January 10, 2000
O'Shaughnessy Funds, Inc.
O'Shaughnessy Cornerstone Growth Fund
35 Mason Street
Greenwich, Connecticut 06830
O'Shaughnessy Funds, Inc.
O'Shaughnessy Aggressive Growth Fund
35 Mason Street
Greenwich, Connecticut 06830
Dear Sirs:
We are acting as counsel to O'Shaughnessy Funds, Inc., a Maryland
corporation in connection with the proposed transfer of substantially all of the
assets of the O'Shaughnessy Aggressive Growth Fund ("Aggressive Growth Fund"),
an investment portfolio of O'Shaughnessy Funds, Inc., to the O'Shaughnessy
Cornerstone Growth Fund ("Cornerstone Growth Fund"), a separate investment
portfolio of O'Shaughnessy Funds, Inc., in exchange for shares of the
Cornerstone Growth Fund (the "Shares"), and the assumption by Cornerstone Growth
Fund of substantially all of Aggressive Growth Fund's liabilities, pursuant to
an Agreement and Plan of Reorganization (the "Agreement"). The transactions
contemplated by the Agreement are collectively referred to herein as the
"Reorganization."
In connection with the filing of the Registration Statement, you have asked
for our opinion regarding the federal income tax consequences of the
Reorganization.
We have participated in the preparation of the O'Shaughnessy Funds, Inc.
Registration Statement on Form N-14 (the "Registration Statement") relating,
among other things, to the Shares of Cornerstone Growth Fund to be offered in
exchange for the assets of Aggressive Growth Fund, and containing the Prospectus
and Proxy Statement relating to the Reorganization (the "Prospectus"), filed
with the Securities and Exchange Commission (the "Commission") pursuant to the
provisions of the Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations of the Commission thereunder. In addition, in
connection with rendering the opinions expressed herein, we have examined
originals or copies, certified or otherwise identified to our satisfaction, of
such other documents, records and instruments as we have deemed necessary or
appropriate for the purpose of rendering this opinion, including the form of the
Agreement included as Exhibit I to the Prospectus.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authority of each signatory, the due
execution and delivery of all documents by all parties, the authenticity of all
agreements, documents, certificates and instruments submitted to us as
originals, the conformity of the Agreement as executed and delivered by the
parties with the form of the Agreement contained in the Prospectus, and the
conformity with originals of all agreements, documents, certificates and
instruments submitted to us as copies.
In rendering the opinions expressed herein, we have assumed that the
transactions contemplated by the Agreement will be consummated in accordance
therewith and as described in the Prospectus. As to other questions of fact
material to this opinion, we have assumed, with your approval and without
independent investigation or verification, that the following facts will be
accurate and complete as of the consummation of the Reorganization (the "Closing
Date").
1. The fair market value of the Shares to be received by each Aggressive
Growth Fund shareholder will be equal to the fair market value of the shares of
Aggressive Growth Fund surrendered in exchange therefor upon the liquidation of
Aggressive Growth Fund.
2. There will be no plan or intention by Aggressive Growth Fund to redeem
its shares prior or incident to and as part of the Reorganization. For purposes
of this assumption, shares of Aggressive Growth Fund required to be redeemed by
Aggressive Growth Fund prior to the Reorganization and not as part of the
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O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Aggressive Growth Fund
January 10, 2000
Page 2
Reorganization but in the ordinary course of its business as an open-end
investment company pursuant to Section 22(e) of the Investment Company Act of
1940, as amended (the "ICA"), shall not be taken into account.
3. Pursuant to the Agreement, Aggressive Growth Fund will distribute in
complete liquidation of Aggressive Growth Fund, the Shares of Cornerstone Growth
Fund received by Aggressive Growth Fund in the Reorganization.
4. The liabilities of Aggressive Growth Fund assumed by Cornerstone Growth
Fund pursuant to the Reorganization, plus the liabilities, if any, to which
assets transferred pursuant to the Reorganization will be subject, constitute
less than 20% of the total consideration for the Reorganization, all such
liabilities will have been incurred by Aggressive Growth Fund in the ordinary
course of its business, and Cornerstone Growth Fund will pay no other
consideration, except for the Shares, in connection with the Reorganization.
5. All expenses incurred by Aggressive Growth Fund with respect to the
Reorganization will be borne by Aggressive Growth Fund. Each shareholder of
Aggressive Growth Fund will pay its respective share of the expenses, if any,
incurred in connection with the Reorganization. Cornerstone Growth Fund will pay
the expenses, if any, incurred by it in connection with the Reorganization.
6. No intercorporate indebtedness will exist between Cornerstone Growth
Fund and Aggressive Growth Fund that was issued, acquired, or will be settled at
a discount.
7. Aggressive Growth Fund will not own, directly or indirectly, nor will it
have owned during the five years preceding the Closing Date, directly or
indirectly, any stock of Cornerstone Growth Fund.
8. The assets of Aggressive Growth Fund transferred to Cornerstone Growth
Fund will include all assets owned by Aggressive Growth Fund at fair market
value on the Closing Date subject to all known liabilities of Aggressive Growth
Fund at such time.
9. In accordance with the terms of the Agreement, Aggressive Growth Fund
will transfer all of its business and will transfer assets to Cornerstone Growth
Fund representing at least 90% of the fair market value of the net assets, and
at least 70% of the fair market value of the gross assets, held by Aggressive
Growth Fund immediately prior to the Reorganization. For purposes of this
assumption, amounts paid by Aggressive Growth Fund to shareholders who receive
cash or other property, amounts paid to dissenters, amounts used by Aggressive
Growth Fund to pay its reorganization expenses and all redemptions and
distributions (other than regular, normal redemptions and dividends) made by
Aggressive Growth Fund immediately preceding the Reorganization will be included
as assets of Aggressive Growth Fund held immediately prior to the
Reorganization.
10. The fair market value of the assets of Aggressive Growth Fund
transferred to Cornerstone Growth Fund will equal or exceed the sum of
liabilities assumed by Cornerstone Growth Fund, plus the amount of liabilities,
if any, to which the transferred assets will be subject.
11. Aggressive Growth Fund will not be under the jurisdiction of a court in
a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the
Internal Revenue Code of 1986, as amended (the "Code").
12. No cash will be paid to the shareholders of Aggressive Growth Fund in
lieu of fractional Shares.
13. For federal income tax purposes, Aggressive Growth Fund will qualify as
a regulated investment company (as defined in Code Section 851) and will have so
qualified since its formation. The provisions of Code Sections 851 through 855
apply to Aggressive Growth Fund and will continue to apply through the Closing
Date.
14. As of the Closing Date, Aggressive Growth Fund will have declared to
its shareholders of record a dividend or dividends payable prior to closing,
which together with all previous such dividends will have the effect of
distributing all of Aggressive Growth Fund's investment company taxable income
plus the excess of its interest income, if any, excludable from gross income
under Code Section 103(a) (including by virtue of prior Section 853(b)(5)(C) of
the Code) over its deductions disallowed under Sections 265 and 171(a)(2) for
the taxable year of Aggressive Growth Fund ending on the Closing Date and all
its net capital gain realized in such taxable year.
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O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Aggressive Growth Fund
January 10, 2000
Page 3
15. Neither Cornerstone Growth Fund nor any person related thereto within
the meaning of Treasury Regulation Section 1.368-1(e) will have any plan or
intention to reacquire any of the Shares of Cornerstone Growth Fund issued in
the Reorganization. For purposes of this assumption, Shares of Cornerstone
Growth Fund required to be redeemed by Cornerstone Growth Fund not as part of
the Reorganization but in the ordinary course of its business as a portfolio of
an open-end investment company pursuant to Section 22(e) of the ICA shall not be
taken into account.
16. Following the Reorganization, Cornerstone Growth Fund will continue the
historic business of Aggressive Growth Fund or use a significant portion of
Aggressive Growth Fund's historic business assets in its business.
17. Cornerstone Growth Fund will not own, directly or indirectly, nor will
it have owned during the five years preceding the Closing Date, directly or
indirectly, any shares of Aggressive Growth Fund.
18. Cornerstone Growth Fund will not be under the jurisdiction of a court
in a Title 11 or similar case within the meaning of Code Section 368(a)(3)(A).
19. For federal income tax purposes, Cornerstone Growth Fund will qualify
as a regulated investment company (as defined in Code Section 851) and will have
so qualified since its formation. The provisions of Code Sections 851 through
855 apply to Cornerstone Growth Fund prior to the Reorganization and will
continue to apply after the Closing Date.
20. No compensation received by any shareholder-employee of Aggressive
Growth Fund will be separate consideration for the Reorganization; none of the
Shares of Cornerstone Growth Fund received by any shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and any
compensation paid to any shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to other parties bargaining
at arm's length for similar services.
We note that we are members of the Bar of the State of New York and that
our opinion is expressly limited to the federal laws of the United States.
Based on the foregoing and subject to the assumptions and limitations set
forth above and such examination of law as we have deemed necessary, it is our
opinion that the Reorganization should constitute a reorganization within the
meaning of Section 368(a)(1)(C) of the Code. Assuming the Reorganization does so
qualify, we are of the opinion that:
1. Aggressive Growth Fund and Cornerstone Growth Fund will each be a "party
to a reorganization" within the meaning of Section 368(b) of the Code;
2. Pursuant to Sections 361(a), 361(c)(1) and 357(a) of the Code, no gain
or loss will be recognized by Aggressive Growth Fund upon the transfer of
substantially all of its assets to Cornerstone Growth Fund in exchange solely
for Shares of Cornerstone Growth Fund as a result of the Reorganization and the
assumption by Cornerstone Growth Fund of substantially all of Aggressive Growth
Fund's liabilities, if any, or upon the distribution (whether actual or
constructive) of the Shares of Cornerstone Growth Fund in complete liquidation
of Aggressive Growth Fund;
3. Pursuant to Section 1032(a) of the Code, no gain or loss will be
recognized by Cornerstone Growth Fund upon its acquisition of Aggressive Growth
Fund's assets solely in exchange for Shares of Cornerstone Growth Fund and the
assumption by Cornerstone Growth Fund of the liabilities of Aggressive Growth
Fund;
4. Pursuant to Section 362(b) of the Code, the basis of the assets of
Aggressive Growth Fund acquired by Cornerstone Growth Fund will be the same as
the basis of such assets when held by Aggressive Growth Fund immediately prior
to the Reorganization;
5. Pursuant to Section 1223(2) of the Code, the holding period of the
assets of Aggressive Growth Fund acquired by Cornerstone Growth Fund will
include the period during which such assets were held by Aggressive Growth Fund;
O'Shaughnessy Cornerstone Growth Fund
O'Shaughnessy Aggressive Growth Fund
January 10, 2000
Page 4
6. Pursuant to Section 354(a)(1) of the Code, no gain or loss will be
recognized by a shareholder of Aggressive Growth Fund upon the exchange of his
or her shares of Aggressive Growth Fund solely for Shares of Cornerstone Growth
Fund, including fractional Shares, in liquidation of Aggressive Growth Fund;
7. Pursuant to Section 358(a)(1) of the Code, the aggregate basis of the
Shares of Cornerstone Growth Fund received by former Aggressive Growth Fund
shareholders will be the same as the basis of Aggressive Growth Fund shares
surrendered in exchange therefor;
8. Pursuant to Section 1223(1) of the Code, the holding period for Shares
of Cornerstone Growth Fund received by each shareholder of Aggressive Growth
Fund in exchange for his or her shares of Aggressive Growth Fund will include
the period during which such shareholder held shares of Aggressive Growth Fund
(provided Aggressive Growth Fund shares were held as capital assets on the date
of the exchange); and
9. The taxable year of Aggressive Growth Fund will end on the effective
date of the Reorganization and pursuant to Section 381(a) of the Code and
regulations thereunder, Cornerstone Growth Fund will succeed to and take into
account certain tax attributes of Aggressive Growth Fund, such as earnings and
profits and capital loss carryovers.
The opinions expressed herein are based upon currently applicable statutes
and regulations and existing judicial and administrative interpretations. We can
provide no assurance that such statutes or regulations, or existing judicial or
administrative interpretations thereof, will not be amended, revoked or modified
(possibly prior to the Closing Date) in a manner which would affect our
conclusions. Finally, we note that this opinion is solely for the benefit of the
addressees hereof in connection with the transaction described herein and,
except as otherwise provided herein, should not be referred to, used, relied
upon or quoted (with or without specific reference to our firm) in any
documents, reports, financial statements or otherwise, without our prior written
consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and to any reference to our
firm in the Registration Statement or in the Prospectus constituting part
thereof. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Swidler Berlin Shereff Friedman, LLP
Swidler Berlin Shereff Friedman, LLP