APPENDIX G

In re Fremont General Corporation: Tax Consequences of Plan

Christopher E. Prince (State Bar No 183553)
[email protected]
LESNICK PRINCE LLP
185 Pier Avenue, Suite 103
Santa Monica, CA 90405
Telephone: (213) 291-8984
Facsimile: (310)396-0963

Carole Neville (Pro Hac Vice Pending)
[email protected]
SONNENSCHEIN NATH & ROSENTHAL LLP
1221 Avenue of the Americas
New York, New York 10020
Telephone: (212) 768-6700
Facsimile: (212) 768-6800
Attorneys for New World Acquisition, LLC

UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
SANTA ANA DIVISION

F. TAX CONSEQUENCES OF PLAN

1. Certain Federal Income Tax

Consequences of the Plan

TO ENSURE COMPLIANCE WITH U.S. TREASURY DEPARTMENT CIRCULAR 230, HOLDERS OF CLAIMS AND EQUITY INTERESTS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES CONTAINED OR REFERRED TO IN THIS DISCLOSURE STATEMENT IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY SUCH HOLDERS FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THEM UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (“TAX CODE”); (B) SUCH DISCUSSION IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE TRANSACTION OR MATTERS ADDRESSED HEREIN; AND (C) SUCH HOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM THEIR OWN INDEPENDENT TAX ADVISOR.

a) General

The following discussion is a summary of certain U.S. federal income tax consequences of the Plan to the Debtor and to holders of Claims and Equity Interests. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated and proposed thereunder (the “Treasury regulations”), judicial decisions and published administrative rules and pronouncements of the IRS as in effect on the date hereof. Due to the complexity of certain aspects of the Plan, the lack of applicable legal precedent for many of the federal tax consequences of the Plan, the possibility of changes in the law, the potential for disputes as to legal and factual matters with the IRS, the federal tax consequences described in the Plan are subject to significant uncertainties and may or may not reflect the position taken by the Debtor on any tax return. No legal opinions have been requested from counsel with respect to any of the tax aspects of the Plan and no rulings have been or will be requested from the IRS with respect to the any of the issues discussed below. Furthermore, legislative, judicial or administrative changes may occur, perhaps with retroactive effect, that could affect the accuracy of the statements and conclusions set forth below as well as the tax consequences to the Debtor and the Holders of Claims and Equity Interests.

This discussion does not purport to address all aspects of U.S. federal income taxation that may be relevant to the Debtor or the Holders of Claims or Equity Interests in light of their personal circumstances, nor does the discussion deal with tax issues with respect to taxpayers subject to special treatment under the U.S. federal income tax laws (including, for example, banks, governmental authorities or agencies, pass-through entities, brokers and dealers in securities who elect to apply a mark-to-market method of accounting, insurance companies, financial institutions, tax-exempt organizations, small business investment companies, regulated investment companies, foreign taxpayers, and persons who hold Claims as part of a “straddle,” a “hedge against currency risk or a “conversion transaction”). Except as expressly set forth below, no aspect of foreign, state, local or estate and gift taxation is addressed.

By its acceptance of a TOPrS security, each Holder agreed to treat the Junior Notes as indebtedness and the TOPrS as evidence of indirect beneficial ownership in the Junior Notes, in each case for United States federal income tax purposes. The balance of this discussion assumes that such treatment is correct.

No assurance can be given as to the positions that the Debtor and its subsidiaries may take in any tax returns, or as to the amount of the Debtor’s NOLs or other tax attributes. This discussion includes certain financial projections and estimates based on preliminary information that is subject to further review. No assurance can be given that actual results will not differ materially.

THE FOLLOWING SUMMARY IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED UPON THE PERSONAL CIRCUMSTANCES OF EACH HOLDER OF A CLAIM OR EQUITY INTEREST. THERE CAN BE NO ASSURANCE THAT THE IRS WILL NOT CHALLENGE ANY OF THE TAX CONSEQUENCES DESCRIBED HEREIN, OR THAT SUCH A CHALLENGE, IF ASSERTED, WOULD NOT BE SUSTAINED. ACCORDINGLY, EACH HOLDER OF A CLAIM OR EQUITY INTEREST IS URGED TO CONSULT WITH SUCH HOLDER’S TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF THE PLAN.

b) Consequences to Debtor Group

(i) Mergers of FGCC and FRC into the Debtor

Pursuant to the Plan, each of FGCC and FRC would be merged into the Debtor in connection with effectiveness of the Plan, but prior to, and as a condition to, the infusion of equity capital by New World and the issuance of the Warrants. Each merger should be treated for U.S. federal income tax purposes as a liquidation of FGCC or FRC, as the case may be, into the Debtor. It is expected that each of FGCC and FRC will be solvent at the time of the merger and that each merger should be treated as a liquidation pursuant to Section 332.

(ii) Cancellation of Indebtedness

A taxpayer generally must include in gross income the amount by which indebtedness discharged exceeds any consideration (i.e., the issue price of debt instruments or the fair market value of property, including stock of the taxpayer) given in exchange for such discharge (such excess, “COD income”). Section 108 of the Code provides two relevant exceptions to this general rule: first, COD income is not included in gross income to the extent the payment of such indebtedness would have given rise to a deduction (the “Deductible Payment Exception”) and second, any COD income realized may be excluded from gross income if the cancellation occurs in a case under the Bankruptcy Code, but only if the taxpayer is under the jurisdiction of a bankruptcy court and the cancellation is granted by the court or is pursuant to a plan approved by the court (the “Bankruptcy Exception”). Any COD income excluded from gross income under the Bankruptcy Exception generally must be applied to reduce certain tax attributes of the taxpayer, including NOLs, by the amount of COD income that is excluded.

Under the Plan, Holders of Claims in the following classes will be paid the full amount of their Allowed Claims: Administrative Claims, Priority Taxes, Secured Claims, Priority Non-Tax Claims, General Unsecured Claims of the Holders of the 7.875% Senior Notes. Since those Claims will be paid in full, satisfaction of such Claims should not give rise to COD Income to the Debtor (except to the extent that interest previously accrued and deducted by the Debtor is not required to be paid). Similarly, the Holders of General Unsecured Claims in Class 3A, Senior Notes in Class 3B, the TOPrS Claims and the Junior Notes (if Holders of the TOPrS Claims elect to have such Claims and Notes reinstated, as described above), the Equity Interests and the Section 510(b) Claims will not be impaired and, in certain cases, such Claims do not relate to debt instruments, and therefore no COD Income should result from these Claims.

If the Holders of the TOPrS Claims so elect, such Claims will not be reinstated; rather, Holders will receive New Notes and Common Stock in the Debtor in exchange for their TOPrS Claims, and the TOPrS and the Junior Notes will be extinguished. In such event, the Debtor would realize COD income to the extent the sum of the issue price of the New Notes and the fair market value of the common shares issued to Holders of TOPrS Claims is less than the adjusted issue price of the TOPrS exchanged therefor.

The adjusted issue price of the TOPrS would be equal to the original issue price of the TOPrS, increased by the amount of any accrued but unpaid interest and original issue discount. The issue price of the New Notes generally would be equal to their fair market value if the New Notes are considered to be publicly traded for U.S. federal income tax purposes. If the TOPrS are considered to be publicly traded but the New Notes are not, the New Notes will be considered to have been issued as part of an investment unit, the issue price of which is equal to the fair market value of the TOPrS. The issue price of the New Notes would be determined by allocating the issue price of the investment unit between the New Notes and the common shares in accordance with their relative fair market values. If neither the TOPrS nor the New Notes are considered to be publicly traded, the issue price of the New Notes will be their principal amount. In general, a debt instrument will be treated as publicly traded if (i) it is listed on a national securities exchange or certain interdealer quotation systems; (ii) it appears on a system of general circulation that provides a reasonable basis to determine its fair market value by disseminating either recent price quotations of one or more identified brokers, dealers or traders or actual prices of recent sales transactions; or (iii) under certain circumstances, price quotations for the debt instrument are readily available from dealers, brokers or traders. It is likely that the TOPrS and/or the New Notes will be considered publicly traded for U.S. federal income tax purposes.

As noted above, the Debtor is the common parent of an affiliated group of corporations that join in the filing of a consolidated U.S. federal income tax return (the “Debtor Group”). The principal intercompany claim between the Debtor and its affiliates is an intercompany payable owed by the Debtor to FRC, the bulk of which is owed in connection with the Tax Allocation Agreement. The merger of FRC into the Debtor that will be consummated pursuant to the Plan will result in the elimination of this intercompany claim. If, as expected, the liquidation of FRC into the Debtor is tax-free pursuant to Section 332, no discharge of indebtedness income should be recognized upon elimination of the intercompany claim.

As a result of the foregoing, the Debtor believes that it may realize a material amount of COD income for U.S. federal income tax purposes if Holders of TOPrS Claims elect to receive New Notes and common shares in exchange for their TOPrS Claims. The amount of any COD Income will depend upon the fair market value of New Notes and common shares transferred in exchange for the TOPrS Claims. Pursuant to the Bankruptcy Exception, the Debtor would not recognize this COD Income as taxable income; rather, the Debtor would be required to reduce its tax attributes, beginning with its NOLs.

The Holders of Claims and Equity Interests should be advised that no ruling has been requested from the IRS regarding this issue and no assurances can be given that the positions intended to be taken by the Debtor will be accepted by the IRS.

(iii) Net Operating Losses

Based on information made available by the Debtor, as of December 31, 2008, the Debtor Group estimates that it had U.S. consolidated net operating losses of approximately $819 million. The Debtor has indicated that the amount of such NOLs remains subject to adjustment by the IRS, and that the Debtor expects to carryback a substantial amount of such NOLs to prior years. The effect of such carrybacks would be to cover additional tax assessments, and/or to generate tax refunds, in prior years, depending upon the outcome of ongoing IRS examinations. In general, NOLs may be carried back two years and forward twenty years. Federal legislation recently was enacted that would permit certain eligible businesses to elect to carryback certain NOLs for a period of 3, 4, or 5 years to offset taxable income in those preceding taxable years. The Reorganized Debtor’s ability to carry forward NOLs remaining after any permitted carrybacks may be limited by Section 382 of the Code, as described below.

(iv) Possible Limitations on Net Operating Losses, “Built-in” Losses and Deductions

c) Overview of Section 382

(1) Net Operating Losses.

Under Section 382 of the Code, if a corporation with NOLs (a “loss corporation”) undergoes an “ownership change,” the amount of its pre-change NOLs that may be utilized to offset post-change taxable income is subject to an annual limitation (the “Section 382 Limitation”). In general terms, an “ownership change” will occur if one or more of the corporation’s 5% shareholders increase their ownership, in the aggregate, by more than 50 percentage points over a three-year period. The Section 382 Limitation is an amount equal to the product of the applicable long-term tax-exempt rate in effect on the date of the ownership change (for example, 4.16% for ownership changes occurring in December 2009) and the value of the loss corporation immediately prior to the ownership change. The value of the loss corporation generally is equal to the value of the stock of the loss corporation immediately before the ownership change, provided that such value is subject to (i) reduction if the corporation will hold substantial nonbusiness assets after the ownership change and (ii) certain other adjustments specified in Section 382 and applicable Treasury regulations. If a loss corporation does not continue its historic business or use a significant portion of its business assets in a new business for two years after the ownership change, the Section 382 Limitation would be zero. Generally, Section 382 and the Section 382 Limitation are applied to a consolidated group as though the group were a single corporation, subject to certain exceptions noted below.

(2) Built-in Losses.

In addition to limiting a corporation’s ability to utilize NOLs, the Section 382 Limitation may limit the use of certain losses or deductions which are “built-in” as of the date of an ownership change and which are subsequently recognized. If a loss corporation has a net unrealized built-in loss at the time of an ownership change in excess of a specified threshold (taking into account most assets and all items of “built-in” income and deduction), then any built-in loss or deduction recognized during the following five years (up to the amount of the original net built-in loss) generally will be treated as a pre-change loss and will be subject to the Section 382 Limitation. Conversely, if the loss corporation has a net unrealized built-in gain at the time of an ownership change, in excess of a specified threshold, then any built-in gain recognized during the following five years (up to the amount of the original net built-in gain) generally will increase the Section 382 Limitation in the year recognized, such that the loss corporation would be permitted to use pre-change losses against such built-in gain income in addition to its regular annual allowance.

(3) Section 382(1)(5)Bankruptcy Exception.

Section 382(1)(5) provides an exception to the application of the Section 382 Limitation for certain loss corporations under the jurisdiction of a court in a bankruptcy case (the “Section 382(1)(5) Bankruptcy Exception”). The Section 382(1)(5) Bankruptcy Exception applies if historic shareholders and certain creditors prior to an ownership change own at least 50 percent of the total voting power and total value of the loss corporation’s stock after the ownership change (the “50 percent historic shareholder test”). The historic shareholders and creditors must own at least 50 percent of the corporation’s stock as a result of being shareholders and creditors immediately before the ownership change. Thus, for example, if a party that is an historic shareholder acquires additional shares for new consideration pursuant to the Plan, those additional shares would be considered ‘new’ shares and would not be considered historic for purposes of the 50 percent historic shareholder test. Solely for purposes of the 50 percent historic shareholder and creditor test, options or warrants of the loss corporation generally are deemed exercised if such treatment would result in the 50 percent historic shareholder and creditor test being failed. The continuity of business enterprise requirement does not apply to an ownership change that qualifies for the Section 382(1)(5) Bankruptcy Exception. The loss corporation must, however, carry on more than an insignificant amount of an active trade or business, or an acquisition of control as defined in Section 269 of the Code may be considered to have been made for a prohibited purpose under Section 269.

If the Section 382(1)(5) Bankruptcy Exception applies to a loss corporation, the loss corporation’s pre-change NOLs and built-in losses would not be subject to a Section 382 Limitation. Instead, the amount of the loss corporation’s pre-change NOLs that may be carried over to post-change years would be reduced by the amount of interest deductions claimed during the three taxable years preceding the Effective Date, and during the part of the taxable year prior to and including the Effective Date, in respect of indebtedness exchanged for the Debtor’s stock pursuant to the Plan. Such indebtedness would include the indebtedness represented by the TOPrS Claims, if the Holders of the TOPrS Claims elect to receive New Notes and Common Stock in exchange therefor. The Section 382(1)(5) Bankruptcy Exception provides that a second ownership change occurring during the two-year period immediately following the first ownership change would reduce the Section 382 Limitation to zero. There is no clear interpretation as to whether and how the Section 382(1)(5) Bankruptcy Exception applies to a consolidated group; e.g., whether historic shareholders of a parent corporation who satisfy the 50 percent historic shareholder test prevent the other members of the consolidated group from experiencing an ownership change.

(4) Alternative: Section 382(1)(6).

If a loss corporation does not qualify for the Section 382(1)(5) Bankruptcy Exception or elects not to apply the Section 382(1)(5) Bankruptcy Exception, a special rule under Code Section 382(1)(6) applicable to corporations under the jurisdiction of a bankruptcy court will apply in calculating the loss corporation’s value for purposes of determining the Section 382 Limitation. Under this special rule, the loss corporation’s value would be the lesser of (a) the value of the loss corporation’s stock immediately after the ownership change (as opposed to immediately before the ownership change, as discussed above) and (b) the value of the loss corporation’s assets determined without regard to liabilities immediately before the ownership change, subject to certain adjustments specified in Section 382 and the applicable Treasury regulations. One such adjustment is a reduction in the value of a loss corporation that holds substantial nonbusiness assets immediately after an ownership change.

(d) Application of Section 382 to the Debtor Group

(1) Ownership change.

To facilitate the Section 382 analysis, the Debtor has made available certain information regarding owner shifts in Debtor stock over the past three years. This information indicates that an approximately 34.7% owner shift has occurred over the three-year period ending January 31, 2010 (an assumed Plan effective date used solely for purposes of this analysis). No assurance can be given that the information furnished by the Debtor would be accepted by the IRS. Shares to be issued pursuant to the Plan would add to this owner shift, as would some or all shares acquired by New World and certain of its investors, and possibly certain Holders of TOPrS, prior to the Petition Date. Any shares issued in respect of Section 510(b) Claims would not add to this owner shift if, as expected, such shares in the aggregate represent less than ten percent of the then outstanding shares. Based on the foregoing, New World expects that the owner shifts over the three years preceding the expected Effective Date, together with the issuance of shares pursuant to the Plan, would trigger an “ownership change” of the Debtor Group. If an “ownership change” occurs, the Debtor Group’s NOLs would become subject to a Section 382 Limitation unless the Section 382(1)(5) Bankruptcy Exception applies.

(2) Section 382(1)(5) Bankruptcy Exception.

In order for the Section 382(1)(5) Bankruptcy Exception to apply, historic shareholders and certain creditors of the Debtor must own at least 50 percent of the Debtor’s stock after the ownership change, as a result of their historic ownership. This 50 percent historic shareholder and creditor test compares stock ownership immediately before and immediately after an ownership change, and is distinct from the rolling three-year test used to determine if an ownership change has occurred. Solely for purposes of the 50 percent historic shareholder and creditor test, shares issued pursuant to the Plan would be considered new shares and would not be counted as historic share ownership. Similarly, solely for purposes of the 50 percent historic shareholder test, Warrants issued pursuant to the Plan would be deemed exercised, and the shares deemed issued upon exercise would be considered new shares and not historic shares. Shares issued to a Holder of a TOPrS Claim generally would be treated as issued to a historic creditor as a result of such creditor’s historic ownership if such creditor held, or is deemed to have held, its TOPrS since the date that is 18 months before the date of the filing of the title 11 case. Shares issued in respect of Section 510(b) Claims likely would be considered historic shares, because these shares would be issued in respect of ordinary course claims which arose prior to the ownership change. New World estimates that the shares to be issued to New World and to Holders of TOPrS claims that are not historic creditors, together with the shares that would be deemed issued upon deemed exercise of the Warrants, would be less than 50 percent of the shares outstanding after the ownership change. The remaining shares of Debtor stock, which would represent more than 50 percent of the shares outstanding after the ownership change, would be owned by historic shareholders and creditors of the Debtor as a result of such historic ownership. Accordingly, New World anticipates that the 50 percent historic shareholder and creditor ownership test will be satisfied and that the Section 382(1)(5) Bankruptcy Exception will apply to the Debtor. If the Section 382(1)(5) Bankruptcy Exception applies to the Debtor, the Debtor’s NOLs and built-in losses arising prior to the ownership change will not be subject to a Section 382 Limitation.

(3) Debtor’s Subsidiaries.

A portion of the Debtor Group’s NOLs is attributable to subsidiaries of the Debtor, including FRC and FGCC. FRC and FGCC are loss corporations that are not under the jurisdiction of a court in a bankruptcy case. As noted above, the Section 382(1)(5) Bankruptcy Exception is applicable only to loss corporations that are under the jurisdiction of a court in a bankruptcy case. Pursuant to the Plan, however, FRC and FGCC will be merged into the Debtor on the Effective Date. If, as expected, these mergers are treated for Federal income tax purposes as tax-free liquidations pursuant to Section 332, then the Debtor, which is under the jurisdiction of a court in a bankruptcy case, would succeed to the NOLs and certain other tax attributes of FGCC and FRC on the Effective Date. New World intends to request the Debtor to file its tax returns for the period which includes the Effective Date in a manner which applies the Section 382(1)(5) Bankruptcy Exception not only to NOLs which were originally attributable to the Debtor, but also to NOLs to which the Debtor succeeds as a result of the mergers of FGCC and FRC into the Debtor. No assurance can be given that the Debtor will file its tax returns on this basis. Because no definitive guidance exists on the application of the Section 382(1)(5) Bankruptcy Exception to a group of corporations, and/or to the contemplated mergers/liquidations, it is unclear whether the Section 382(1)(5) Bankruptcy Exception would apply to the NOLs of FGCC and FRC.

(4) Alternative Treatment.

If the Section 382(1)(5) Bankruptcy Exception does not apply to NOLs of the Debtor, the transactions contemplated by the Plan may subject the Debtor’s NOLs to a Section 382 Limitation calculated under the special rules of Section 382(1)(6), as described above. If the Section 382(1)(5) Bankruptcy Exception does not apply to NOLs of FRC or the other subsidiaries of the Debtor, the transactions contemplated by the Plan may subject those NOLs to a Section 382 Limitation determined under the regular rules of Section 382, as described above.

2. Consequences to Holders of Claims

The federal income tax consequences of the Plan to a Holder of a Claim will depend upon several factors, including but not limited to: (i) the origin and nature of the Holder’s Claim, (ii) whether the Holder is a resident of the United States for tax purposes (or falls into any of the special classes of taxpayers excluded from this discussion as noted above), (iii) whether the Holder reports income on the accrual or cash basis method, (iv) whether the Holder has taken a bad debt deduction or worthless security deduction with respect to the Claim and (v) whether the Holder receives distributions under the Plan in more than one taxable year.

HOLDERS ARE STRONGLY ADVISED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX TREATMENT UNDER THE PLAN OF THEIR PARTICULAR CLAIMS.

a) Contingent Liability Claims

In general, the Claims can be divided into two broad categories for federal income tax purposes. The first category consists of Claims that are not treated as debt for federal income tax purposes. Most of the Administrative Claims, Priority Taxes, Priority Non-Tax Claims, General Unsecured, and Section 510(b) Claims, for example, are included in this category.

The Holder of such a Claim generally should not recognize any income, gain or loss, if at all, until actual receipt of consideration under the Plan (in the case of a cash basis taxpayer) or at such time as the Holder’s right to consideration under the Plan becomes fixed and determinable (in the case of an accrual basis taxpayer). In either case, the Holder generally should be treated no differently for federal income tax purposes than had the consideration been received with respect to the Holder’s original Claim, except to the extent that a payment from the Debtor represents interest, which a Holder shall report in accordance with such Holder’s method of accounting as described in the preceding sentence.

Holders of Administrative Claims, Priority Taxes, Priority Non-Tax Claims, certain General Unsecured Claims, and Section 510(b) Claims, will recognize gain or loss equal to the amount realized under the Plan in respect of their Claims, less their respective tax bases in their Claims. The amount realized for this purpose will generally be equal to the amount of cash and the fair market value of common stock received under the Plan in respect of their Claims.

The character of any gain or loss recognized will depend on a number of factors, as described below. The Holder’s aggregate tax basis for any non-cash consideration received under the Plan will generally equal the amount realized. The holding period for any non-cash consideration received under the Plan will generally begin on the day following the receipt of such consideration.

b) Debt Claims

The second category of Claims consists of Claims that are treated as debt obligations for federal income tax purposes (“Debt Claims”). This category would include, among other Claims, Senior Notes Claims, Junior Note Claims, and the TOPrS Claims. The payment or reinstatement of a Debt Claim under the Plan will be treated as one of two possible transactions for federal income tax purposes: a continuation of the Debt Claim or payment of the Debt Claim in a fully taxable transaction.

(1) Continuation of Debt Claims.

A Holder of a TOPrS Claim who receives (or maintains) an obligation of the Debtor under the Plan that does not differ significantly from the original Claim generally should not have a taxable event for federal income tax purposes. Accordingly, if the Holders of the TOPrS Claims elect to have their TOPrS Claims reinstated, such Holders generally should not have a taxable event for federal income tax purposes.

(2) Recapitalization Transactions.

If the Holders of the TOPrS Claims elect to exchange those claims for New Notes and Common Stock, recapitalization treatment will apply to any such exchange if, as expected, the notes represented by the TOPrS Claims constitute “securities” for U.S. federal income tax purposes. The determination of whether a debt instrument constitutes a “security” for U.S. federal income tax purposes depends upon an evaluation of the nature of the debt instrument, with an important factor being the original term of the debt instrument. Generally, corporate debt instruments with maturities when issued of less than five years are not considered securities while corporate debt instruments with maturities when issued often years or more are considered securities. Moreover, the IRS has ruled that a new debt instrument with a term of two years may be treated as a security where an acquiring corporation issued it in a transaction that otherwise constitutes a tax-free reorganization in exchange for a target debt instrument which had an original term of more than ten years and had the same maturity date and terms (except for the interest rate) as the acquirer debt instrument. According to the IRS ruling, the acquirer debt instrument represented a continuation of the Holder’s interest in the corporation in substantially the same form. The debt instruments represented by the TOPrS Claims had an original term of 30 years and should be treated as “securities.” The New Notes, which have a term to maturity of five years, may not constitute securities. It is also uncertain whether the New Notes will be treated as having substantially the same terms as the notes represented by the TOPrS Claims and thereby represent a continuation of such notes. Due to the inherently factual nature of the determination, each Holder is urged to consult its own tax advisor regarding the treatment of the New Notes as securities for U.S. federal income tax purposes.

If the New Notes constitute securities for U.S. federal income tax purposes, the exchange of a TOPrS Claim for New Notes and Common Stock should be treated as a tax-free exchange for U.S. federal income tax purposes. As a result, except with respect to consideration received for accrued interest, accrued market discount not previously includible in income, and fractional shares, a Holder of a TOPrS Claim should not recognize gain or loss on the exchange provided the principal amount of the New Notes received does not exceed the principal amount of the notes represented by the TOPrS Claim exchanged therefor. A Holder’s adjusted tax basis in the TOPrS Claim surrendered should be apportioned between the Common Stock and the New Notes based on their respective fair market values on the Effective Date, and the Holder’s holding period in the Common Stock and the New Notes would include its holding period in the notes represented by the TOPrS Claim surrendered therefor.

If the New Notes do not constitute securities, the exchange would be a partially tax-free exchange. A Holder of a TOPrS Claim would realize gain or loss on the exchange of such TOPrS Claim for New Notes and common shares in an amount equal to the difference between (x) the sum of the issue price of the New Notes (as discussed above) and the fair market value of common shares received and (y) the Holder’s tax basis in the notes represented by the TOPrS Claim. A Holder of a TOPrS Claim would not be entitled to recognize any loss realized as a result of the exchange of such Claim, and would recognize any gain realized, but only to the extent of any “boot” received. “Boot” for this purpose would include the fair market value of any New Notes received. Further, nonrecognition will not apply to the extent Common Stock or New Notes (even if such notes constitute securities) are received in respect of accrued interest or accrued market discount not previously includible in income. A Holder’s initial aggregate tax basis in common shares received in the exchange would be equal to such Holder’s adjusted tax basis in the notes represented by the TOPrS Claims exchanged therefor, increased by any gain recognized on the exchange, and decreased by the amount of boot received. In general, the Holder’s holding period for the common shares received would include the Holder’s holding period for the note represented by the TOPrS Claim exchanged therefor, except to the extent the common shares were received in respect of a claim for accrued interest, A Holder’s initial aggregate tax basis in New Notes received would be equal to the fair market value of such notes on the Effective Date, and the Holder’s holding period for such New Notes would commence on the day following the Effective Date.

Whether or not a New Note constitutes a security, a Holder of a TOPrS Claim that receives cash in lieu of a fractional share would recognize gain in an amount equal to the difference between the amount of cash received in respect of the fractional share and the portion of the Holder’s tax basis in the TOPrS Claim that is allocable to the fractional share. Any gain or loss recognized on the exchange generally should be capital gain or loss and should be long-term capital gain or loss if, at the time of the exchange, a Holder has held the TOPrS Claim for more than one year. Each Holder of a TOPrS Claim should consult with his or her own tax advisors concerning the treatment of cash received in lieu of a fractional share.

(3) Fully Taxable Transactions.

If a Debt Claim, including a Claim relating to the Senior Notes, is discharged under the Plan other than as described above, the discharge will generally constitute a fully taxable transaction to the Holder and any gain or loss realized as a result of the exchange or discharge will be recognized. A Holder whose discharge of a Debt Claim constitutes a fully taxable transaction will realize gain or loss equal to the difference between (i) the “amount realized” in respect of the Claim and (ii) the Holder’s tax basis therein. The amount realized generally will be equal to the sum of the cash received, less any amounts allocable to interest.

c) Distributions in Discharge of Accrued but Unpaid Interest

Distributions received in respect of Allowed Claims will be allocated first to the principal amount of such Allowed Claims, with any excess allocated to accrued but unpaid interest. However, there is no assurance that the IRS will respect such allocation for federal income tax purposes. Holders of Allowed Claims not previously required to include in their taxable income any accrued but unpaid interest on an Allowed Claim may be treated as receiving taxable interest, to the extent any consideration they receive under the Plan is allocable to such accrued but unpaid interest. Holders previously required to include in their taxable income any accrued but unpaid interest on an Allowed Claim may be entitled to recognize a deductible loss, to the extent that such accrued but unpaid interest is not satisfied under the Plan. Holders should consult their own tax advisors concerning the allocation of consideration received in satisfaction of their Allowed Claims and the federal income tax treatment of accrued but unpaid interest.

d) Character of Gain or Loss

The character of any gain or loss as long-term or short-term capital gain or loss or as ordinary income or loss recognized by a Holder of Allowed Claims under the Plan will be determined by a number of factors, including, but not limited to, the status of the Holder, the nature of the Allowed Claim in such Holder’s hands, the purpose and circumstances of its acquisition, the Holder’s holding period of the Allowed Claim, and the extent to which the Holder previously claimed a loss, bad debt deduction or charge to a reserve for bad debts with respect to the Allowed Claim. In this regard, section 582(c) of the Internal Revenue Code (“IRC”) provides that the sale or exchange of a bond, debenture, note or certificate, or other evidence of indebtedness by a bank or certain other financial institutions, will not be considered the sale or exchange of a capital asset. Accordingly, any gain recognized by such creditors as a result of the implementation of the Plan will be ordinary income.

In general, if a creditor holds a Debt Claim as a capital asset, any gain recognized will be classified as capital gain, except to the extent of interest (including accrued market discount, if any, as described below), and any loss required to be recognized will be classified as capital loss. Such gain or loss will be long-term with respect to Debt Claims for which the creditor’s holding period is more than one year. There is a favorable tax rate applied to long-term capital gains for non-corporate holders. Any capital losses realized generally may be used by a corporate holder only to offset capital gains, and by an individual holder only to the extent of capital gains plus $3,000 of other income.

e) Market Discount

Generally, a “market discount” bond is one acquired after its original issuance for less than the issue price of such bond plus the aggregate amount, if any, of original issue discount includible in the income of all holders of such bond before such acquisition. Generally, gain realized on the disposition of a market discount bond (or on the disposition of property exchanged for such bond in certain non-taxable exchanges) will be ordinary income to the extent of “accrued market discount” at the time of such disposition (determined using either constant interest or ratable daily accrual).

3. Consequences to Holders of Equity Interests

Pursuant to the Plan, all Equity Interests are being reinstated. A Holder of an Equity Interest should not have a taxable event for federal income tax purposes.

4. Withholding

All Distributions to holders of Allowed Claims under the Plan are subject to any applicable withholding, including employment tax withholding. The Debtor and/or the Post-Confirmation Estate will withhold appropriate employment taxes with respect to payments made to a Holder of an Allowed Claim which constitutes a payment for compensation. Payors of interest, dividends, and certain other reportable payments are generally required to withhold from such payments if the payee fails to furnish such payee’s correct taxpayer identification number (social security number or employer identification number), to the payor. This rate is currently 30% but is scheduled to be reduced in future years. The Debtor and/or the Post-Confirmation Estate may be required to withhold a portion of any payments made to a Holder of an Allowed Claim if the Holder (i) fails to furnish the correct social security number or other taxpayer identification number (“TIN”) of such Holder, (ii) furnishes an incorrect TIN, (iii) has failed to properly report interest or dividends to the IRS in the past or (iv) under certain circumstances, fails to provide a certified statement signed under penalty of perjury, that the TIN provided is the correct number and that such Holder is not subject to backup withholding. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax. Certain persons are exempt from backup withholding, including, in certain circumstances, corporations and financial institutions.

AS INDICATED ABOVE, THE FOREGOING IS INTENDED TO BE A SUMMARY ONLY AND NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING WITH A TAX PROFESSIONAL. THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES OF THE PLAN ARE COMPLEX AND, IN SOME CASES, UNCERTAIN. ACCORDINGLY, EACH HOLDER OF A CLAIM OR INTEREST IS URGED TO CONSULT SUCH HOLDER’S TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND OTHER TAX CONSEQUENCES APPLICABLE UNDER THE PLAN.

G. Trading Restrictions

In order to preserve the tax benefits from a second change in control, New World intends to provide an amendment to the Articles of Incorporation. The proposed amendment to the Articles of Incorporation to prevent a Post Effective Date second change of control generally would restrict any person or entity from attempting to transfer (which includes any direct or indirect acquisition, sale, transfer, assignment, conveyance, pledge or other disposition) any of the Reorganized Debtor’s stock (or options, warrants or other rights to acquire such stock, or securities convertible or exchangeable into such stock), to the extent that the transfer would (i) create or result in an individual or entity becoming a 5-percent stockholder of the Reorganized Debtor’s stock for purposes of Section 382 of the IRC (which the amendment refers to as a “Five Percent Shareholder”) or (ii) increase the stock ownership percentage of any existing Five Percent Shareholder. The amendment would not prevent transfers that are sales by a Five Percent Shareholder, although it would restrict any purchasers that seek to acquire shares from a Five Percent Shareholder to the extent that the purchaser is or would become a Five Percent Shareholder.

In order to provide for effective policing of the provision, the amendment will require a Restricted Holder (defined as a Person or group of Persons that is a Five Percent Shareholder and acquires or proposes to acquire securities) prior to the date of the proposed acquisition, to request in writing that the Board of Directors (or a committee thereof that has been appointed by the Board of Directors) review the proposed acquisition and authorize or not authorize the proposed acquisition in accordance with the amendment. The Board of Directors may authorize an acquisition by a Restricted Holder, if it determines, in its sole discretion, that, after taking into account the preservation of the tax benefits, such acquisition would be in the best interests of the Reorganized Debtor and its stockholders.

The amendment provides that any transfer that violates the provisions of the amendment would be null and void ab initio and shall not be effective to transfer any record, legal, beneficial or any other ownership of the number of shares which result in the violation of the amendment (which are referred to as “Excess Securities”). The purported transferee would not be entitled to any rights as a stockholder of the Reorganized Debtor with respect to the Excess Securities. Instead, the purported transferee would be required, upon demand by the Reorganized Debtor to transfer the Excess Securities to an agent designated by the Reorganized Debtor for the limited purpose of consummating an orderly arm’s-length sale of such shares. The net proceeds of the sale will be distributed first to reimburse the agent for any costs associated with the sale, second to the purported transferee to the extent of the price it paid, and finally any additional amount will go to the purported transferor, or, if the purported transferor cannot be readily identified, to a charity designated by the Board of Directors. The amendment would also provide the Reorganized Debtor with various remedies to prevent or respond to a purported transfer which violates its provisions.

Although New World believes that this should preserve the Fremont NOLs, it cannot guarantee that they will remain available for the Reorganized Debtor because in order to realize value from the NOLs, the Reorganized Debtor must also acquire income-producing assets or otherwise conduct a business that generates positive income that can be set off by the NOLs.