Exhibit 8.1

March 1, 2018

	KATHERINE E. DAVID
	(210) 250-6122
	Katy.David@strasburger.com

 

Mr. Harry E. Hosmer

Chairman of the Board

Royale Energy, Inc.

1870 Cordell Court, Suite 210

San Diego, California 92020

 

Dear Mr. Hosmer:

 

This letter expresses our opinion regarding certain United States federal income tax consequences to the shareholders¹ of Royale Energy, Inc. (“Royale”) related to the merger of Royale Merger Sub, Inc. (“Royale Merger Sub”) with and into Royale, with Royale as the surviving corporation and wholly-owned subsidiary of Royale Energy Holdings, Inc. (“Parent”) (the “Transaction”).

 

I.	Statement of Opinion

 

Based on the facts and analysis set forth in this letter, and subject to the limitations described at the end of this letter, in our opinion, the Transaction will qualify as a transaction qualifying for non-recognition of gain or loss under Internal Revenue Code (“Code”) section 351(a), as amended.

 

In rendering the opinions set forth above, we have taken into account the potentially relevant judicial doctrines, including the step transaction, business purpose, economic substance, substance over form, and sham transaction doctrines, as well as potentially relevant statutory and regulatory anti-abuse rules.  In addition, we have considered the business and tax purposes for the transactions contemplated with respect to the Transaction and matters to which our opinions relate, and have analyzed the law as it relates to all of the facts and circumstances associated with those

 

 

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transactions in the manner described in and required by Treas. Reg. sections 1.6662-4(d)(3)(ii), 1.6662-4(g)(4)(ii), 1.6664-4(c), and 1.6664-4(f)(2)(i)(B)(2).

 

This letter is a statement of our opinion, and is not a guarantee that the conclusions set forth in this letter will be sustained if challenged by the Internal Revenue Service (“Service”).

 

II.	Factual Investigation

 

For purposes of rendering our opinion, we have been furnished and have reviewed the following documentation (the “Relevant Documents”):

 

1.	Amended and Restated Agreement and Plan of Merger among Royale, Parent, Royale Merger Sub, Matrix Merger Sub, Inc. (“Matrix Merger Sub”), and Matrix Oil Management Corporation (“Matrix”) (the “Merger Agreement”).

 

2.	Section 351 Plan of Merger and Exchange.

 

3.	Pledge Agreement by Parent, as Debtor in Favor of Arena Limited SPV, LLC as Secured Party.

 

4.	Such other documents as we have deemed necessary.

 

We are not aware of any documents other than the Relevant Documents that would alter our conclusions.  We have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals and the conformity with original documents of all documents submitted to us as copies, the fact that each party to an agreement has the power and capacity to execute, deliver and perform all obligations under such documents, the due authorization of all requisite action with respect to such documents (including the execution and delivery thereof) by each party thereto, and the validity and binding effect of such documents upon each party.  We have also assumed that all factual assertions in the Relevant Documents are accurate and complete in all material respects.  We have no reason to believe that any of the foregoing assumptions is unreasonable.

 

III.	Statement of Facts

 

Based on our review of the Relevant Documents and discussions with you and other persons with knowledge of the Transaction, we understand the relevant facts to be as set forth in this letter.  In rendering our opinion, we have assumed that you have read this letter closely and have concluded, after reasonable independent factual

 

 

investigation, that the facts stated in this letter are accurate and complete in all material respects, and that there are no unreasonable factual assumptions.

 

A.	Description of Entities

 

Royale is a California corporation primarily engaged in managing oil and gas assets.  Royale has authorized 30,000,000 shares of no par value common stock with 21,850,185 shares outstanding.

 

Matrix is a California corporation primarily engaged in managing non-operating oil and gas assets.  Matrix is owned by the following entities: Jordan Enterprises Limited Partnership (30.84%), Meeteetse Limited Partnership (30.84%), PEM Resources Limited Partnership (17.06%), Loren Enterprises, L.P. (5.25%), JRS ENERGY INVESTMENTS, LLC (5.00%), OAKVIEW INVESTMENTS LP (5.00%), GROVES INVESTMENTS, LP (5.00%), and Matrix Investments L.P. (1.02%) (a California limited partnership) (“MILP”).

 

Parent is a Delaware corporation.  Parent is newly-formed to hold all of the issued and outstanding stock of Royale Merger Sub, a California corporation and Matrix Merger Sub, a California corporation.  Parent has authorized 280,000,000 shares, $0.001 par value Common Stock and 10,000,000 shares, $0.001 par value Preferred Stock.

 

MILP,² Matrix Las Cienegas Limited Partnership (a California limited partnership),³ and Matrix Permian Investments, LP (a Texas limited partnership)⁴ (collectively, the “Matrix LPs”) hold various interests in oil and gas leases and wells.

 

 

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² Matrix is the general partner and owns a 1.02% interest, and the limited partners are as follows: Jordan Enterprises Limited Partnership (30.84%); Meeteetse Limited Partnership (30.84%); PEM Resources Limited Partnership (17.06%); Loren Enterprises, L.P. (5.25%); GROVES INVESTMENTS, LP (5.00%); JRS ENERGY INVESTMENTS, LLC (5.00%); and OAKVIEW INVESTMENTS LP (5.00%).

³ Matrix is the general partner and owns a 0.80% interest, and the limited partners are as follows: Jordan Enterprises Limited Partnership (34.08%); Meeteetse Limited Partnership (34.08%); PEM Resources Limited Partnership (11.66%); Loren Enterprises, L.P. (5.04%); GROVES INVESTMENTS, LP (4.78%); JRS ENERGY INVESTMENTS, LLC (4.78%); and OAKVIEW INVESTMENTS, LP (4.78%).

⁴ Matrix is the general partner and the limited partners are as follows: Walou Investments, LP (31.23%); Meeteetse Limited Partnership (31.23%); PEM Resources Limited Partnership (17.34%); Loren Enterprises, L.P. (5.20%); GROVES INVESTMENTS, LP (5.00%); JRS ENERGY INVESTMENTS, LLC (5.00%); and OAKVIEW INVESTMENTS LP (5.00%).

Matrix Royalty, L.P. (“Matrix Royalty”) is a Texas Limited Partnership.⁵

 

Matrix Oil Corporation (“Matrix Operator”) is a California corporation primarily engaged in operating the Whittier and Bellevue oil and gas fields in California. Matrix Operator is owned by Johnny Jordan (31.67%), Jeffrey Kerns (31.67%), Michael McCaskey (31.67%), and Shawna Loren (4.99%).

 

Prior to the Transaction, and in the ordinary course of business, Matrix, Matrix Operator, Matrix Royalty, and the Matrix LPs issued approximately $20,124,000 in aggregate principal and accrued interest amount of subordinated promissory notes (“Matrix Debt”). Prior to the Transaction, the holders of Matrix Debt exchanged their Matrix Debt for approximately $20,124,000 of preferred limited partnership interests of MILP (the “Matrix Preferred Interests”).

 

B.	The Proposed Transactions

 

The parties propose the following transactions:

 

 

 

 

 

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⁵ Matrix is the general partner and the limited partners are as follows:  Walou Investments, LP (12.50%); Meeteetse Limited Partnership (12.50); PEM Resources Limited Partnership (12.50%); Loren Enterprises, L.P. (12.50%); GROVES INVESTMENTS, LP (12.50%); JRS ENERGY INVESTMENTS, LLC (12.50%); OAKVIEW INVESTMENTS LP (12.50%); and SIRC PROPERTIES, L.L.C. (12.50%).

⁶ In the Mergers, (1) each issued and outstanding share of Royale common stock will be converted into one share of Parent Common Stock, and (2) each issued and outstanding share of Matrix Common Stock will be converted into the number of shares of Parent Common Stock equal to the quotient of (a) the product of the Aggregate Royale Number (as defined in the Merger Agreement) multiplied by 0.6198452, divided by (b) the Aggregate Matrix Number (as defined in the Merger Agreement).

 

 

 

 

C.	Representations

 

The shareholders of Royale, the shareholders of Matrix, the Limited Partners, the Matrix Operator Holders, and the holders of the Matrix Debt (individually, a “Transferor”, collectively, the “Transferors”) make the following representations with respect to the proposed transactions:

 

 

 

 

 

 

 

 

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⁷ Steps 1 – 6, collectively, are the “Exchanges.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IV.	Applicable Law

 

A.	Code Section 351(a) Transaction

 

1.	In General

 

Under a Code section 351(a) transaction, one or more persons can transfer property to a corporation in exchange for stock in the corporation without recognizing gain or loss.  In particular, a transfer of property qualifies for non-recognition treatment if: (1) property⁸ is transferred to Newco⁹ by one or more transferors; (2) solely in exchange for stock¹⁰ of Newco; and (3) immediately after the exchange, the transferor(s) are in “control”¹¹ of Newco.¹²

 

The tax consequences are as follows:

 

 

 

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⁸ For purposes of Code section 351(a), the term “property” is defined broadly, with Code section 351(a) stating only three specific exclusions to “property” (relating to services, certain debt of the corporation, and accrued interest owed by the corporations). Code section 351(d).

⁹ “Newco” means a newly-formed entity.

¹⁰ “Stock” does not include stock rights and stock warrants. Treas. Reg. section 1.351-1(a)(1).

¹¹ Code section 368(c).

¹² Code section 351(a).

¹³ Code section 1032(a).

 

 

 

 

 

 

2.	Horizontal Double-Dummy Structure

 

Simultaneous reverse subsidiary mergers¹⁸ constitute a transaction known as the “horizontal double-dummy technique.”¹⁹

 

The mechanics of this transaction are as follows:

 

 

 

 

 

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¹⁴ Code section 358(a)(1).

¹⁵ Code section 1223(1).

¹⁶ Code section 362(a).

¹⁷ Code section 1223(2).

¹⁸ A reverse subsidiary merger is a merger in which the buyer (the “Acquiring Corporation”) forms a subsidiary and that Acquiring Corporation subsidiary merges with and into the company to be acquired (the “Target Company”).  Code section 368(a)(2)(E).  As a result, the Target Company becomes a wholly-owned subsidiary of the Acquiring Corporation.  Id.

¹⁹ 2 Martin D. Ginsburg, Jack S. Levin, & Donald E. Rocap, Mergers, Acquisitions, and Buyouts: A Transactional Analysis of the Governing Tax Legal, and Accounting Considerations ¶904, n.1 (2017) (“[T]he quoted term . . . is descriptive of the transaction’s corporate mechanics; simultaneous transitory subsidiary (reverse) mergers of newly formed corporations . . . .”).

²⁰ See P.L.R. 8822062 (Mar. 7, 1988).

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The two subsidiary corporations (i.e., S1 and S2) and the two reverse subsidiary mergers (i.e., the merger of S1 and S2 into T1 and T2 respectively) are disregarded and the mergers are treated as the acquisition by Newco of property (i.e., the outstanding stock of T1 and T2) in exchange for Newco common stock.²¹  Therefore, each of the exchanges will constitute a Code section 351(a) exchange, and no gain or loss is recognized by the transferors of T1 and T2 stock upon receipt of Newco stock in exchange for T1 or T2 stock.²²

 

The tax consequences of the horizontal double-dummy transaction are as follows:

 

 

 

 

 

 

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²¹ See Rev. Rul. 79-273, 1979-2 C.B. 125; Rev. Rul. 78-250, 1978-1 C.B. 83; Rev. Rul. 73-427, 1973-2C.B. 301; Rev. Rul. 67-448, C.B. 144; P.L.R. 8822062 (Mar. 7, 1988); P.L.R. 7915011 (Jan. 1, 1979).

²² P.L.R. 8822062 (Mar. 7, 1988).

²³ Code section 1032(a).

²⁴ Code section 362(a).

²⁵ Code section 358(a)(1).

²⁶ Code section 1223(1).

²⁷ Code section 1223(2).

 

 

V.

Analysis

 

As to the Royale shareholders, the Transaction, executed in conjunction with the transactions contemplated by the Merger Agreement and the Section 351 Plan of Merger and Exchange, supports a conclusion that the Transaction qualifies for non-recognition of gain and loss under Code section 351(a).

 

The simultaneous reverse subsidiary mergers executed by Royale and Matrix constitute a horizontal double-dummy transaction.²⁸  Accordingly, the two subsidiary corporations (i.e., Royale Merger Sub and Matrix Merger Sub) and the two reverse subsidiary mergers (i.e., the Transaction and the Matrix Merger) are disregarded and the Mergers are treated as the acquisition by Parent of property (i.e., the outstanding common stock of Royale and the outstanding common stock of Matrix) in exchange for Parent common stock.²⁹  Therefore, the Transaction qualifies as a Code section 351(a) transaction because: (1) the Royale shareholders are treated as exchanging property (i.e., Royale common stock) for Parent common stock³⁰ and (2) immediately after the Mergers, the Royale shareholders and the Matrix shareholders will be in “control” of Parent (within the meaning of Code section 368(c)).

 

As a result of the exchange, the Royale shareholders will not recognize any gain or loss.³¹  The Royale shareholders will have a tax basis in the Parent common stock received in the Transaction equal to the tax basis of the Royale common stock surrendered in the Transaction.³²  The Royale shareholders will have a holding period for Parent common stock received in the Transaction that includes its holding period for its shares of Royale common stock surrendered in the Transaction.³³

 

VI.	Conclusion

 

Based upon the foregoing, it is our opinion that, for United States federal income tax purposes, the Transaction will qualify as a transaction qualifying for nonrecognition of gain or loss under section 351 of the Code.  The discussion in the section of the Registration Statement on Form S-4 of Royale, which includes the Joint

 

 

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²⁸ P.L.R. 8822062 (Mar. 7, 1988).

²⁹ See Rev. Rul. 79-273, 1979-2 C.B. 125; Rev. Rul. 78-250, 1978-1 C.B. 83; Rev. Rul. 73-427, 1973-2 C.B. 301; Rev. Rul. 67-448, C.B. 144; P.L.R. 8822062 (Mar. 7, 1988); P.L.R. 7915011 (Jan. 1, 1979).

³⁰ See P.L.R. 8822062 (Mar. 7, 1988).

³¹ Code section 351(a); P.L.R. 8822062 (Mar. 7, 1988).

³² Code section 358(a)(1).

³³ Code section 1223(1).

 

 

 

VII.	Limitations and Disclosures

 

A.	Factual Accuracy

 

Our opinions are based on the facts as set forth in the Relevant Documents and in this letter.  You have represented to us that the facts set forth above are, to your knowledge and belief after reasonably inquiry, accurate and complete in all material respects.  If any of such facts are inaccurate or incomplete in any material respect, then our opinions could be adversely affected.

 

B.	Changes in Law; No Binding Effect

 

This letter is based upon relevant provisions of the Code and the Treasury Regulations promulgated thereunder, the related legislative history, and interpretations of the foregoing expressed in court decisions and existing administrative rulings and practices of the Service all as of the date hereof.  These provisions and interpretations are subject to change, which may or may not be retroactive in effect, and which could result in modifications of our conclusions.  This letter is not binding on the Service or the courts and it is possible the Service may successfully take a contrary position.

 

C.

Scope

 

Our opinion is limited to the United States federal income tax matters as expressly set forth herein.  We express no opinion as to any matter which is not expressly set forth herein.  In particular, we express no opinion on the tax consequences of the transactions or matters addressed herein for federal gift, estate, and generation skipping transfer tax purposes or under the income tax laws of any state or foreign jurisdiction.  We also express no opinion on the tax consequences of the transactions described herein to any person other than the Royale shareholders.

 

D.	Intended Use and Reliance

 

Our opinion is rendered solely for Royale’s benefit for the purposes of defending the United States federal income tax reporting of the Transaction in accordance with the conclusions stated above.  We understand that Royale will use our opinion as a basis for representing the federal income tax effect of the transaction in

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Form S-4 to be filed with the Securities and Exchange Commission and we have no objection to its use in this manner.

 

E.	Attorney-Client Privilege; Work Product Doctrine

 

This letter communicates legal advice, and has been prepared in anticipation of potential litigation concerning the tax consequences described herein.  It is intended that this letter be protected from discovery under the attorney-client privilege and work product doctrine to the extent provided by law.  Disclosure of this letter and the information communicated in it should be carefully controlled so that disclosure is not made in a manner that will invalidate the protected status of the information.

 

F.	Confidentiality Disclaimer

 

We confirm that there is no limitation on the disclosure by the Royale shareholders or any other parties to the transaction of the tax treatment or tax structure of the transaction as described in this letter.  The implications of any such disclosure on attorney-client privilege or other applicable legal protections should be carefully considered prior to any such disclosure.

 

Sincerely yours,

 

Strasburger & Price, LLP

By:  /s/ Katherine E. David

Katherine E. David