exv8w1

You have requested the opinion of KPMG, LLP (“KPMG”) regarding certain federal income tax consequences resulting from a transaction involving AirGate PCS, Inc. (“AirGate” or the “Company”). The transaction (the “Recapitalization Plan”) consists of:

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an offer to exchange (the “Exchange”) all outstanding 13.5% senior subordinated discount notes due 2009 (the “Old Notes”) for newly issued shares of common stock and newly issued 9 3/8% senior subordinated secured notes due 2009 (the “New Notes”);

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a consent solicitation to remove substantially all of the restrictive covenants in the indenture governing the Old Notes and obtain waivers of any defaults incurred in connection with the restructuring; and

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SEC Form S-4 Registration dated December 30, 2003 (the “Registration Statement”)

We assume that all steps will be effectuated under state law and will be consistent with the legal documentation and with the description of the steps described in the Documents. We also assume that all information, representations and warranties set forth in the Documents are complete and accurate.

AirGate issued the Old Notes to the public on September 30, 1999. According to the form of note included in the Form S-1 Registration Statement and the Term Sheet included in the Registration Statement, the Old Notes contained the following terms:

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AirGate agreed to pay stated interest semi-annually in arrears, commencing in April 2005. Interest was to begin accruing on October 1, 2004.

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AirGate cannot redeem the Old Notes prior to October 1, 2004. Thereafter, AirGate can call the Old Notes at stated percentages set forth in the Old Notes. Notwithstanding the foregoing, during the first 36 months after the issue date, AirGate could have redeemed up to 35% of the accreted value (as defined in the applicable indenture agreement) of the Old Notes, in whole or in part, with the net cash proceeds of one or more equity offerings.

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The holders of the Old Notes (the “Old Noteholders”) had rights to require AirGate to repurchase the Old Notes under certain circumstances, including a change in control of AirGate or when AirGate held cash in excess of certain limits.

In exchange for the Old Notes, as part of the Recapitalization Plan, the holders will receive solely common stock and New Notes. The relevant terms of the New Notes set forth in the Term Sheet attached to the Registration Statement are as follows:

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The notes are subordinated to other indebtedness. They are secured (second priority) by liens on all assets of the Company. The first priority lenders will have the sole ability to control the exercise of remedies with respect to the collateral.

In addition to the foregoing statement of facts, AirGate has made the following representations to KPMG in connection with the Recapitalization Plan. KPMG has not independently verified the completeness and accuracy of any of the following representations in rendering the opinion contained herein.

(a)

AirGate is undertaking the Recapitalization Plan for bona fide corporate business reasons and will affect the Recapitalization Plan in accordance with applicable state and federal laws.

(b)

The fair market value of the common stock and New Notes to be received by each exchanging Old Noteholder will be approximately equal to the fair market value of Old Notes surrendered in exchange therefore.

(c)

After the consummation of the Recapitalization Plan, AirGate will continue its historic business.

(d)

The Recapitalization Plan is a single, isolated transaction and is not part of a plan to periodically increase the proportionate interest of any shareholder in the assets or earnings and profits of AirGate.

(e)

AirGate will pay its expenses incurred in connection with the Recapitalization Plan and each Old Noteholder will pay its own expenses incurred in connection with the Recapitalization Plan.

(f)

As of the effective date of the Recapitalization Plan, AirGate’s ability to satisfy the New Notes will be dependent upon its future economic performance. AirGate’s ability to make payments on the New Notes will depend on its ability to generate cash in the future, and AirGate cannot give assurances that its business will generate sufficient cash flow from operations to enable it to pay the New Notes.

(g)

The proceeds from the sale of the collateral securing the New Notes may not be sufficient to satisfy AirGate’s obligations on the New Notes because proceeds from a sale of the collateral would be distributed to satisfy 1) indebtedness and all other obligations under its credit facility, and 2) any other indebtedness secured by a first-priority lien on the collateral, before any such proceeds could be distributed in respect of the New Notes.

In addition to the foregoing representations, we have made the following assumptions in connection with the Recapitalization Plan:

(a)

Both the Old Notes and the New Notes constitute “indebtedness” and the common stock constitutes “stock” under the principles of Internal Revenue Code § 385(b).

(b)

At the time of the Exchange, the principal amount of the Old Notes will exceed the principal amount of the New Notes.

(c)

At the time of the exchange, the issue price of the New Notes will not exceed the adjusted issue price of the Old Notes.

(d)

AirGate will be considered legally to be the same corporation before and after the consummation of the Recapitalization Plan.

Neither the Internal Revenue Code (the “Code”) nor the regulations define the term “securities” for Code § 354 purposes. However, the determination of an obligation’s qualification as a security has a long history with the courts.¹ Indeed, the Supreme Court has itself considered the issue twice in the 1930’s. In Pinellas Ice & Cold Storage Co. v. Commissioner,² the target corporation transferred its assets to an acquiring corporation in exchange for cash and secured notes, all of which were payable within 105 days of the acquisition. In concluding that the notes were not securities within the meaning of the predecessor of Code § 361(a), the Court noted that, to fall within the reorganization provisions, the seller must acquire “an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes.“³ The Court found that the petitioner sold its assets “for the equivalent of cash.“⁴ In Helvering v. Watts,⁵ the Court concluded, without much analysis, that seven-year bonds received by the taxpayers in a purported reorganization constituted securities for purposes of the reorganization provisions. The Court simply stated that the bonds “cannot be regarded as cash, as were the short-term notes referred to in Pinellas Ice Co.“⁶

Subsequent court decisions have often given significant weight to an instrument’s maturity date in analyzing its characterization.⁷ Indeed, some commentators have indicated that, as a

¹ Before 1989, transferors of property in a Code § 351 transaction were permitted to receive “securities,” as well as stock, of the transferee corporation on a tax-free basis. Although Code § 351 was amended in 1989 to permit tax-free treatment only upon the receipt of stock, cases arising under pre-1989 law which address the meaning of the term “securities” for Code § 351 purposes are relevant authority for the meaning of the term in the reorganization context. Lloyd-Smith v. Commissioner, 116 F.2d 642 (2^nd Cir. 1941) (no justification for different meaning of the word securities for Code § 351 purposes than the meaning for reorganization purposes).

⁷ Pacific Public Service Co. v. Commissioner, 154 F.2d 713 (9^th Cir. 1946) (unsecured demand notes received for stock were not securities for reorganization purposes); Neville Coke & Chemical Co. v. Commissioner, 148 F.2d 599, 602 (3^rd Cir. 1945) (notes payable between 3 and 5 years not securities for reorganization purposes; court noted that “the time

rule of thumb, obligations with terms of five years or less have difficulty qualifying as securities, while those with a term of ten years or more generally do qualify.⁸ Nevertheless, several courts have noted that the test of whether an obligation qualifies as a security is not a mechanical determination of the maturity date.⁹

As previously noted, the Supreme Court in Pinellas Ice & Cold Storage Co. looked to whether the obligation gave the creditor “an interest in the affairs” of the debtor corporation or was more properly viewed as “the equivalent of cash.” While these phrases can be found in subsequent court decisions, other courts have formulated this concept somewhat differently by seeking to determine whether payment of the obligation was dependent on the success of the debtor’s business, or phrased differently, whether the obligation exposed the creditor to a significant risk of loss. One frequently cited case that employed such a formulation is Camp Wolters Enterprises, Inc. v. Commissioner.¹⁰

Camp Wolters involved the issue of whether unsecured notes payable in five equal annual installments, the first of which was due in five years, constituted securities for purposes of pre-1989 Code § 351. As part of its analysis, the court focused on an outstanding debt to a third party that prevented payment on the installment notes until such third party debt was satisfied. Specifically, the court noted that, in the event that the transferee corporation had

element is not the determining factor”); Commissioner v. Sisto Financial Corp., 139 F.2d 253 (2^nd Cir. 1943) (taxpayer holding demand and short term notes of target as well as target stock received acquiring corporation stock in exchange for such instruments; debt obligations were not securities); Lloyd-Smith v. Commissioner, 116 F.2d 642, 644 (2^nd Cir. 1941) (unsecured notes with two year term received by the taxpayer in exchange for property were not securities for pre-1989 section 351 purposes; notes “differed little from cash or credit received in the course of a sale”); L. & E. Stirn, Inc. v. Commissioner, 107 F.2d 390, 392 (2^nd Cir. 1939) (bonds with an average maturity of 2 1/2 years and that were paid off within 10 months were not securities such that their receipt did not qualify for tax-free reorganization treatment; test is “whether bonds or notes which are exchanged represent an investment in the business of the transferee or are a practical substitute for a cash sale”); Cortland Specialty Co. v. Commissioner, 60 F.2d 937, 940 (2^nd Cir. 1932) (unsecured notes payable within 14 months and that were readily marketable and received by taxpayer in exchange for property were not securities for purposes of the reorganization provisions; different result may have been appropriate if “obligations . . . [gave] creditors . . . some assured participation in the properties of the transferee corporation”). Indeed, in the typical case of a short term instrument, it may well be that the creditor does not possess the type of interest in the debtor corporation that would satisfy the tests formulated in the court decisions discussed above. However, an analysis of all relevant facts and circumstances, not just the instrument’s maturity date, is required under the relevant case law before a conclusion can be reached as to the qualification of the instrument as a security. See U.S. v. Mills, 399 F.2d 944 (5^th Cir. 1968) (1 year note held a security after considering all pertinent facts).

⁸ Bittker & Eustice, FEDERAL INCOME TAXATION OF CORPORATIONS AND SHAREHOLDERS, 12-188 (7^th ed. 2000); Kliegman, SINGLE ENTITY REORGANIZATIONS: RECAPITALIZATIONS AND F REORGANIZATION, 774 Tax. Mgmt. 21 (BNA 2001).

⁹ See, Camp Wolters Enterprises, Inc. v. Commissioner, 230 F.2d 555 (5^th Cir. 1956); Lagerquist v. Commissioner, 53 T.C.M. 530 (1987).
¹⁰ 230 F.2d 555 (5^th Cir. 1956).

been unsuccessful and unable to repay the third party debt, the holders of the installment notes would have no right to demand payment. Thus, the court found that the note holders were “assuming a substantial risk of [the transferee corporation’s] enterprise, and on the date of issuance were inextricably and indefinitely tied up with the success of the venture, in some respects similar to stockholders.“¹¹ As a result, the court held that the installment notes constituted securities.

Court decisions issued subsequent to Camp Wolters have employed a similar analysis. For example, in Aqualane Shores, Inc. v. Commissioner,¹² certain individuals contributed land to the taxpayer-corporation in exchange for a small amount of cash and an installment obligation payable over five years in equal annual installments. The installment obligation represented over 96 percent of the recited value of the land. The corporation, which was to develop the land for a residential subdivision, had virtually no working capital. Rather, its only asset was the contributed land. The court found that payment on the obligation could be made only if and when sales of the land were made. Thus, the court determined that payment was “dependent upon and at the risk of the success of the venture.“¹³ It then went on to state that "[t]he obligations were a participation in the pot luck of the enterprise.“¹⁴ Having concluded that the obligation clearly represented “risk capital,” the court held that it constituted a security.

In Lagerquist v. Commissioner,¹⁵ the taxpayer was an officer and shareholder of several corporations, which were engaged in a related business (the “Galco Companies”). The Galco Companies were facing an “uncertain future” and were in need of additional capital. Negotiations between the shareholders of the Galco Companies and an unrelated party resulted in an agreement pursuant to which the shareholders of the Galco Companies contributed their stock in the Galco Companies and the unrelated party contributed assets to a newly-formed corporation (“LNC”). In exchange for his stock, the taxpayer received from LNC shares of its stock and two notes running for consecutive terms of four and five years. In determining whether the notes constituted securities for purposes of pre-1989 Code § 351, the court first stated that “[s]ecurities represent the taxpayer’s continuing interest in the incorporated enterprise.“¹⁶ After noting that the term of a note is an important but not determinative factor in the analysis, the court stated:

Short-term notes may thus qualify as securities when they represent the taxpayer’s continuing interest in the enterprise. Short-term notes may be

securities when the properties for which the notes were issued are indispensable to the corporation, when such properties are not used for temporary or current corporate needs, and when substantial additional investment is required to assure the corporation’s survival.¹⁷

The court then proceeded to determine “whether the [transferee corporation’s] notes exposed petitioner to the risks of the enterprise on the date of issue.“¹⁸ The court first noted that the notes were virtually unmarketable. Moreover, based on the lack of an agreement for the corporation to retain liquid assets, the court noted that immediate repayment of the notes could have been accomplished only through the sale of operational assets. The court ultimately concluded that the taxpayer remained exposed to the risk of the enterprise citing (i) the subordination of the notes to all present and future bank debt, institutional debt, and long-term debt, (ii) LNC’s need for additional borrowed capital, (iii) the realization of the parties that LNC would have to repay the notes out of its future earnings, and (iv) the fact that LNC faced many of the same problems that had plagued the Galco Companies. Thus, the court found that the notes constituted securities for federal income tax purposes.

In D’Angelo Associates, Inc. v. Commissioner,¹⁹ an individual transferred rental property to a corporation owned by his family members and received back, among other things, a demand note. In analyzing whether the note constituted a security for purposes of pre-1989 Code § 351, the court referred to Camp Wolters and then stated the following:

Thus, securities are investment instruments which give the holder a continuing participation in the affairs of the debtor corporation. They are to be contrasted with short-term notes which are essentially the equivalent of cash and represent the termination of the holder’s interest in the property transferred to the corporation.²⁰

The court then stated that the note was not the equivalent of cash, but rather gave the transferor a continuing investment in the transferred property. The court noted that the debtor corporation did not have sufficient liquid assets to retire it at the time of issuance and that repayment “at any time proximate to the issuance date could have been accomplished only through the sale of the assets transferred.“²¹ Consequently, the court concluded that payment of the note was intended to be derived from the rental earnings of the contributed property, and thus constituted a security.²²

²² See also U. S. v. Mills, 399 F.2d 944 (5^th Cir. 1968) (1 year, unsecured promissory note of newly-formed corporation received in exchange for property by person owning all but a de minimis amount of the debtor corporation#s stock constituted a security; court found an intent to renew the obligation so that it would remain indefinitely an obligation of the

Moreover, the Internal Revenue Service (the “Service”) seems to have accepted the Camp Wolters formulation in at least one ruling. In Rev. Rul. 59-98,²³ a corporation that was in serious financial difficulties for several years issued common stock for its first mortgage bonds. The bonds had originally been payable in three to ten years with an average time to maturity at issuance of six and one-half years. Relying on the Camp Wolters language cited above, the Service concluded that the bonds constituted securities and the exchange constituted a tax-free recapitalization under Code § 368(a)(1)(E).

The tax consequences of an exchange of debt for debt for the holder of the debt instrument will depend on whether the debt instruments are “securities” for federal tax purposes. Whether a debt instrument is a security for tax purposes is based upon the overall facts and circumstances surrounding the instrument. If the Old Notes and the New Notes are both tax “securities,” the exchange will qualify as a reorganization (i.e., a recapitalization). If the exchange qualifies as a reorganization, the holder of the debt will generally be unable to recognize any loss realized on the exchange, but will be required to recognize gain to the extent the principal amount of any securities received exceeds the principal amount of any securities surrendered in the exchange.

The courts have repeatedly held that notes with a term in excess of ten years will constitute securities for purposes of the reorganization rules.²⁴ The Old Notes were issued on