EXHIBIT 8.1
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
February 5, 2001
Mr. Sanford A. Belden
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
Mr. William M. Davis
First Liberty Bank Corp.
645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania 18433
Dear Messrs. Belden and Davis:
You have requested our opinion regarding certain Federal income tax consequences
of a merger involving First Liberty Bank Corp. ("First Liberty"), and Community
Bank System, Inc. ("CBSI"), pursuant to an Agreement and Plan of Merger (as
amended, the "Agreement") dated November 29, 2000, by and between First Liberty
and CBSI.
In connection with the rendering of this opinion, we have reviewed (1) the joint
proxy statement/prospectus included in the Registration Statement (the "Proxy
Statement"), (2) the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on the date hereof by CBSI (the "Registration
Statement"), and (3) the Agreement. In addition, we have relied upon
representations made by CBSI and First Liberty in their representation letters
dated as of the date hereof (the "Representations"). We have not independently
verified the accuracy or completeness of such information. Capitalized terms
not otherwise defined in this opinion will have the meaning set out in the
Registration Statement or the Agreement.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name in the prospectus forming a part of the
Registration Statement.
Background
CBSI is a publicly held bank holding company organized in Delaware in April
1983. The principal banking subsidiary of CBSI is Community Bank, N.A.
("Community Bank"), a national banking association.
Community Bank System, Inc.
February 5, 2001
Page 2
As of November 29, 2000, the authorized capital stock of CBSI consisted of
500,000 shares of preferred stock, none of which was issued and outstanding; and
20,000,000 shares of common stock, no par value, of which 6,993,459 shares were
issued and outstanding and 648,100 shares were held in Treasury. An aggregate
of 952,148 shares of CBSI were reserved for existing and future grants under
CBSI's Long Term Incentive Compensation Plan, pursuant to which options to
purchase a total of 730,193 shares of CBSI common stock were issued and
outstanding as of November 29, 2000 (of which options to purchase an aggregate
of 483,357 shares were then exercisable). The common stock of CBSI is publicly
traded.
First Liberty is a Pennsylvania corporation organized on February 13, 1984. The
Company is a bank holding company registered under the Bank Holding Company Act
of 1956, as amended. First Liberty conducts its principal activities through its
wholly owned banking subsidiary, First Liberty Bank & Trust ("First Liberty
Bank"), a Pennsylvania banking institution.
As of November 29, 2000, the authorized capital stock of First Liberty consisted
solely of 10,000,000 shares of First Liberty common stock, of which 6,368,640
shares were issued and outstanding and 60,820 shares were held in treasury. An
aggregate of 78,086 shares of First Liberty common stock were subject to options
issued and outstanding on such date, all of which options were then exercisable.
The common stock of First Liberty is publicly traded.
Proposed Reorganization
For what are represented to be valid business reasons as set forth in the Proxy
Statement, CBSI proposes to acquire First Liberty in a transaction described in
the Agreement as summarized below.
As set forth in the Agreement, the following transactions will occur at the
Effective Time:
1. First Liberty will merge with and into CBSI (the "Merger"), with CBSI being
the surviving entity, in accordance with the terms of the Agreement, the
General Corporation Law of the State of Delaware (the "DGCL"), and the
Business Corporation Law of the Commonwealth of Pennsylvania (the "PBCL").
Pursuant to the Merger, the separate corporate existence of First Liberty
will cease. CBSI will acquire all of the assets and will assume all of the
liabilities of First Liberty.
2. At the Effective Time of the Merger, the nondissenting shareholders of
First Liberty will be entitled to receive .56 shares (subject to adjustment
in the event of a stock split, recapitalization, reclassification or other
similar change) of CBSI common stock for each share of First Liberty common
stock that they held. In lieu of fractional shares, each holder of such
shares will be paid cash in an amount equal to such fraction multiplied by
the closing price of CBSI common stock on the effective time.
Community Bank System, Inc.
February 5, 2001
Page 3
3. Dissenting shareholders of First Liberty who perfect their rights will be
entitled to receive payment for the fair value of their shares under
Section 1930 and Subchapter D of Chapter 15 of the PBCL.
4. Each outstanding option to purchase shares of First Liberty common stock
will be deemed assumed by CBSI.
5. Following the consummation of the Merger, First Liberty Bank, which will
become a wholly-owned subsidiary of CBSI as a result of the Merger, will
merge with and into Community Bank (the "Bank Merger"), with Community Bank
continuing as the surviving bank, pursuant to a plan of merger in
accordance with Section 215a of The National Bank Act, and the Pennsylvania
Banking Code of 1965 (the "PBC"). Pursuant to the Bank Merger, the separate
corporate existence of First Liberty Bank will cease. Community Bank will
acquire all of the assets and will assume all of the liabilities of First
Liberty Bank.
Representations
The following representations have been made in connection with the proposed
Merger:
1. The fair market value of the CBSI common stock received by each shareholder
of First Liberty will be approximately equal to the fair market value of
the First Liberty common stock surrendered in the exchange. The formulas
set forth in the Agreement for the exchange of CBSI shares for First
Liberty stock, and the other terms of the Agreement, are the results of
arm's-length bargaining.
2. To the best knowledge of the management of First Liberty, there is no plan
or intention on the part of the shareholders of First Liberty to sell,
exchange, or otherwise dispose of the CBSI stock received in the Merger.
3. CBSI has no plan or intention to reacquire any of its stock issued in the
Merger except for repurchases made on the open market, through a broker for
the prevailing market price pursuant to its stock repurchase program (but
only to the extent that such repurchases do not adversely affect its
ability to account for the Merger as a pooling of interests). The stock
repurchase program was not a matter negotiated with First Liberty or First
Liberty shareholders and there was not an understanding between the First
Liberty shareholders and CBSI that the First Liberty shareholders'
ownership of CBSI stock would be transitory. To the best of the knowledge
of the management of CBSI, no person related to CBSI within the meaning of
Treasury Regulation Section 1.368-1(e)(3) and no person acting as an
intermediary for CBSI or such a related person has a plan or intention to
acquire any of the CBSI shares issued in the Merger.
4. No cash or other property has been furnished directly or indirectly by CBSI
or Community Bank (or anyone related to either of them within the meaning
of Treasury Regulation Section 1.368-1(e)(3), or anyone
Community Bank System, Inc.
February 5, 2001
Page 4
acting on behalf of any of them as an agent, in each case a "Related
Party") in connection with redemptions or purchases of First Liberty stock
by First Liberty or distributions by First Liberty to First Liberty
shareholders. In addition, no liabilities of the First Liberty shareholders
will be assumed by CBSI (or any Related Party), nor will any of the First
Liberty stock be subject to any liabilities.
5. CBSI has no plan or intention to sell or otherwise dispose of any of the
assets of First Liberty acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers described
in Section 368(a)(2)(C) of the Code.
6. The liabilities of First Liberty assumed by CBSI and the liabilities to
which the transferred assets of First Liberty are subject were incurred by
First Liberty in the ordinary course of its business.
7. Following the transaction, CBSI will continue the historic business of
First Liberty or use a significant portion of First Liberty's historic
business assets in a business.
8. CBSI, First Liberty, and the shareholders of First Liberty will each pay
their respective expenses in connection with the Merger except as otherwise
provided in the Agreement.
9. There is no intercorporate indebtedness existing between First Liberty and
CBSI that was issued, acquired, or will be settled at a discount.
10. CBSI and First Liberty are not investment companies within the meaning of
Section 368(a)(2)(F)(iii) and (iv) of the Code.
11. First Liberty is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
12. The fair market value of the assets of First Liberty transferred to CBSI
will equal or exceed the sum of the liabilities assumed by CBSI plus the
amount of liabilities, if any, to which the transferred assets are subject.
13. The payment of cash in lieu of fractional shares of CBSI is not a
separately bargained-for consideration and represents a mere mechanical
rounding-off of the fractional share interest that may result from the
exchange.
14. The Dissenters' rights will not have been exercised with respect to more
than 10% of the outstanding shares of First Liberty common stock.
15. The principal reasons for the Merger are bona fide business purposes.
16. The Merger will qualify as a statutory merger under the DGCL and the PBCL.
Community Bank System, Inc.
February 5, 2001
Page 5
The following representations have been made in connection with the proposed
Bank Merger:
1. Community Bank has no plan or intention to sell or otherwise dispose of any
of the assets of First Liberty Bank acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers described
in Section 368(a)(2)(C) of the Code.
2. Following the transaction, Community Bank will not issue additional shares
of its stock that would result in CBSI losing control of Community Bank
within the meaning of Section 368(c)(1) of the Code.
3. The liabilities of First Liberty Bank assumed by Community Bank and the
liabilities to which the transferred assets of First Liberty Bank are
subject were incurred by First Liberty Bank in the ordinary course of its
business.
4. Following the transaction, Community Bank will continue the historic
business of First Liberty Bank or use a significant portion of First
Liberty Bank's historic business assets in a business.
5. There is no intercorporate indebtedness existing between First Liberty Bank
and Community Bank that was issued, acquired, or will be settled at a
discount.
6. Community Bank and First Liberty Bank are not investment companies within
the meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code.
7. First Liberty Bank is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of Section 368(a)(3)(A) of the Code.
8. The fair market value of the assets of First Liberty Bank transferred to
Community Bank will equal or exceed the sum of the liabilities assumed by
Community Bank plus the amount of liabilities, if any, to which the
transferred assets are subject.
9. The total adjusted tax basis of the assets transferred by First Liberty
Bank to Community Bank will equal or exceed the sum of the liabilities to
be assumed and the liabilities, if any, to which the transferred assets are
subject.
10. The principal reasons for the Bank Merger are bona fide business purposes.
11. The Bank Merger will qualify as a statutory merger under Section 215a of
the National Bank Act and the PBC.
Community Bank System, Inc.
February 5, 2001
Page 6
Opinions
On the basis of the facts and representations set forth above, it is our opinion
that:
1. The merger of First Liberty with and into CBSI will qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code.
First Liberty and CBSI will each be a "party to a reorganization" within
the meaning of Section 368(b) of the Code;
2. No gain or loss will be recognized by the First Liberty shareholders with
respect to shares of CBSI common stock (including any fractional share
interest to which the shareholders may be entitled) received in exchange
for their shares of First Liberty common stock (Section 354(a)(1));
3. The payment of cash to First Liberty shareholders in lieu of fractional
share interests of CBSI stock will be treated as if the fractional shares
were distributed as part of the exchange and then redeemed by CBSI. These
cash payments will be treated as having been received as distributions in
full payment in exchange for CBSI stock redeemed as provided in Section
302(a) of the Code. (Rev. Rul. 66-365, 1966-2 C.B. 116, and Rev. Proc. 77-
41, 1977-2 C.B. 574);
4. No gain or loss will be recognized by First Liberty as a result of the
Merger (Section 361(a));
5. No gain or loss will be recognized by CBSI upon the Merger (Section
1032(a));
6. The aggregate tax basis for CBSI shares received by each First Liberty
shareholder in the transaction (including any fractional share interest to
which the shareholders may be entitled) will be the same as the aggregate
tax basis of the First Liberty shares held by each such First Liberty
shareholder immediately prior to the Merger (Section 358(a)(1));
7. The holding period of CBSI shares received by each First Liberty
shareholder in the transaction will include the period during which the
First Liberty shares surrendered in exchange therefor were held (provided
such First Liberty shares were held as capital assets on the Effective
Date) (Section 1223(1));
8. The tax basis of the assets of First Liberty acquired by CBSI will be the
same as the tax basis of such assets in the hands of First Liberty
immediately prior to the Merger (Section 362(b));
9. The holding period of the assets of First Liberty in the hands of CBSI will
include the period during which those assets were held by First Liberty
(Section 1223(2));
Community Bank System, Inc.
February 5, 2001
Page 7
10. CBSI will succeed to and take into account the items of First Liberty
described in Section 381(c) of the Code, including the earnings and profits
(or deficit in earnings and profits), of First Liberty as of the date of
the transaction. CBSI will take those items into account subject to the
conditions and limitations specified in Sections 381, 382, 383 and 384 of
the Code and applicable Treasury Regulations;
11. The Bank Merger of First Liberty Bank with and into Community Bank will
qualify as a tax-free reorganization within the meaning of Section
368(a)(1)(A) of the Code;
12. No gain or loss will be recognized by First Liberty Bank as a result of the
Bank Merger (Section 361(a));
13. No gain or loss will be recognized by Community Bank upon the Bank Merger
(Section 1032(a));
14. No gain or loss will be recognized by CBSI upon the Bank Merger (Section
1032(a), Section 354(a)(1));
15. The tax basis of the assets of First Liberty Bank acquired by Community
Bank will be the same as the tax basis of such assets in the hands of First
Liberty Bank immediately prior to the Bank Merger (Section 362(b));
16. The holding period of the assets of First Liberty Bank in the hands of
Community Bank will include the period during which those assets were held
by First Liberty Bank (Section 1223(2));
17. Community Bank will succeed to and take into account the items of First
Liberty Bank described in Section 381(c) of the Code, including the
earnings and profits (or deficit in earnings and profits), of First Liberty
Bank as of the date of the transaction. Community Bank will take those
items into account subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 of the Code and applicable Treasury
Regulations.
Substantial Authority
Provided that the facts, assumptions, and representations contained herein are
correct, substantial authority, within the meaning of Section 6662 of the Code,
exists for the opinions expressed herein.
Caveats
Our opinions are not binding on any court or on the Internal Revenue Service
("IRS"). The IRS may examine the transactions discussed above and contemplated
by the Agreement. In doing so, the IRS is not bound by the factual
representations made to us, and may reach conclusions contrary to our opinions.
Community Bank System, Inc.
February 5, 2001
Page 8
The conclusions expressed herein are based upon the facts, assumptions and
representations as set forth above. Such conclusions could change if these
facts, assumptions or representations are incorrect, or if any facts have been
omitted.
The conclusions expressed herein are based upon the Code, the Regulations
thereunder, the applicable and currently publicly available administrative
positions of the IRS, and existing court decisions, all as publicly available on
the date of this letter. No assurance can be given that legislative or
administrative changes or court decisions may not be forthcoming which could
significantly modify the conclusions expressed herein. Any such changes may or
may not be retroactive with respect to the Merger described above and, as a
result, could adversely affect the tax consequences as set forth above.
PricewaterhouseCoopers LLP will have no duty to update this letter unless so
requested.
This opinion is limited solely to the Federal income tax consequences as
expressed above, and no opinion is expressed concerning state, local, or foreign
tax considerations. No opinion is expressed concerning the Federal income tax
treatment under other provisions of the Code and Regulations, or concerning the
tax treatment of any conditions existing at the time of, or effects resulting
from, the Merger or the tax consequences of the Merger with respect to any other
taxpayers that are not specifically covered by the opinions expressed in this
letter. No opinion is expressed concerning the tax consequences of the
assumption by CBSI of the outstanding options of First Liberty. Therefore, such
taxpayers should consult with their own tax advisers as to the potential tax
risks involved.
Very truly yours,
/s/ PricewaterhouseCoopers LLP