Exhibit (12)
Opinion and Consent of Ropes & Gray LLP Regarding Tax Matters
February 12, 2007
BB&T Large Cap Growth VIF
BB&T Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219
BB&T Large Cap VIF
BB&T Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219
Ladies and Gentlemen:
We have acted as counsel in connection with the Agreement and Plan of
Reorganization (the "Agreement") dated as of December 5, 2006 by BB&T Variable
Insurance Funds, a Massachusetts business trust (the "Trust"), on behalf of two
of its series, BB&T Large Cap Growth VIF ("Target Fund") and BB&T Large Cap VIF
("Acquiring Fund"). The Agreement describes a transaction (the "Transaction") to
occur as of the date of this letter (the "Exchange Date"), pursuant to which
Acquiring Fund will acquire substantially all of the assets of Target Fund in
exchange for shares of beneficial interest in Acquiring Fund (the "Acquiring
Fund Shares") and the assumption by Acquiring Fund of all of the liabilities of
Target Fund following which the Acquiring Fund Shares received by Target Fund
will be distributed by Target Fund to its shareholders in liquidation and
termination of Target Fund. This opinion as to certain U.S. federal income tax
consequences of the Transaction is furnished to you pursuant to Section 9(f) of
the Agreement. Capitalized terms not defined herein are used herein as defined
in the Agreement.
Target Fund is a series of the Trust, which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. Shares of Target Fund are available exclusively
as a funding vehicle for variable annuity contracts and variable life insurance
policies (each a "Variable Contract") offered by the separate accounts (or
subaccounts thereof) of certain life insurance companies. Life insurance
companies establish separate accounts that in turn own shares of Target Fund in
order to fund the respective insurance company's obligations under Variable
Contracts that the respective insurance company has written; those separate
accounts (not the owners of the Variable Contracts) are the shareholders of
Target Fund. Shares of Target Fund are redeemable at net asset value at each
shareholder's option. Target Fund has elected to be a regulated investment
company for federal income tax purposes under Section 851 of the Internal
Revenue Code of 1986, as amended (the "Code").
Acquiring Fund is also a series of the Trust, which is registered under the
1940 Act as an open-end management investment company. Shares of Acquiring Fund
are available exclusively as a funding
vehicle for Variable Contracts offered by the separate accounts (or subaccounts
thereof) of certain life insurance companies. Life insurance companies establish
separate accounts that in turn own shares of Acquiring Fund in order to fund the
respective insurance company's obligations under Variable Contracts that the
respective insurance company has written; those separate accounts (not the
owners of the Variable Contracts) are the shareholders of Acquiring Fund. Shares
of Acquiring Fund are redeemable at net asset value at each shareholder's
option. Acquiring Fund has elected to be a regulated investment company for
federal income tax purposes under Section 851 of the Code.
For purposes of this opinion, we have considered the Agreement, the
Combined Prospectus/Proxy Statement dated December 15, 2006 and such other items
as we have deemed necessary to render this opinion. In addition, you have
provided us with letters dated as of the date hereof, representing as to certain
facts, occurrences and information upon which you have indicated that we may
rely in rendering this opinion (whether or not contained or reflected in the
documents and items referred to above).
The facts you have represented as to in representation 5 of the letter from
Acquiring Fund and representation 6 of the letter from Target Fund, each dated
as of the date hereof (which facts are described in the subsequent paragraphs of
this opinion), support the conclusion that, following the Transaction, Acquiring
Fund will continue the historic business of Target Fund as an open-end
investment company that serves as a funding vehicle for Variable Contracts and
invests primarily in domestic equity and equity-related securities of large
companies.
Various factors demonstrate the similarity between Target Fund's and
Acquiring Fund's historic business activities. Target Fund's investment
objective (capital growth) is consistent with, and generally constitutes a
subset of, Acquiring Fund's investment objective (capital growth, current income
or both). Moreover, each fund seeks to achieve its investment objective by
investing primarily in domestic equity and equity-related securities of large
companies. Although Target Fund seeks to achieve its investment objective by
investing primarily in equity and equity-related securities of large
capitalization growth companies and Acquiring Fund has historically sought to
achieve its investment objective by investing primarily in equity and
equity-related securities of large capitalization value companies, Acquiring
Fund has recently broadened its investment strategy such that it invests in
equity and equity-related securities of large capitalization companies without
regard to whether they are "growth" or "value" companies, and will continue to
do so following the Transaction.
The similarity between Target Fund's and Acquiring Fund's historic business
activities is also demonstrated by a comparison of the funds' portfolios as of
June 30, 2006 (the "comparison date"), a randomly selected date that reflects
the composition of the funds' portfolios without reference to the Transaction.
As of the comparison date, the funds had nearly identical general asset
allocations, as 95% to 96% of each fund's assets consisted of stocks (as one
would expect from equity funds) and 4% to 5% of each fund's assets consisted of
cash and equivalents. In addition, the regional exposure of each fund's assets
was identical, as 100% of each fund's assets was attributable to North America
as of the comparison date. Although the funds' dividend yields (0.90% for Target
Fund and 2.40% for Acquiring Fund) and overall yields (0.53% for Target Fund and
2.34% for Acquiring Fund) differed, the funds had comparable weighted average
P/E ratios (19.30 for Target Fund and 13.50 for Acquiring Fund).
In addition, consistent with the funds' shared goals and strategies, the
funds hold stocks with similar characteristics. First, the funds' portfolios are
similar in terms of market capitalization. As of the comparison date, the
average market capitalization figures were $51.6 billion and $82.1 billion for
Target
Fund and Acquiring Fund, respectively, which reflects the funds' comparable
focus on investments in equity and equity-related securities of large companies.
When compared in terms of the percentage of net assets that each fund invested
in stocks of varying market capitalizations, their holdings showed considerable
similarity. Each fund invested greater than 74% of its portfolio in a
combination of large and giant cap stocks (as one would expect from funds with a
comparable focus on investments in equity and equity-related securities of large
companies), invested 17-22% of its portfolio in mid-cap stocks, invested
approximately 3% of its portfolio in small stocks and invested 0% of its
portfolio in micro-cap stocks.(1)
The funds' portfolios also reflect comparable industry diversification. As
of the comparison date, the funds' equity investments were compared using three
broad industry sectors, which were also subdivided into narrower sub-categories.
Looking solely at the three broad sectors, the funds' equity investments in such
sectors shared a total overlap of 82.5%, constituted by 35.70% in the service
economy sector, 29.20% in the manufacturing economy sector and 17.60% in the
information economy sector. Each fund invested the smallest percentage (in each
case, approximately 20%) of its equity in the information economy sector. Upon
further dividing these three large industry sectors into sub-categories (service
economy: healthcare services, consumer discretionary, business services,
financial services; manufacturing economy: consumer staples, industrial
materials, energy, utilities; and information economy: telecommunications and
other), the funds shared a total overlap of 74%.
Consistent with the similarity of investment strategies, the two funds bear
comparable risk profiles. As of the comparison date, Target Fund and Acquiring
Fund correlated with their standard benchmarks (Russell 1000 Growth and S&P 500,
respectively) to a similar degree, with betas of 1.02 and 1.07, respectively.(2)
The specific characteristics described above (the relative figures and
percentages in terms of performance, asset allocation, market capitalization,
industry diversification and risk profile) do not constitute fixed aspects of
Target Fund's and Acquiring Fund's investment strategies. Rather, they reflect
the fact that the funds' similar investment strategies have led them to react
similarly to the market conditions in place as of the comparison date (by
choosing similar portfolios).
Although prior to, and in connection with, the Transaction Target Fund
disposed of securities, the proceeds generated by these dispositions were
reinvested by Target Fund in a manner fully consistent with the funds shared
line of business and, consistent with that shared line of business, at least 33
1/3% of Target Fund's historic assets were not required to be sold by virtue of
the investment objectives, strategies, policies, risks or restrictions of
Acquiring Fund. Acquiring Fund has no plan or intention to change any of its
investment objectives, strategies, policies, risks or restrictions after the
Transaction. After the Transaction, Acquiring Fund will invest all assets
acquired from Target Fund in a manner consistent with the funds' shared
investment strategies, as described above and reflected by the aforementioned
portfolio data.
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(1) We consider "micro-cap" stocks to be those with market capitalizations
under $1 billion. "Small-cap" stocks are those with market capitalizations
between $1-5 billion; "mid-cap" stocks are those with market
capitalizations between $5-15 billion; "large-cap" stocks are those with
market capitalizations between $15-50 billion; and "giant-cap" stocks are
those with market capitalizations over $50 billion.
(2) Beta is the statistical measure of the degree of variance between a
security or fund and a specifically defined market, such as Russell 1000
Growth or the S&P 500.
Based on the foregoing representations and assumptions and our review of
the documents and items referred to above, we are of the opinion that generally,
subject to the final paragraphs hereof, for U.S. federal income tax purposes:
(i) The Transaction will constitute a reorganization within the meaning of
Section 368(a) of the Code, and Acquiring Fund and Target Fund each
will be a "party to a reorganization" within the meaning of Section
368(b) of the Code;
(ii) Under Section 1032 of the Code, no gain or loss will be recognized by
Acquiring Fund upon the receipt of the assets of Target Fund in
exchange for Acquiring Fund Shares and the assumption by Acquiring
Fund of the liabilities of Target Fund;
(iii) Under Section 362(b) of the Code, the basis in the hands of Acquiring
Fund of the assets of Target Fund transferred to Acquiring Fund in the
Transaction will be the same as the basis of such assets in the hands
of Target Fund immediately prior to the transfer;
(iv) Under Section 1223(2) of the Code, the holding periods of the assets
of Target Fund in the hands of Acquiring Fund will include the periods
during which such assets were held by Target Fund;
(v) Under Section 361 of the Code, no gain or loss will be recognized by
Target Fund upon the transfer of Target Fund's assets to Acquiring
Fund in exchange for Acquiring Fund Shares and the assumption by
Acquiring Fund of the liabilities of Target Fund, or upon the
distribution of Acquiring Fund Shares by Target Fund in liquidation to
the separate accounts, as Target Fund shareholders;
(vi) Under Section 354 of the Code, no gain or loss will be recognized by
the separate accounts, as Target Fund shareholders, upon the exchange
of their Target Fund shares for Acquiring Fund Shares;
(vii) Under Section 358 of the Code, the aggregate basis of Acquiring Fund
Shares a separate account, as a Target Fund shareholder, receives in
connection with the Transaction will be the same as the aggregate
basis of its Target Fund shares exchanged therefor;
(viii) Under Section 1223(1) of the Code, the holding period of a separate
account, as a Target Fund shareholder, for its Acquiring Fund Shares
will be determined by including the period for which it held the
Target Fund shares exchanged therefor, provided that it held such
Target Fund shares as capital assets; and
(ix) Acquiring Fund will succeed to and take into account the items of
Target Fund described in Section 381(c) of the Code, subject to the
conditions and limitations specified in Sections 381, 382, 383 and 384
of the Code and the Regulations thereunder.
We express no view with respect to the effect of the reorganization on any
transferred asset as to which any unrealized gain or loss is required to be
recognized at the end of a taxable year (or on the termination or transfer
thereof) under federal income tax principles.
In connection with this opinion, we call your attention to Revenue Ruling
87-76, 1987-2 C.B. 84, published by the Internal Revenue Service (the "IRS"). In
that ruling, the IRS held that the so-called "continuity of business enterprise"
requirement necessary for tax-free reorganization treatment was not met in the
case of an acquisition of an investment company which invested in corporate
stocks and bonds by an investment company which invested in municipal bonds.
Specifically, the IRS based its ruling on its conclusion that the business of
investing in corporate stocks and bonds is not the same line of business as
investing in municipal bonds. We believe that the IRS's conclusion in this
ruling has always been questionable. In addition, a series of private letter
rulings issued in July of 2005 suggest that the IRS's position on this issue is
evolving: the IRS relied upon historic business representations to conclude that
the reorganization satisfied the continuity of business enterprise requirement.
However, even if the IRS's 1987 revenue ruling were a correct statement of law,
the facts of the Transaction are distinguishable from those in the ruling.
We believe that Acquiring Fund and Target Fund are both engaged in the same
line of business: each is an open-end management investment company that serves
as a funding vehicle for Variable Contracts and invests primarily in domestic
equity and equity-related securities of large companies. The funds' portfolios
are substantially similar in terms of asset allocation, market capitalization,
sector diversification, regional exposure and risk profile. Although prior to,
and in connection with, the Transaction Target Fund disposed of securities, we
understand that the proceeds generated by these dispositions were reinvested by
Target Fund in a manner fully consistent with the funds' shared line of business
and that, consistent with that shared line of business, at least 33 1/3% of
Target Fund's historic assets were not required to be sold by virtue of the
investment objectives, strategies, policies, risks or restrictions of Acquiring
Fund. After the Transaction, Acquiring Fund will continue the funds' shared line
of business for the benefit of the stockholders of both Target and Acquiring
Funds. Although Acquiring Fund will dispose of securities formerly held by
Target Fund, these dispositions will be fully consistent with the historic
investment policies of Target Fund and there is no reason why all proceeds
generated by such dispositions cannot be reinvested in a manner fully consistent
with such policies. In these circumstances, we are of the opinion that Acquiring
Fund will have continued the historic business of Target Fund for the benefit
of, among others, the historic stockholders of Target Fund, and that the
continuity of business enterprise doctrine should, as a result, be fulfilled.
Because Revenue Ruling 87-76 is the only ruling on which taxpayers can rely
(i.e., the only ruling that is not a private letter ruling) dealing specifically
with the application of the "continuity of business enterprise" requirement to a
reorganization involving investment companies, however, our opinion cannot be
free from doubt. No ruling has been or will be obtained from the IRS as to the
subject matter of this opinion and there can be no assurance that the IRS or a
court of law will concur with the opinion set forth above.
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Our opinion is based on the Internal Revenue Code of 1986, as amended,
Treasury Regulations, Internal Revenue Service rulings, judicial decisions, and
other applicable authority, all as in effect on the date of this opinion. The
legal authorities on which this opinion is based may be changed at any time. Any
such changes may be retroactively applied and could modify the opinions
expressed above.
Very truly yours,
/s/ Ropes & Gray LLP
Ropes & Gray LLP