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DIRECT
DIAL
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212.735.3742
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DIRECT
FAX
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917.777.3742
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EMAIL
ADDRESS
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ERIC.REQUENEZ@SKADDEN.COM
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May
15, 2009
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RE:
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ING
Clarion Real Estate Income Fund ("IIA")
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ING Clarion Global
Real Estate Income Fund
("IGR")
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Response: The
Reorganization is structured as a state-law merger of IIA with and into
IGR Merger Subsidiary ("Merger
Subsidiary") – a so-called "A" reorganization for federal income
tax purposes – in order to eliminate uncertainty about whether a direct
asset transfer would satisfy one of the requirements for a tax-free asset
transfer – a so-called "C" reorganization for federal income tax
purposes. In order to qualify as a "C" reorganization, among
other things, the acquiring entity (IGR) must acquire "substantially all
of the properties of another corporation [i.e., the target entity
(IIA)]". I.R.C. Section 368(a)(1)(C). IIA has
recently redeemed auction-rate preferred stock in order to comply with the
asset coverage tests of Section 18 of the 1940 Act. It is
uncertain whether the assets (i.e., cash) that IIA used in this recent
redemption of its preferred stock will count as IIA's assets when
evaluating whether IGR has acquired "substantially all of the properties"
of IIA. For federal income tax purposes, in general, assets
used by a target entity to redeem its stock prior to a purported "C"
reorganization may count as target entity assets for purposes of
determining whether the acquiring entity has acquired "substantially all
of the properties" of the target entity. Because there is no
"substantially all of the properties" requirement for a tax-free merger
structured as an "A" reorganization for federal income tax purposes, IIA's
prior redemptions of its preferred stock are not relevant to qualification
of the Reorganization as an "A" reorganization. Accordingly,
IGR and IIA structured the Reorganization as a state-law merger in order
to eliminate what would have been a tax issue if the Reorganization were
structured as a "C"
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reorganization. Under
the state-law merger structure, IGR will still acquire all of the assets
held by IIA at the time of the Reorganization.
The
tax opinion typically required in connection with transactions, such as
the Reorganization, is that the transaction "will" be treated as a
reorganization under Section 368(a) of the Internal Revenue
Code. For the reasons discussed above, it would be more
difficult, and more expensive, for Skadden, Arps to render such a "will"
tax opinion if the Reorganization is structured as a "C" reorganization
for federal income tax purposes than if the Reorganization is structured
as an "A" reorganization for federal income tax
purposes. Moreover, Skadden, Arps' tax opinion might not be
completely free from doubt if the Reorganization is structured as a "C"
reorganization, which would be contrary to the typical standard of tax
opinion expected for these types of
transactions.
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Response: Merger
Subsidiary is not and will not be required to be registered as an
investment company under the 1940 Act as it has been organized solely to
facilitate the merger and will be dissolved as soon as practicable after
the merger. Pursuant to Section 7(a) of the 1940 Act and Rule
3a-2 under the 1940 Act, a company of this nature is not required to
register as an investment company.
Section
7(a) of the 1940 Act prohibits an investment company that has a board of
directors and that has not registered under Section 8 of the 1940 Act from
engaging in any business in interstate commerce or controlling any company
that is engaged in any business in interstate commerce, among other
things. However, the last sentence of Section 7(a) provides
that "the provisions of this subsection (a) shall not apply to
transactions of an investment company which are merely incidental to its
dissolution." Because the principal purpose of Merger
Subsidiary is to facilitate the merger and it will be dissolved as soon as
practicable after the merger, Merger Subsidiary should be exempt from
registration as an investment company under Section 7(a) and Rule 3a-2
under the 1940 Act. The staff has issued a number of no-action
letters supporting this position. See, e.g., The Fund American
Co. Inc. (pub. avail. November 16, 1990); LDX Group,
Incorporated
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(pub.
avail. May 4, 1990); and Keyes Offshore Limited (pub. avail. October 20,
1986).
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Furthermore,
Rule 3a-2 under the 1940 Act provides that "an issuer is deemed not to be
engaged in the business of investing, reinvesting, owning, holding or
trading in securities during a period of time not to exceed one year;
provided that the issuer has a bona fide intent to be engaged primarily,
as soon as is reasonably possible… in a business other than that of
investing, reinvesting, owning, holding or trading in securities, such
intent to be evidenced by: (1) the issuer's business activities; and (2)
an appropriate resolution of the issuer's board of
directors..." Rule 3a-2 has long been interpreted to permit
companies that are commencing a public offering and thus losing the
ability to rely on Section 3(c)(7) or 3(c)(1) for exclusion from
investment company status to have six months to one year from the
completion of the offering to confirm their asset composition so as to
have another exception such as Section 3(c)(5) for mortgage
REITs.
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The
staff has also issued no-action letters to permit registered funds to
operate long-term through unregistered investment subsidiaries where that
was necessary to obtain tax treaty benefits or satisfy regulatory
requirements of other jurisdictions. See, e.g., France Growth
Fund, Inc. (pub. avail. July 15, 2003); Alternative Investment Partners
Absolute Return (pub. avail. July 10, 2006); and Man-Glenwood Lexington
TEI, LLC (pub. avail. April 30, 2004). The use of Merger
Subsidiary for the transitory purpose of facilitating the merger raises
far fewer issues under the 1940 Act than the use of such investment
vehicles.
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Finally,
there is precedent for the use of subsidiaries for this purpose without
registering the subsidiary as an investment company. See, e.g.,
Highland Credit Strategies Fund, Registration Statement (Form N-14) (Dec.
24, 2008).
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Sincerely,
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| /s/ Eric Requenez | ||
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Eric
Requenez, Esq.
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Enclosure
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