Exhibit 99.1
March 22, 2001
Mercury Air Group, Inc.
5456 McConnell Avenue
Los Angeles, CA 90066
Mercfuel, Inc.
5456 McConnell Avenue
Los Angeles, CA 90066
Re: Certain Federal Income Tax Consequences of the Distribution
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Ladies and Gentleman:
We have acted as counsel to Mercury Air Group, Inc. ("MAG"), a Delaware
corporation, in connection with: (i) MAG's contribution ("Contribution") of the
assets and liabilities used in its fuel sales and service business ("Fuel
Business") to Mercfuel, Inc. ("Mercfuel"); and (ii) MAG's proposed distribution
("Distribution") of the Mercfuel stock to MAG's shareholders pursuant to a
Master Separation and Distribution Agreement (the "Agreement"). MAG and
Mercfuel have requested our opinion as to the proper treatment of the
Contribution and Distribution for United States federal income tax purposes./1/
Unless the context requires otherwise, capitalized terms used in this
opinion letter and not otherwise defined herein shall have the meanings ascribed
to such terms in the Information Statement, which is contained in the
Registration Statement on Form 10 filed by Mercfuel with the Securities and
Exchange Commission, as amended (the "Registration Statement").
FACTS AND ASSUMPTIONS RELIED UPON
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate, including (but not limited to) the Registration
Statement and the reports incorporated by reference therein, and the Agreement.
We have assumed, with your consent, that all documents submitted to us are
authentic originals or faithful reproductions thereof, that all such documents
have been or will be duly executed to the extent required, that all
representations and statements set forth in such documents are true and correct,
that any such representation or statement "to the best of the knowledge and
belief" of any person (or with similar qualification) is true and correct
without such qualification, and that all obligations imposed by any such
documents on the parties thereto have been or will be performed or satisfied in
accordance with their terms.
We also have obtained such additional information and representations as we
have deemed relevant and necessary through consultation with officers and
outside advisors of MAG
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/1/ All Code and section references are to the Internal Revenue Code of 1986, as
amended.
and Merfcuel, including representations made by MAG in a letter to us dated
March 22, 2001, by Mercfuel in a letter to us dated March 22, 2001, and by CFK
Partners in a letter to us dated March 22, 2001 (collectively, the
"Representation Letters"). With your consent, we have reviewed and relied upon
the statements made and the conclusions reached in a letter from VMR Capital
Markets, U.S. to MAG's Board of Directors, dated December 28, 2000 (the "VMR
Letter"), regarding the corporate business purposes for the Distribution. We
have assumed, with your consent, that the statements contained in the
Representation Letters and the VMR Letter are true and correct in all respects
on the date hereof and will continue to be true and correct at the time of the
Distribution.
Finally, with your consent, we have assumed that: (i) during the four-year
period beginning two years before the Distribution, no person or persons have
acquired or will acquire, directly or indirectly, stock representing a 50-
percent or greater interest in MAG or Mercfuel within the meaning of Section
355(e) of the Internal Revenue Code of 1986, as amended (the "Code"); and (ii)
none of the corporate acquisitions that were made by MAG at any time prior to
the Distribution were made as part of a plan or series of related transactions
that includes the Distribution within the meaning of Section 355(e).
OPINION
Based upon and subject to the foregoing, we are of the opinion that,
although the matter is not free from doubt, (i) the contribution by MAG of
certain assets and liabilities to Mercfuel in exchange for common stock of
Mercfuel, followed by the Distribution, should be treated as a reorganization
within the meaning of Section 368(a)(1)(D) of the Code; and (ii) the
Distribution should be treated as a transaction to which Section 355 of the Code
applies. If the Distribution is treated in accordance with the preceding
sentence, the following U.S. federal income tax consequences generally will
apply:
- A MAG stockholder will not recognize any income, gain or loss as a
result of the receipt of Mercfuel common stock in the Distribution.
- A MAG stockholder's holding period for shares of Mercfuel common stock
received in the Distribution will include the period for which that
stockholder's shares of MAG common stock were held.
- The tax basis of MAG common stock held by a MAG stockholder immediately
before the Distribution will be apportioned between such MAG common
stock and the MercFuel Common stock received by such stockholder in the
Distribution based upon the relative fair market value of such MAG
common stock and MercFuel common stock on the date of the Distribution.
- Neither MAG nor Mercfuel will recognize any gain or loss in connection
with the Distribution, other than deferred intercompany gains and excess
loss accounts, if any, that may be triggered as a result of the
Distribution or transactions undertaken in connection with the
Distribution.
The opinions set forth above are not free from doubt because of the inherently
factual nature of the analysis and requirements necessary to qualify the
Distribution under section 355 of the Code.
Notwithstanding any other statement in this letter, no opinion is expressed
herein as to the tax consequences of the Distribution to special classes of MAG
stockholders, e.g. tax-exempt entities, non-resident alien individuals, foreign
entities, foreign trusts and estates and beneficiaries thereof, insurance
companies, and dealers in securities, or stockholders who acquired MAG common
stock by exercising employee stock options or otherwise as compensation or who
do not hold their shares of MAG common stock as a "capital asset" within the
meaning of Section 1221 of the Code. In addition, this discussion does not
address any state, local or foreign tax considerations relative to the
Distribution.
The opinion expressed herein is based upon our analysis of the Code, the
U.S. Treasury regulations promulgated thereunder, administrative positions of
the Internal Revenue Service, and judicial decisions as of the date hereof and
represents our best legal judgment as to the matters addressed herein. Our
opinion, however, is not binding on the Internal Revenue Service or the courts.
Accordingly, no complete assurance can be given that the opinion expressed
herein, if contested, would be sustained by a court. Moreover, the authorities
upon which our opinion is based are subject to change, possibly on a retroactive
basis, and any such changes could adversely affect the opinion rendered herein
and the tax consequences of the Distribution.
In particular, the Service may challenge the tax-free status of the
Distribution on the grounds that it lacks an adequate "business purpose," or
that the device requirement of Section 355(a)(1)(B) of the Code (which requires
that the Distribution not be used principally as a device for the distribution
of the MAG's earnings and profits) is not satisfied. Accordingly, there can be
no assurance that the Service will not successfully assert that the Distribution
is a taxable event.
If the Distribution is held to be taxable for United Stated federal income
tax purposes, MAG and its shareholders could be subject to a material amount of
tax. It is important to note that this could adversely effect MAG's financial
condition: (i) MAG would recognize capital gain equal to the difference between
the fair market value of the MercFuel common stock on the Distribution Date and
MAG's tax basis in such stock; (ii) each stockholder receiving shares of
MercFuel common stock in the Distribution may be treated as having received a
distribution equal to the value of MercFuel common stock received which would be
taxable as ordinary income to the extent of MAG's current and accumulated
earnings and profits; (iii) the holding period for determining capital gain
treatment of the MercFuel common stock received in the Distribution would
commence on the date of the Distribution; and (iv) each stockholder would have a
tax basis in the shares of MercFuel common stock received in the Distribution
equal to the fair market value of such shares. Corporate stockholders may be
eligible for a dividends-received deduction (subject to certain limitations)
with respect to the portion of the Distribution constituting a dividend, and may
be subject to the Code's extraordinary dividend provisions which, if applicable,
would require a reduction in such holder's tax basis in his or her MAG stock to
the extent of such deduction.
As noted above, our opinion is based solely on the documents that we have
examined, the additional information that we have obtained, the assumptions that
we have made, and the representations that have been made to us. Our opinion
cannot be relied upon if any of the facts contained in such documents or in any
such additional information is, or later becomes, inaccurate or if any of the
assumptions we have made is, or later becomes, inaccurate.
We hereby consent to the filing of a form of this opinion letter as an
Exhibit to the Registration Statement and to the references to our firm in the
Information Statement. In giving such consent, we do not thereby admit that we
are in the category of persons whose consent is required under the federal
securities laws. Except as stated in this paragraph, this opinion letter may
not be furnished to, quoted in whole or in part, or relied upon by any person
other than MAG or Mercfuel for any purpose without our prior written consent.
Finally, our opinion is limited to the United States federal income tax
matters specifically covered thereby, and we have not been asked to address, nor
have we addressed, any other federal, state, local, or foreign income, estate,
gift, transfer, sales, use, or other tax consequences that may result from the
Distribution or any other transaction, including any transaction undertaken in
connection with the Distribution.
Respectfully Submitted
BAKER & McKENZIE
/s/ Frederick E. Henry
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Frederick E. Henry