NO OWNERSHIP CHANGE IN PUBLIC OFFERING OF ESOP SHARES.

UIL Number(s) 0382.07-00, 0382.07-05

                                             Date: September 30, 1996

[1] This letter responds to your November 8, 1995, request for a ruling as to certain federal income tax consequences of a proposed transaction. Additional information was submitted in letters dated April 25, 1996, August 5, 1996, September 16, 1996, and September 26, 1996. The information submitted for consideration is summarized below.

[2] The rulings contained in this letter are predicated upon facts and representations submitted by the taxpayer and accompanied by a penalties of perjury statement executed by an appropriate party. This office has not verified any of the material submitted in support of this request for rulings. Verification of the factual information, representations, and other data may be required as part of the audit process.

[3] Company is a producer of product a and acquired its business operations in a fully taxable transaction from Corporation X in Year 1. Company has two wholly-owned subsidiaries, S1 (which is engaged in Business B) and S2 (which is engaged in Business C). Company, S1, and S2 comprise an affiliated group of corporations (the Group), all of which are included in a federal consolidated income tax return.

[4] The Group computes its income for federal income tax purposes on the accrual method of accounting on the basis of a taxable year ending June 30 of each year. As of Date 1, the Group had net operating loss carryforwards of $ f.

[5] The Company had issued and outstanding one class of common stock and one class of nonvoting, nonconvertible preferred stock prior to the Testing Date. The preferred stock had a stated value of $g per share. Dividends on the preferred stock are payable in arrears. If dividends are paid in preferred stock, they are paid at h percent of the stated value. If dividends are paid in cash, they are paid at i percent of the stated value. The preferred stock ranks senior to common stock, but junior to all other creditors in the event of liquidation.

[6] Prior to the Testing Date, e percent of the Company's outstanding shares of common stock (j shares) was owned by ESOP and its employees as distributees of Company stock from ESOP (k shares of common stock were owned directly by active employees over the age of 1). Approximately m percent of the Company's preferred stock (approximately n of o shares) was owned by the Preferred Plan. ESOP and the Preferred Plan are trusts qualified under section 401(a) of the Internal Revenue Code. ESOP and the Preferred Plan were formed at the same time.

[7] Initially, all shares of Company stock held by ESOP were held in a suspense account as required for leveraged ESOPs under the Internal Revenue Code. Subsequently, on an annual basis, shares were released for allocation to the accounts of participants in proportion to the amount of the acquisition loan that was repaid for the plan year. Allocations were made on the basis of the relative compensation of participants, in compliance with Code limitations. Company has projected that repayment of the acquisition loan and the resultant final allocation of the suspense account shares to participants' accounts will be made in the Plan Year 3.

[8] Pursuant to ESOP, the accounts of all participants employed by the Company are vested at all times. ESOP provides participants with voting power over the allocated shares. With respect to unallocated shares in the suspense account, ESOP provides that such shares are subject to a "mirror image" rule, such that unallocated shares are voted in the same proportion as the allocated shares. ESOP confers plan participants with voting rights relating to their interests in the plan apart from the employer securities held in it. As a result, the Company cannot amend the ESOP, except for changes required by law, without the approval of Z. Furthermore, the Company cannot terminate ESOP without consent of the participants and Z.

[9] ESOP is required to distribute dividends paid on Company common stock to its plan participants. In addition, under ESOP since Year 1, the participants have been entitled to obtain distributions of their allocated stock upon termination of service, at age l if still in active service, or, in the case of death, beneficiaries could obtain a distribution in the year following the ll anniversary of the participant's death. Further, during the mm plan year period beginning with the plan year in which a participant has attained age nn and has oo years of participation in the plan, participants shall be entitled to request a withdrawal of up to pp percent of the balance of their account. Beginning with the mm plan year in such period, the preceding sentence shall be applied by substituting qq percent for pp percent.

[10] On the Testing Date, Company issued p shares of common stock to raise capital (the Public Offering). As part of the Public Offering, ESOP sold to the public q of existing shares of Company common stock (the Secondary Offering). These shares were sold at the direction of the plan participants to fund cash distributions to those participants who are former employees.

[11] In Year 1, the Company adopted an Executive Plan. The Executive Plan gave participants an opportunity to share in the net equity appreciation of the Company from the date of grant of an award to the date of its exercise. The Executive Plan committee was authorized to distribute a total of bb units to participants under the Executive Plan and no more than cc plan units to any one participant. Each plan unit represented the right to receive either cash or a number of shares of common stock, in an amount or having an appraised value equal to dd. As of Date 4, bb plan units were awarded and outstanding. At no time could the bb plan units be exercised into more than ee percent of Company's outstanding common stock. No individual held more than ff plan units at any time. The plan units had no voting or other control rights in the Company and could not be assigned or transferred in any manner other than by will or the laws of descent and distribution. There were never any exercises of any Executive Plan units into stock. Participants in the Executive Plan have been offered the opportunity to surrender their plan units (Surrender Units) for stock options granted under the Year 2 Stock Option Plan (Replacement Options), described below.

[12] In connection with the Public Offering, the Board of Directors of the Company adopted the Year 2 Stock Option Plan (Year 2 Plan), primarily to provide substitute benefits for plan units previously granted under the Executive Plan. Pursuant to the Year 2 Plan, the Company may grant options with respect to an aggregate of up to gg shares of common stock with no individual optionee to receive an option for more than hh shares of common stock. No individual can convert either his or her plan units or Replacement Options to more than ii percent of the outstanding stock of Company. To date, there have been no exercises of any Replacement Options.

[13] In connection with Company's acquisition of its business operations from Corporation X in Year 1, Company issued a warrant (Warrant) to Corporation X. The Warrant could be exercised into r shares of Company common stock for $ s per share. At all times, the Warrant was only exercisable into less than t percent of the common stock of Company. At the time of the issuance of the Warrant, the value of the Company stock was approximately $ u per share. In addition, a portion of the value of the Warrant (i.e., the first $ v of value) was pledged to Y for certain Corporation X pension plans.

[14] On Date 2, Company entered into a warrant purchase agreement with Corporation X. The warrant purchase agreement provided for the purchase by Company of the Warrant. Company was contractually required to purchase the Warrant in installments over a specified time period, subject to extensions and limitations. Each installment operated as a purchase of the warrantholder's right to acquire a specific amount of Company shares (Warrant Share). The purchase price for any portion of the Warrant was $ w per Warrant Share. Several contingencies also existed which limited any purchases to be made by Company.

[15] On Date 3, the Company purchased the first installment of x Warrant Shares at $ w per share. In connection with the Public Offering, Corporation X sold the warrant to the underwriters for $ v per Warrant Share (i.e., $ z in total). At such time, the warrantholder was entitled to purchase the remaining aa shares of common stock for $ s per share. Y received $ v per share, and Corporation X received the remainder of the purchase price of the Warrant. The underwriters exercised the warrant and sold kk shares as part of the Public Offering. As part of this transaction, the warrant purchase agreement was terminated.

[16] The taxpayer has made the following representations:

     (a) Neither the Company nor its subsidiaries are under the

[19] This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.

[20] It is important that a copy of this letter be attached to the federal income tax returns of the taxpayers involved for the taxable year in which the transaction covered by this letter is consummated.

[21] Pursuant to the power of attorney on file in this office, a copy of this letter has been sent to your authorized representatives.

                                   Sincerely yours,