1
EXHIBIT 8.1
April 23, 1996
Ms. Ruth A. Martin
Chairman
Home Interstate Bancorp
2633 Cherry Avenue
Signal Hill, California 90806
Mr. Stephen A. Carpenter
Chairman
CU Bancorp
16030 Ventura Boulevard
Encino, California 91436
Dear Ms. Martin and Mr. Carpenter:
This opinion is being furnished to you in connection with the proposed mergers
of Home Interstate Bancorp ("Home") and its wholly owned banking subsidiary,
Home Bank, with CU Bancorp ("CU") and its wholly owned banking subsidiary,
California United Bank, National Association ("CU Bank"), which are expected to
be completed on June 28, 1996 ("the Effective Date"). You have requested
our opinion concerning the following:
o Whether the merger of Home into CU will qualify as a reorganization
under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended ("the Code").
o That the exchange of Home common stock to the extent exchanged for CU
common stock will not give rise to gain or loss for federal income tax
purposes to the holders of Home common stock with respect to such
exchange.
o Whether the simultaneous merger of CU Bank into Home Bank, will qualify
as a reorganization under Section 368(a)(1)(A) of the Code.
You have asked for our opinion on the federal income tax consequences to CU,
Home, Home Bank, CU Bank, the stockholders of Home, and the stockholders of CU.
We have not considered any nonincome tax, state, local, or foreign income tax
consequences, and, therefore, do not express any opinion regarding the
treatment that would be given the merger by the applicable authorities on any
non income tax or any state, local or foreign tax issues. We also
2
- -----------------
Page 2
April 23, 1996
express no opinion on nontax issues, such as corporate law or securities law
matters, including, but not limited to, all securities law disclosure
requirements.
In rendering our opinion, we have relied upon the accuracy and completeness of
the facts and information as contained in the Agreement and Plan of
Reorganization dated January 10, 1996, as amended on March 29, 1996 ("the
Agreement"), including all exhibits attached thereto, and the representations
included below. To the extent there are any changes to the Agreement or
representations, our opinion may be affected accordingly.
The discussion and conclusions set forth below are based upon the Code, the
Treasury Regulations, and existing administrative and judicial interpretations
thereof as of the Effective Date, all of which are subject to change. All
section references are to the Internal Revenue Code of 1986, as amended, unless
otherwise stated. If there is a change in the Code, the Treasury Regulations,
or public rulings thereunder, the current Internal Revenue Service rulings or
releases, or in the prevailing judicial interpretation of the foregoing, the
opinion expressed herein would necessarily have to be re-evaluated in light of
any such changes. We have no responsibility to update this opinion for events,
transactions, or changes in the above-listed law and authority or circumstances
occurring after the Effective Date.
This opinion is solely for the benefit of Home and CU and is not intended to be
relied upon by anyone other than Home and CU. Although you do hereby have our
express consent to inform Home Bank, CU Bank, and Home common stockholders of
our opinion by including copies of this letter as an exhibit to the Agreement
and as an exhibit in the Registration Statement on Form S-4 for the proposed
transactions, we assume no responsibility for tax consequences to them.
Instead, each of these parties must consult and rely upon the advice of his/her
counsel, accountant, or other advisor. Except to the extent expressly
permitted hereby, and without the prior written consent of this firm, this
letter may not be quoted in whole or in part or otherwise referred to in any
documents or delivered to any other person or entity.
PROPOSED TRANSACTIONS
Our understanding of the proposed transactions, as described in the Agreement,
is as follows:
A. Home will be merged with and into CU under the provisions of
the California General Corporations Code.
B. The common stockholders of Home will receive shares of CU
common stock proportionate in value, based on the terms
contained in Article VII of Exhibit A of the
3
- -----------------
Page 3
April 23, 1996
Agreement. The shares of CU issued under the Agreement will
represent approximately 52 percent of the shares of CU stock
following the merger. In lieu of issuing fractional shares of
CU common stock as a result of the merger, common stockholders
of Home will be entitled to receive a cash payment equal to
such fractional share multiplied by the designated value of a
share of CU common stock.
C. Simultaneous with the merger of Home into CU, and as part of
the same overall transaction, CU Bank will be merged with and
into Home Bank under the California General Corporations Code.
No additional shares of Home Bank or CU will be issued as a
result of this transaction.
Objecting stockholders of Home may dissent from the merger involving Home and
CU, and instead receive cash in exchange for their shares of Home common stock,
based on the fair market value of such stock determined under Section 13 of the
California General Corporations Code. Objecting stockholders of CU may dissent
from the merger involving Home and CU, and, if certain other conditions of
Section 13 of the California General Corporations Code are satisfied, will have
the right to receive payment in cash of the fair market value of such holder's
shares of CU stock.
As a condition to entering into the Agreement, CU and Home each required the
other to enter into a Warrant Purchase Agreement (Exhibits C and D). Each
Warrant Purchase Agreement provides for the grant of a warrant ("Warrant") to
purchase shares representing approximately 19.9 percent of the issuing party's
common stock. The Warrant exercise prices are equal to an average of the
closing sales price of the issuing company's stock for the 20 trading days
prior to January 8, 1996. Each Warrant Purchase Agreement provides that the
holder of the Warrant is entitled to purchase the Warrant shares upon the
occurrence of certain events that create the potential for another party to
acquire control of the issuing party. The Warrants will be terminated upon the
occurrence of the mergers.
ADDITIONAL REPRESENTATIONS
In addition to the representations included in the Agreement, the following
representations have been made to us by representatives of CU, CU Bank, Home,
and Home Bank:
a) CU and the stockholders of Home will pay their respective
expenses, if any, incurred in connection with the successful
consummation of the transaction.
b) There is no intercorporate indebtedness existing between Home
and CU, or between CU Bank and Home Bank, that was issued,
acquired, or will be settled at a discount.
4
- -----------------
Page 4
April 23, 1996
c) The fair market value of the assets of Home transferred to CU
will equal or exceed the sum of the liabilities assumed by CU
plus the amount of liabilities, if any, to which the
transferred assets are subject.
d) The fair market value of the assets of CU Bank transferred to
Home Bank will equal or exceed the sum of the liabilities
assumed by Home Bank plus the amount of liabilities, if any,
to which the transferred assets are subject.
e) None of the compensation received by any stockholder-employees
of Home or Home Bank will be separate consideration for, or
allocable to, any of their shares of Home common stock; none
of the shares of CU common stock received by any stockholder
employees will be separate consideration for, or allocable to,
any employment agreement; and the compensation paid to any
stockholder-employees will be for services actually rendered
and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services.
f) Home will be merged with and into CU under the California
General Corporations Code.
g) Simultaneously, and as part of the same overall transaction as
the merger of Home into CU, CU Bank will be merged with and
into Home Bank under the California General Corporations Code.
h) The Home common stockholders will have unrestricted rights of
ownership of CU common stock received in the transaction, and
their ability to retain the CU common stock received in the
transaction will not be limited in any way.
i) The ratio for the exchange of shares of Home common stock for
CU common stock in the transaction was negotiated through
arm's length bargaining. Accordingly, the fair market value
of the CU common stock to be received by Home common
stockholders in the transaction will be approximately equal to
the fair market value of the Home common stock surrendered by
such stockholders in exchange therefore.
j) Unless an Acquisition Event occurs, as defined in Section 1.3
of the Warrant Purchase Agreements, and the Warrants are
exercised, the Warrants will be terminated upon the occurrence
of the mergers.
The following representations have been made to us by representatives of CU and
CU Bank:
5
- -----------------
Page 5
April 23, 1996
a) CU has no plan or intention to re-acquire any of its stock
issued in the transaction. There is no plan or intention by
the Home common stockholders who own five percent or more of
the stock, and to the best of the knowledge of the management
of CU, there is no plan or intention on the part of the
remaining common stockholders to sell, exchange, or otherwise
dispose of a number of shares of CU common stock received in
the transaction that would reduce the stockholders' ownership
of CU common stock to a number of shares having a value, as of
the Effective Date, of less than 50 percent of the value of
all the formerly outstanding common stock of Home as of the
same date. For purposes of this representation, shares of
Home common stock exchanged for cash in lieu of fractional
shares of CU stock will be treated as outstanding Home common
stock on the Effective Date. Moreover, shares of Home common
stock and shares of CU common stock held by Home stockholders
and otherwise sold, redeemed, or disposed of before the
transaction in contemplation thereof, or subsequent to the
transaction, will be considered in making this representation
b) The liabilities of CU Bank assumed by Home Bank and the
liabilities to which the transferred assets of CU Bank are
subject were incurred by CU Bank in the ordinary course of
business.
c) CU has no plan or intention to sell or otherwise dispose of
the stock of Home Bank or any of the assets of Home or Home
Bank acquired in the transactions, except for dispositions
made in the ordinary course of business or transfers described
in Section 368(a)(2)(C) of the Code.
d) Following the transactions, CU will continue the historic
businesses of Home, or use a significant portion of these
historic business assets in the operation of a trade or
business.
e) The payment of cash in lieu of fractional shares of CU common
stock is solely for the purpose of avoiding the expense and
inconvenience to CU of issuing fractional shares and does not
represent separately bargained-for consideration. The total
cash consideration that will be paid in the transaction to the
Home stockholders instead of issuing fractional shares of CU
common stock will not exceed (1) one percent of the total
consideration that will be issued in the transaction to the
Home stockholders in exchange for their shares of Home common
stock. The fractional share interests of each Home
stockholder will be aggregated, and no Home stockholder will
receive
6
- -----------------
Page 6
April 23, 1996
cash for such fractional share interests in an amount equal to
or greater than the value of one full share of CU common stock.
f) The assumption by CU of the liabilities of Home, pursuant to
the transactions are for bona fide business purposes and the
principal purpose of such assumptions is not the avoidance of
federal income tax on the transfer of assets of Home to CU
pursuant to the transactions.
g) CU and CU Bank are not investment companies as defined in
Sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv).
h) The proposed transaction is being undertaken for reasons
germane to the continuance of the business of CU and CU Bank.
i) The total adjusted basis of the assets of CU Bank transferred
to Home Bank will equal or exceed the sum of the liabilities
assumed by Home Bank plus the amount of liabilities, if any,
to which the transferred assets are subject.
j) There are no deferred intercompany transactions between
members of the CU consolidated group or excess loss accounts
in the stock of such members.
The following representations have been made to us by representatives of Home
and Home Bank:
a) There is no plan or intention by the Home common stockholders
who own five percent or more of the stock, and to the best of
the knowledge of the management of Home, there is no plan or
intention on the part of the remaining common stockholders to
sell, exchange, or otherwise dispose of a number of shares of
CU common stock received in the transaction that would reduce
the stockholders' ownership of CU common stock to a number of
shares having a value, as of the Effective Date, of less than
50 percent of the value of all the formerly outstanding common
stock of Home as of the same date. For purposes of this
representation, shares of Home common stock exchanged for cash
in lieu of fractional shares of CU stock will be treated as
outstanding Home common stock on the Effective Date.
Moreover, shares of Home common stock and shares of CU common
stock held by Home stockholders and otherwise sold, redeemed,
or disposed of before the transaction in contemplation
thereof, or subsequent to the transaction, will be considered
in making this representation.
7
- -----------------
Page 7
April 23, 1996
b) The liabilities of Home assumed by CU and the liabilities to
which the transferred assets of Home were incurred by Home in
the ordinary course of business.
c) Home Bank has no plan or intention to sell or otherwise
dispose of any of the assets of CU Bank acquired in the
transactions, except for dispositions made in the ordinary
course of business or transfers described in Section
368(a)(2)(C) of the Code.
d) Following the transactions, Home Bank will continue the
historic businesses of CU Bank, or use a significant portion
of these historic business
assets in the operation of a trade or business.
e) The assumption by Home Bank of the liabilities of CU Bank,
pursuant to the transactions are for bona fide business
purposes and the principal purpose of such assumptions is not
the avoidance of federal income tax on the transfer of assets
of CU Bank to Home Bank pursuant to the transactions.
f) Home and Home Bank are not investment companies as defined in
Sections 368(a)(2)(F)(iii) and 368(a)(2)(F)(iv).
g) The proposed transaction is being undertaken for reasons
germane to the continuance of the business of Home and
Home Bank.
h) The total adjusted basis of the assets of Home transferred to
CU will equal or exceed the sum of the liabilities assumed by
CU, plus the amount of liabilities, if any, to which the
transferred assets are subject.
ANALYSIS OF APPLICABLE FEDERAL TAX PROVISIONS
Section 354(a)(1) addresses the effects of corporate reorganizations on
shareholders, providing in general that no gain or loss shall be recognized if
stock or securities in a corporation a party to a reorganization are, in
pursuance of the plan of reorganization, exchanged solely for stock or
securities in such corporation or in another corporation, a party to the
reorganization,
For purposes of Code Section 354, the terms "reorganization" and "party to a
reorganization" mean only a reorganization or a party to a reorganization as
defined in Sections 368(a) and 368(b). Section 368(a)(1)(A) states that the
term reorganization includes a statutory merger or consolidation. Reg. Section
1.368-2(b)(1) states that in order for a transaction to qualify as a
reorganization under Section 368(a)(1)(A), the transaction must be a merger or
consolidation
8
- -----------------
Page 8
April 23, 1996
effected pursuant to the corporation laws of the United States or State or
Territory or the District of Columbia. Under Section 368(b), the term party to
a reorganization includes both corporations in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another.
The regulations under Section 368 require as a part of a reorganization a
continuity of the business enterprise under the modified corporate form, a bona
fide business purpose for the reorganization, and a continuity of interest
therein on the part of those persons who, directly or indirectly, were owners
of the enterprise prior to the reorganization. Reg. Section 1.368-1(d)(2)
states that the continuity of business enterprise requirement is met if the
acquiring corporation either continues the acquired corporation's historic
business or uses a significant portion of the acquired corporation's business
assets in the operation of a trade or business. Based on the representations
set forth above, the continuity of business enterprise requirement is met with
respect to the assets and business operations of Home Bank.
Reg. Section 1.368-2(g) indicates that in addition to coming within the scope
of the specific language of Sec. 368(a), a reorganization must also be
"undertaken for reasons germane to the continuance of the business of a
corporation a party to the reorganization." If the transaction or series of
transactions has no business or corporate purpose, then the plan is not a
reorganization under Section 368(a). See Reg. Section 1.368-1(c). The Boards
of Directors of CU and Home believe that the merger will serve the business
purposes of both institutions and their respective shareholders and customers
by creating a stronger enterprise in terms of management, growth opportunities,
and profitability. Specifically, they believe that the combination of CU
Bank's commercial loan capability and Home Bank's substantial retail deposit
base will have a positive impact on the operations of the combined enterprise.
Thus, the surviving bank in the merger should be able to generate commercial
loans utilizing the low cost retail deposits of Home Bank plus achieve other
advantages of consolidation and centralization of certain management functions
and economies of scale. Accordingly each merger should satisfy the business
purpose requirement under the regulations for a tax-free reorganization.
The continuity of interest requirement does not require that all shareholders
of the acquired corporation have a proprietary interest in the surviving
corporation after the acquisition; it is not even necessary for a substantial
percentage of such shareholders to have such an interest. Rather, the IRS
announced in Rev. Proc. 77-37 that it would rule that the continuity of
interest requirement is met so long as one or more of the acquired
corporation's shareholders retain a sufficient proprietary interest in the
continuing corporation. The IRS indicated in Rev. Proc. 77-37 that a
sufficient proprietary interest is an interest with a value that is at least
50% of the total equity value of the acquired corporation.
9
- -----------------
Page 9
April 23, 1996
In addition to meeting the continuity of interest requirement immediately after
the reorganization, the former shareholders of the acquired corporation must
retain their interest in the acquiring corporation for some time after the
reorganization. The courts have ruled that the tax-free nature of the
reorganization may be retroactively invalidated if the continuity of interest
is not maintained either because, at the time of the reorganization, the
shareholders intended to dispose of the proprietary interest soon after the
reorganization (Christian Est. v. Comr., T.C. Memo 1989-413) or because a
shareholder disposes of stock immediately following the reorganization in
accordance with a pre-existing commitment to sell (American Wire Fabrics Corp.
v. Comr., 16 T.C. 607). The courts have generally looked to the intent of the
shareholders at the time of the reorganization to dispose of their interests in
determining whether the continuity of interest requirement is subsequently
violated. Based on the above representations made by representatives of Home,
Home Bank, and CU, the continuity of interest requirement is met with respect
to the transactions. See also Rev. Rul. 84-30.
Section 356(a)(1) provides that if Section 354 would apply to an exchange but
for the fact that the property received in the exchange consists not only of
property permitted to be received under Section 354 without the recognition of
gain but also of other property or money then the gain, if any, to the
recipient shall be recognized but not in excess of the sum of money and the
fair market value of the property received.
Section 356(c) states that no loss from the exchange may be recognized by the
shareholder.
In other official pronouncements, the Internal Revenue Service has treated the
distribution of cash as part of a reorganization and in a transaction subject
to Section 356 by applying the redemption principles under Section 302.
Section 302 provides, in part, that a redemption will be treated as a
distribution in part or full payment in exchange for stock if it can meet the
tests of that section. The determination whether a CU or Home dissenting
shareholder has an exchange under Section 302 is a shareholder-by-shareholder
determination taking into account direct and indirect stock ownership as
determined under the complex stock ownership attribution rules of Section 318.
Ordinarily, if a shareholder exercises dissenter's rights and receives cash in
exchange for all of the shares owned by the shareholder, the shareholder should
have an exchange that qualifies for capital gain or loss treatment provided the
stock exchanged is held as a capital asset. If a dissenting shareholder,
however, only dissents in part, the determination will have to be made based on
all facts and circumstances or by using certain mechanical ownership tests.
The Section 318 attribution rules, however, must be applied by each shareholder
in testing his or her own individual consequences. If the exchange fails to
satisfy any of the requirements for exchange treatment for tax purposes, the
distribution may be treated as a dividend. This could result in ordinary
income with respect to the entire amount of
10
- -----------------
Page 10
April 23, 1996
cash received regardless of the shareholder's basis in the stock or inherent
gain or loss in the shares tendered for cash. Each dissenting shareholder of
Home or CU or shareholder receiving cash in the transaction should consult his
or her own tax advisor on the tax consequences of the transaction.
In Rev. Rul. 66-365, the IRS concluded that a cash payment made by the
acquiring corporation in lieu of issuing fractional shares in a transaction
qualifying as a reorganization under Section 368(a)(1)(A) of the Code provided
such cash payment is not separately bargained for, will be treated under
Section 302 of the Code as in redemption of fractional share interests.
Therefore, each shareholder's redemption will be treated as a distribution in
full payment in exchange for his or her fractional share interest under Section
302(a) of the Code and accorded capital gain or loss treatment provided the
redemption is not essentially equivalent to a dividend and that the fractional
shares redeemed constitute a capital asset in the hands of the holder as
discussed below. In Rev. Proc. 77-41, the IRS stated that "a ruling will
usually be issued under Section 302(a) of the Code that cash to be distributed
to shareholders in lieu of fractional share interests arising in corporate
reorganizations ... will be treated as having been received in part or in full
payment in exchange for the stock redeemed if the cash distribution is
undertaken solely for the purpose of saving the corporation the expense and
inconvenience of issuing and transferring fractional shares, and is not
separately bargained-for consideration."
Under Section 302, where there is a complete redemption of all of a
shareholder's stock in a corporation (after consideration of the constructive
ownership rules of Section 302(c)), the redemption payment is treated as made
entirely in exchange for the shareholder's stock in the corporation (Section
302(b)(3)).
Under Section 358(a)(1), in the case of an exchange to which Section 354 or
Section 356 applies, the basis of property which is permitted to be received
under such section without the recognition of gain or loss shall be the same as
that of the property exchanged, decreased by the amount of any money received
by the recipient and the amount of loss recognized by the recipient as a result
of the exchange and increased by the amount which was treated as a dividend and
the amount of other gain recognized by the recipient as a result of the
transaction.
It should be noted that where cash is received in lieu of fractional shares,
the substance of the transaction is that of a hypothetical receipt of the
fractional shares and then a redemption of such shares. Therefore, the basis
that is to be allocated to the stock of the acquiring corporation received must
be allocated to the shares retained and the fractional shares hypothetically
received. The gain or loss attributable to the receipt of cash in lieu of
fractional shares is measured by comparing the cash received with the basis
allocated to the fractional shares that
11
- -----------------
Page 11
April 23, 1996
are hypothetically received, and such gain or loss is recognized as discussed
earlier pursuant to Rev. Rul. 66-365.
Code Section 361 (a) states that, as a general rule, no gain or loss is to be
recognized by a corporation if such corporation is a party to a reorganization
and exchanges property, in pursuance of the plan of reorganization, solely for
stock or securities in another corporation a party to the reorganization.
Section 361(b) states that if Section 361(a) would apply to an exchange but for
the fact that the property received in exchange consists not only of stock or
securities afforded nonrecognition treatment under Section 361 (a), but also of
other property or money, then provided the corporation receiving such other
property or money distributes it in pursuance to the plan of reorganization, no
gain to the corporation shall be recognized from the exchange. Section 361(a)
states that as a general rule no gain or loss shall be recognized to a
corporation a party to a reorganization on the distribution to its shareholders
of any stock in another corporation which is a party to the reorganization if
such stock was received by the distributing corporation in the exchange.
Section 1032(a) states that no gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for such
corporation's stock, including treasury stock.
Code Section 362(b) states that the basis of property received by the acquiring
corporation in a reorganization is the same as it would be in the hands of the
transferor of the assets, increased by any gain recognized by the transferor.
The transferor for purposes of the preceding sentence in the instant case is
Home.
Section 1221 defines a capital asset as property held by the taxpayer which is
not inventory or other property held by the taxpayer primarily for sale to
customers in the ordinary course of a trade or business, property used in the
taxpayer's trade or business subject to the allowance for depreciation under
Section 167, a copyright, literary, musical or artistic composition, a letter
or memorandum, or similar property created by the personal efforts of the
taxpayer, accounts or notes receivable acquired in the ordinary course of a
trade or business for services rendered or from the sale of inventory or other
property held by the taxpayer primarily for sale to customers in the ordinary
course of business, or a publication of the United States Government which is
received from the United States Government or any agency thereof other than by
purchase at the price at which it is offered for sale to the public.
Section 1223(l) states that in determining the period for which a taxpayer has
held property received in an exchange, there shall be included the period for
which he or she held the property exchanged if the property has, for the
purpose of determining gain or loss from a sale
12
- -----------------
Page 12
April 23, 1996
or exchange, the same basis as the property exchanged and the property
exchanged was a capital asset as defined in Section 1221 as of the date of the
exchange.
Section 1223(2) states that for determining the period for which the taxpayer
has held property however acquired there shall be included the period for which
such property was held by another person if the property has the same basis in
whole or in part in his hands as it would have had in the hands of such other
person.
Subchapter P of Chapter 1 of the Code provides limitations on the recognition
of capital gains and losses including, but not limited to, the allowance of
capital losses to the extent of capital gains with respect to corporate
taxpayers and the allowance of up to $3,000 of net capital losses with respect
to taxpayers other than corporate taxpayers.
The Warrants issued under the Warrant Purchase Agreements in each instance can
only be exercised upon the occurrence of certain events that are beyond the
Warrant-holder's control. Moreover, they will expire on the Effective Date of
the transaction. Rev. Rul. 90-11 provides that the issuance of stock purchase
rights pursuant to a poison pill plan was not a taxable event. The rights gave
the shareholders the right to purchase stock upon the occurrence of certain
events that are similar to the exercise events specified in the Warrant
Purchase Agreements. Rev. Rul. 68-601 provides that a warrant to acquire stock
will be considered an option for section 318 purposes if the holder has the
right to obtain the stock "at his election." The Warrants issued under the
Warrant Purchase Agreements would therefore be disregarded for section 318
purposes because they do not provide the holder the right to acquire stock
unless certain contingencies occur that are beyond the holder's control; no
such right exists now or will exist until such an event happens. Due to the
transitory nature of the Warrants, and the inability of the holder to exercise
the Warrants unless certain contingencies occur, neither the issuance nor the
expiration of the Warrants on the Effective Date will produce gain or loss to
the issuers or holders of the Warrants.
Reg. Section 1.1502-75(d)(3) defines the term "reverse acquisition" for asset
acquisitions and stock acquisitions. Reg. Section 1.1502-75(d)(3) provides
that, in the case of an asset acquisition, a reverse acquisition occurs if the
stockholders of the acquired corporation immediately before the acquisition own
more than 50 percent of the fair market value of the stock of the acquiring
corporation immediately after the transaction by reason of owning stock in the
acquired corporation. As stated above, the Home stockholders immediately
before the transaction, as a result of owning Home stock, will own more than 50
percent of the fair market value of CU stock immediately after the transaction.
Accordingly, the transaction will constitute a reverse acquisition under Reg.
Section 1.1502-75(d)(3).
13
- -----------------
Page 13
April 23, 1996
Reg. Section 1.1502-75(d)(3)(v) provides that when a reverse acquisition
occurs, the taxable year of the acquiring group (the CU group) will close on
the date of the transaction, and the affiliated group of which CU and CU Bank
were members will terminate on that date. Unless certain exceptions for
acquisition of an entire consolidated group apply, any deferred intercompany
transactions (Reg. Section 1.1502-13) or excess loss accounts (Reg. Section
1.1502-19) would be triggered by the termination of the CU group. As
represented, the CU group has no deferred intercompany transactions or excess
loss accounts. Therefore, the application of those exceptions need not be
addressed. Based upon these representations, the transactions will not result
in any gain or loss to Home, Home Bank, CU, or CU Bank under the consolidated
return regulations.
OPINION
Based upon all of the foregoing, including representations of the management of
CU and the management and Board of Directors of Home, it is our opinion that:
a) The merger of Home with and into CU, as described above, will
constitute a reorganization under Section 368 of the Code
(Section 368(a)(1)(A)).
b) Home and CU will each be "a party to a reorganization"
(Section 368(b)).
c) With the exception for any gain or loss recognized as a result
of the receipt of cash in lieu of fractional shares, no gain
or loss will be recognized by the common stockholders of Home
on the receipt of CU common stock in exchange for surrendered
Home common stock pursuant to the plan of reorganization
(Section 354(a)(1)).
d) The tax basis of the CU common stock received by Home common
stockholders will be the same as the basis of the Home common
stock surrendered in exchange therefor, decreased by the
amount of basis allocated to the fractional shares that are
hypothetically received by the stockholder and redeemed for
cash, and increased by any gain recognized on the exchange
(not including any gain recognized for the receipt of cash in
lieu of fractional shares) (Section 358(a)(1)).
e) The holding period of the CU common stock received by the Home
common stockholders will include the period during which the
Home common stock surrendered in exchange therefor was held,
provided that the Home common stock is held as a capital asset
in the hands of the Home stockholders on the Effective Date
(Section 1223(l)).
14
- -----------------
Page 14
April 23, 1996
f) The payment of cash in lieu of fractional share interests of
CU common stock will be treated as if each fractional share
was distributed as part of the exchange and then redeemed by
CU. Pursuant to Section 302(a) of the Code, these cash
payments will be treated as having been received as
distributions in full payment in exchange for the CU common
stock. Any gain or loss recognized upon such exchange (as
determined under Section 1001 and subject to the limitations
of Section 267) will be capital gain or loss provided the
fractional share would constitute a capital asset in the hands
of the exchanging stockholder (Rev. Rul. 66-365 and Rev.
Proc. 77-41).
g) Each shareholder of Home who elects to dissent from the merger
transaction involving Home and CU under the provisions of
Chapter 13 of the California General Corporations Code, and
receives cash in exchange for their shares of Home common
stock, will be treated as receiving such payment in complete
redemption of their shares of Home, provided such shareholder
does not actually or constructively own any Home common stock
after the exchange under the provisions and limitations of
Section 302.
h) Each shareholder of CU who elects to dissent from the merger
transaction involving CU and Home and receives cash in
exchange for their shares of CU common stock will be treated
as receiving such payment in complete redemption of their
shares of CU, provided such shareholder does not actually or
constructively own any CU common stock after the exchange
under the provisions and limitations of Section 302.
i) No gain or loss will be recognized by Home on the transfer of
all of its assets to CU solely in exchange for CU common stock
and cash in lieu of fractional shares which is subsequently
distributed to Home common stockholders pursuant to the plan
of reorganization (Section 361).
j) No gain or loss will be recognized by CU on the receipt by CU
of substantially all of the assets of Home in exchange for CU
stock (Section 1032(a)).
k) The tax basis of Home's assets in the hands of CU will be the
same as the basis of those assets in the hands of Home
immediately prior to the merger (Section 362(b)). The tax
basis of Home's assets in the hands of CU will not be
increased by any cash paid to dissenters or cash paid in lieu
of fractional shares.
l) The holding period of the assets of Home in the hands of CU
will include the period during which such assets were held by
Home (Section 1223(2)).
15
- -----------------
Page 15
April 23, 1996
m) The merger of CU Bank with and into Home Bank, as described
above, will constitute a reorganization under Section 368 of
the Code (Section 368 (a)(1)(A)).
n) CU Bank and Home Bank will each be a "party to a
reorganization" (Section 368 (b)).
o) No gain or loss will be recognized by CU on the merger of Home
Bank into CU Bank (Section 354(a)(1)).
p) No gain or loss will be recognized by Home Bank on the
transfer of all of its assets to CU Bank pursuant to the plan
of reorganization (Section 361).
q) The tax basis of CU Bank's assets in the hands of Home Bank
will be the same as the basis of those assets in the hands of
CU Bank immediately prior to the transaction (Section 362(b)).
The tax basis of CU Bank's assets in the hands of Home Bank
will not be increased by any cash paid to dissenting
shareholders of CU or Home or cash paid in lieu of fractional
shares.
r) The holding period of the assets of CU Bank in the hands of
Home Bank will include the period during which such assets
were held by Home Bank (Section 1223(2)).
s) No gain or loss will be recognized by CU or Home upon the
issuance or the expiration of the Warrants on the Effective
Date of the transaction.
t) The merger of Home into CU will be a reverse acquisition (Reg.
Section 1.1502-75(d)(3). As a result, the taxable year of the
CU consolidated group will end on the Effective Date, and the
CU group will terminate on the Effective Date (Reg. Section
1.1502-75(3)(v). The transaction will not result in any gain
or loss to CU or CU Bank under the consolidated return
regulations.
We express no opinion on the impact, if any, on any other sections of the Code,
other than that as stated immediately above, and neither this opinion nor any
prior statements are intended to imply or to be an opinion on any other
matters.
The opinions expressed herein are based solely upon our interpretation of the
Code and income tax regulations as further interpreted by court decisions,
rulings, and procedures issued by the Internal Revenue Service, as of the
effective date of this letter. Our opinions may be subject to change in the
event of changes in any of the foregoing authorities, some of which could be
retroactive. The opinions expressed herein are not binding on the Internal
Revenue Service,
16
- -----------------
Page 16
April 23, 1996
and there can be no assurance that the Internal Revenue Service will not take a
position contrary to any of the opinions expressed herein, or if the Internal
Revenue Service took such a position, whether it would be sustained by the
courts.
The opinions expressed herein reflect our assessment of the probable outcome of
litigation and other adversarial proceedings based solely on an analysis of the
existing tax authorities relating to the issues. Further, Home Bank, CU Bank,
and Home common stockholders are urged to discuss the consequences of the
proposed transactions with their own tax advisors.
Very truly yours,
ARTHUR ANDERSEN LLP
By Arthur Andersen LLP