTC.
(o) No two parties to the merger are investment companies within the meaning of
such term as used in section 368(a)(2)(F)(iii) and (iv).
(p) On the date of the merger the fair market value of the assets of BTC will
exceed the sum of its liabilities plus the liabilities, if any, to which
the transferred assets are subject.
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(q) BTC is not under the jurisdiction of a court in a Title 11 or similar case
within the meaning of section 368(a)(3)(A).
(r) None of the NBI common stock being issued to the BTC shareholders will
represent compensation for past or future services or for a covenant not to
compete. The compensation to be paid to BTC directors, officers and
employees who are stockholders of BTC and who will be employed following
the merger will not be part of the consideration paid for their BTC common
stock but will be commensurate in each instance with amounts paid to third
parties bargaining at arm's-length for similar services.
(s) NBI will pay cash in lieu of fractional shares merely as a convenience and
not as separately bargained for consideration. The total cash paid in lieu
of NBI fractional shares will be less than one percent of the total
consideration received by the BTC shareholders and no BTC shareholder will
receive cash in lieu of more than one fractional share.
The opinions expressed in this letter are rendered only with respect to the
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specific matters discussed herein, and we express no opinion with respect to any
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other legal, federal, or state income tax aspect of this transaction. The
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opinions contained herein are based on the facts, circumstances, and
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representations stated above. If any of the above-stated facts, circumstances,
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or representations are not entirely complete or accurate, it is imperative that
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we be informed immediately, as the inaccuracy could have a material effect on
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our conclusions and we have not independently verified each of the above facts
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or representations.
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In rendering our opinion, we are relying upon the relevant provisions of the
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Internal Revenue Code of 1986, as amended; the regulations thereunder; and
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judicial and administrative interpretations thereof, all of which are subject to
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change or modification by subsequent legislative, regulatory, administrative or
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judicial decisions. Such change could also have an effect on our conclusions.
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Unless specifically requested to do otherwise, KPMG undertakes no responsibility
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to update this opinion in the event of any such subsequent change or
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modification.
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DISCUSSION
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Classification as a reorganization
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Section 368(a)(l)(A) provides that the term "reorganization" includes a
statutory merger. The term statutory merger refers to a merger effected pursuant
to the corporate laws of the United States, a state or territory, or the
District of Columbia. Treasury Regulation ("Reg.") section 1.368-2(b).
In order to qualify as a reorganization by operation of section 368(a)(2)(E),
the transaction must meet two requirements. First, after the transaction, the
corporation surviving the merger (i.e., BTC) must hold substantially all of its
properties and the properties of the merged corporation (i.e., Interim). Second,
the former shareholders of the surviving corporation (i.e., BTC) must exchange,
for an amount of voting stock of the controlling corporation (i.e., NBI), an
amount of stock in the surviving corporation which constitutes control of such
corporation. Control for this purpose is defined in section 368(c) as the direct
ownership of stock possessing at least 80 percent of the total combined voting
power and at least 80 percent of the total number of shares of all other classes
of stock.
The term "substantially all" has the same meaning as the phrase is used in
section 368(a)(1)(C). Reg. section 1.368-2(b)(2). Section 368(a)(1)(C) and the
regulations promulgated thereunder do not define what constitutes substantially
all of the properties of a corporation. The Internal Revenue Service ("the
Service") has established a quantitative test as to the amount of assets of a
corporation that will satisfy the substantially all properties requirement for
purposes of obtaining a private letter ruling. Under Revenue Procedure 77-37,
1977-2 C.B. 568, the "substantially all" requirement of section 368(a)(2)(E) is
satisfied if the surviving corporation retains at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair market value
of the gross assets it held immediately
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before the merger, and if the surviving corporation gets at least the same
percentages of the assets the merged subsidiary held immediately before the
merger.
The "ninety/seventy" guidelines are arbitrary percentages selected by the
Service that do not necessarily represent judicial interpretations of the
meaning of the phrase "substantially all of the properties" under various
subdivisions of section 368. See Louis F. Vicreck v. United States, 83-2
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U.S.T.C. para. 9664 (Cl.Cts.); Ralph C. Wilson, Sr., 46 T.C. 334 (1966);
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John G. Moffat, 42 T.C. 558, 363 F.2nd 860 (9th Cir. 1966) (Aff'g T.C.) 66-
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2 U.S.T.C. para. 9498; James Armour, Inc., 43 T.C. 295 (1964); Smothers v.
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United States, 642 F.2nd 894 (5th Cir. 1981) (aff'g DC), 79-1 U.S.T.C. para.
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9216; and American Manufacturing Company Inc., 55 T.C. 204 (1970).
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What constitutes "substantially all of the properties" in a situation other
than a request for ruling from the Service depends upon the facts and
circumstances in each case rather than upon any particular percentage.
Revenue Ruling 57-518, 1957-2 C.B. 253. The Service is of the view that
the "substantially all of the properties" requirement applies separately to
each trade or business of the transferor corporation.
Requisite to all reorganizations under section 368(a)(1) are: (1) a valid
corporate business purpose, (2) a continuity of the business enterprise
under the modified corporate form and (3) a continuity of interest in the
acquiring or transferee corporation on the part of those persons who
directly or indirectly were the owners of the acquiring or transferor
corporation prior to the reorganization. Reg. section 1.368-1(b). The
term "reorganization" does not embrace the mere purchase by one corporation
of the properties of another. Reg. section 1.368-2(a). These regulations
reflect well-developed judicial interpretations of the statutory definition
of a reorganization, the purpose of which is to exclude from the scope of
the reorganization provisions those transactions that are in fact sales.
Continuity of business enterprise requires that the acquiring corporation
either continue the acquired corporation's historic business or use a
significant portion of the acquired's historic business assets. Reg.
section 1.368-1(d)(2).
The regulations under section 368(a) do not establish the amount of
qualifying consideration necessary to satisfy the continuity of shareholder
interest requirement. However, the Service has promulgated a definite test
as to the amount of consideration necessary to satisfy the continuity of
interest requirement for purposes of obtaining a private letter ruling.
Under Revenue Procedure 77-37, 1977-2 C.B. 568, the continuity of interest
requirement of Reg. section 1.368-1(b) is satisfied if:
...there is continuing interest through stock ownership in the acquiring or
transferee corporation...on the part of the former shareholders of the
acquired or transferor corporation (or a corporation in "control" thereof
within the meaning of section 368(c) of the Code) which is equal in value,
as of the effective date of the reorganization, to at least 50 percent of
the value of all the formerly outstanding stock of the acquired or
transferor corporation as of the same date. It is not necessary that each
shareholder of the acquired or transferor corporation receive in the
exchange, stock of the acquiring or transferor corporation, or a
corporation in "control" thereof, which is equal in value to at least 50
percent of the value of his former stock interest in the acquired or
transferor corporation, so long as one or more of the shareholders of the
acquired or transferor corporation have a continuing interest through stock
ownership in the acquiring or transferee corporation (or a corporation in
"control" thereof) which is, in the aggregate, equal in value to at least
50 percent of the value of all of the formerly outstanding stock of the
acquired or transferor corporation.
The 50 percent definitive test of this revenue procedure does not as a
matter of law establish the amount of qualifying consideration necessary to
meet the continuity of interest requirement of Reg. section 1.368-1(b). In
other words, the continuation of a capital stock ownership in the acquiring
corporation equal to less than 50 percent of the value of the stock of the
acquired corporation does not in itself mark a discontinuity of interest.
The Supreme Court in John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935),
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36-1 U.S.T.C. para. 9019, held that there was a
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reorganization even though the shareholders of the acquired corporation received
less than half of their total consideration in the form of stock of the
acquiring corporation and received nonvoting preferred stock. It is only
necessary that the shareholders continue to have a definite and substantial
equity interest in the assets of the acquiring corporation. Revenue Ruling 61-
156, 1961-2 C.B. 62.
Provided that (1) the merger of Interim with and into BTC qualifies as a
statutory merger under the applicable federal and state laws and is
undertaken for a valid corporate business purpose as represented above, (2)
after the transaction BTC continues its historic business and (3) BTC
shareholders exchange for NBI voting common stock an amount of BTC stock
meeting the continuity of shareholder interest test, then the merger of
Interim with and into BTC will constitute
a reorganization within the meaning of section 368(a)(1)(A) and section
368(a)(2)(E). NBI, BTC and Interim will each be "a party to the
reorganization" within the meaning of section 368(b).
Federal income tax consequences to exchanging shareholders
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Section 354(a)(1) provides that no gain or loss will be recognized if stock
of a corporation which is a party to a reorganization is, pursuant to the
plan of reorganization, exchanged solely for stock of such corporation or
of another corporation which is a party to the reorganization. Section
356(a)(1) in relevant part provides that if money or other property is
received in an exchange to which section 354 would otherwise apply, then
gain, if any, to the recipient will be recognized to the extent of the sum
of the money and fair market value of the other property received. If the
exchange has the effect of the distribution of a dividend, then the amount
of gain recognized that is not in excess of each distributee shareholder's
ratable share of the undistributed earnings and profits of the acquired
corporation will be treated as a dividend. Section 356(a)(2). No loss
will be recognized on the exchange. Section 356(c). Section 358 provides
that shareholders are entitled to a carryover basis for stock received in a
reorganization transaction qualifying under section 354 or 356. Where a
cash payment by the acquiring corporation to the shareholders of the
acquired corporation is in lieu of fractional share interests, representing
a mere rounding-off of the fractions in the exchange and not a separately
bargained-for consideration, such cash payment shall be treated under
section 302 as in redemption of the fractional share interests. Rev. Rul.
66-365, 1966-2 C.B. 116.
The BTC shareholders who receive solely NBI common stock in exchange for
their BTC common stock will not recognize any gain or loss pursuant to
section 354(a)(1). The tax basis which these BTC shareholders will have in
their newly received NBI stock will be the same as their present tax basis
in the BTC stock. Section 358(a).
If the property received in an exchange has the same (i.e., carryover)
basis as the property given up, then section 1223(1) applies to determine
the holding period for the property received. Section 1223(1) provides
that the period during which the taxpayer held the property surrendered in
the exchange is added to the period he or she holds the property received
in the exchange in order to determine the holding period of the property
received.
The tacking of the previous holding period applies only if the property
exchanged was a capital asset in the taxpayer's hands at the time of the
exchange. Section 1223(1). The status of property as a capital asset is
determined under section 1221, which defines "capital asset" as any
property of a taxpayer other than property within specified
classifications. As a general rule, stock of a corporation would be
treated as a capital asset under this section. Provided that his or her
BTC stock is a capital asset, then each BTC shareholder will be able to
include his or her respective ownership period of the BTC stock in
determining the holding period of the NBI stock received in the proposed
transaction.
The payment of cash in lieu of fractional share interests of NBI common
stock will be treated as if the fractional share was distributed to BTC
shareholders as part of the exchange and then redeemed by NBI. These
payments will be treated as having been received by BTC shareholders as
distributions in full payment in exchange for the stock redeemed as
provided in section 302(a). Gain or loss to the shareholder is determined
based on the difference between the full amount of cash received and the
adjusted basis allocable to the fractional share. Provided that his
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or her BTC stock is a capital asset, then the gain or loss recognized as a
result of receiving cash in lieu of a fractional share will be a capital
gain or loss to the shareholder.
CONCLUSION
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Based on the foregoing facts and representations, it is the opinion of KPMG
that the merger of Interim with and into BTC and the acquisition of BTC by
NBI, in accordance with federal banking and Virginia state law, will be
treated as a tax-free reorganization under section 368(a)(1)(A) and section
368(a)(2)(E) of the Code.
The federal income tax effects of the reorganization to the BTC shareholders
are summarized as follows:
1. No gain or loss will be recognized by the shareholders of BTC who receive
solely shares of NBI voting common stock (including a fractional share
interest to which they are entitled) for their BTC common stock upon
consummation of the exchange.
2. The basis of the NBI common stock received (including a fractional share
interest to which they are entitled) by such BTC shareholders will be the
same as the basis of the BTC stock surrendered in the exchange. Provided
that the BTC stock surrendered was a capital asset in the shareholder's
hands immediately prior to the exchange, the holding period of the NBI
stock (including a fractional share interest to which they are entitled)
will include the holding period of the BTC stock.
3. Cash received by a BTC shareholder in lieu of a fractional share interest
in NBI common stock will be treated as received in full payment in exchange
for such fractional share interest. Provided the fractional share would
have constituted a capital asset in the hands of such holder, the
shareholder will recognize a capital gain or loss in an amount equal to the
difference between the amount of cash received and the portion of the
adjusted tax basis in the BTC common stock allocable to the fractional
share interest.
Very truly yours,
KPMG Peat Marwick LLP