FairPoint Communications 2007 Annual Report Download - page 38

Table of Contents
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The spin-off and merger are conditioned upon Verizon’s receipt of a private letter ruling from the Internal Revenue Service to the
effect that the spin-off, including (i) the contribution of specified assets and liabilities associated with the local exchange business of
Verizon New England in Maine, New Hampshire and Vermont, and the customers of the Verizon Group’s related long distance and
Internet service provider businesses in those states, to Spinco, (ii) the receipt by the Verizon Group of the Spinco securities and the special
cash payment and (iii) the exchange by the Verizon Group of the Spinco securities for Verizon Group debt, will qualify as tax-free to
Verizon, Spinco and the Verizon stockholders for United States federal income tax purposes under Section 355 and related provisions of
the Internal Revenue Code, referred to as the Code. The private letter ruling was issued by the Internal Revenue Service on October 5,
2007. Although a private letter ruling from the Internal Revenue Service generally is binding on the Internal Revenue Service, if the factual
representations or assumptions made in the letter ruling request are untrue or incomplete in any material respect, then Verizon and we will
not be able to rely on the ruling.
The spin-off and merger are also conditioned upon the receipt by Verizon of an opinion of its counsel to the effect that the spin-off
will be tax-free to Verizon, Spinco and the stockholders of Verizon under Section 355 and other related provisions of the Code. The
opinion will rely on the Internal Revenue Service letter ruling as to matters covered by the ruling. Lastly, the spin-off and the merger are
conditioned on Verizon’s receipt of an opinion of its counsel and our receipt of an opinion of our counsel, each to the effect that the merger
will be treated as a tax-free reorganization within the meaning of Section 368(a) of the Code. All of these opinions will be based on, among
other things, current law and certain representations and assumptions as to factual matters made by Verizon, Spinco and us. Any change
in currently applicable law, which may or may not be retroactive, or the failure of any factual representation or assumption to be true,
correct and complete in all material respects, could adversely affect the conclusions reached by counsel in their respective opinions. The
opinions will not be binding on the Internal Revenue Service or the courts, and the Internal Revenue Service or the courts may not agree
with the opinions.
The spin-off would become taxable to Verizon pursuant to Section 355(e) of the Code if 50% or more of the shares of either Verizon
common stock or Spinco common stock (including our common stock, as successor to Spinco) were acquired, directly or indirectly, as
part of a plan or series of related transactions that included the spin-off. Because Verizon stockholders will own more than 50% of our
common stock following the merger, the merger, standing alone, will not cause the spin-off to be taxable to Verizon under Section 355(e).
However, if the Internal Revenue Service were to determine that other acquisitions of Verizon common stock or our common stock, either
before or after the spin-off and the merger, were part of a plan or series of related transactions that included the spin-off, this
determination could result in the recognition of gain by Verizon under Section 355(e). In that case, the gain recognized by Verizon likely
would be substantial. In connection with the request for the Internal Revenue Service private letter rulings and the opinion of Verizon’s
counsel, Verizon represented that the spin-off is not part of any such plan or series of related transactions.
In certain circumstances, under the tax sharing agreement, we would be required to indemnify Verizon against tax-related losses to
Verizon that arise as a result of a disqualifying action taken by us or our subsidiaries after the distribution (including for two years after
the spin-off (i) entering into any agreement, understanding or arrangement or engaging in any substantial negotiations with respect to any
transaction involving the acquisition or issuance of our stock, (ii) repurchasing any shares of our stock, except to the extent consistent
with guidance issued by the Internal Revenue Service, (iii) ceasing or permitting certain subsidiaries to cease the active conduct of the
Spinco business and (iv) voluntarily dissolving, liquidating, merging or consolidating with any other person unless the Company is the
survivor of the merger or consolidation, except in accordance with the restrictions in the tax sharing agreement) or a breach of certain
representations and covenants. See “— We may be affected by significant restrictions following the merger with respect to certain actions
that could jeopardize the tax-free status of the spin-off and the merger.” If Verizon were to recognize a gain on the spin-off for reasons not
related to a disqualifying action or breach by us, Verizon would not be entitled to be indemnified under the tax sharing agreement.
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