Rescinded 1981

SSR 75-22: Sections 1861(v)(1)(A) and 1866 (42 U.S.C. 1395c(v)(1)(A) and 1395(cc)—Provider of Services—Transfer of Ownership—Revaluation of Assets to Include "Goodwill" in Computing Depreciation and Return of Equity Capital

20 CFR 405.415, 405.429, 405.625 and 405.626

SSR 75-22

The claimant appealed the intermediary's determination that acquisition of 100 percent of the capital stock of corporate provider of services did not permit revaluation of the provider's assets or the establishing of goodwill for program purposes, contending that by its acquisition of 100 percent of the capital stock, it also in effect acquired 100 percent of the corporate assets, and should be permitted to revalue the assets and include goodwill in its computation of depreciation and return on equity capital. Held, the transaction constituted only the acquisition of the corporate stock of the provider with no transfer of corporate property. Ownership of the corporate property remained vested in the corporate provider, and the intermediary's determination that revaluation of assets and establishing of good will could not be permitted was affirmed.

Under the circumstances prevailing in this case, were the Intermediary's determinations concerning adjustment of the provider's cost reimbursement report for fiscal year ending June 30, 1969, correct and in accordance with the Medicare Law, regulations and instructions issued by the Social Security Administration? Specifically were those determinations correct with respect to:

(1) Computation and allowance of depreciation on actual cost incurred in the purchase through a bona fide sale of the subject facility as an on-going business operation, and

(2) Computation and allowance of return on equity, based on actual cost incurred for such purchase?

The American Institute of Certified Public Accountants defines depreciation as a process of cost allocation:

"Depreciation accounting is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation, not of valuation. Depreciation for the year is the portion of the total charge under such a system that is allocated to the year."

This definition, appearing in Section 104 of the Provider Reimbursement Manual (HIM-15) issued by the U.S. Department of Health, Education, and Welfare) indicates that for Medicare purposes, in order for allowances of depreciation to be applicable, there must be a demonstration that there exists property to which depreciation computations can be applied.

It is a primary contention of the claimant that by its acquisition of 100 percent of the shares of stock of a provider, it also in effect acquired 100 percent of the corporate assets or properties.

To say that a corporation is, in fact, but the sum of its stockholders, and its name but an alias for its individual corporators, is a great confusion of legal ideas. A stockholder and the corporation in which he holds stock are distinct persons in law. An owner may sell or dispose of his stock at pleasure and in doing so, works no change or modification in the title to corporate property. The owner of a share of stock owns no part of the capital of the company. The corporation is its sole owner, holding it for the purpose for which the corporation was created, and upon winding up, for the benefit of creditors and shareholders.

Basic principles of corporation law indicate that when one purchases or acquires stock in a corporation, no matter at what time, he acquires a fractional interest in the capital stock, assets, profits and liabilities of the corporation. However, by the very nature of a corporation, the corporate property is vested in the corporation itself and not in the stockholders. Concentration of stock ownership does not alter the fact that title to the corporate property is vested in the corporation, and not in the owner of the corporate stock, and even the fact that one owns all the corporate stock does not make him the owner of its property. So too, the earnings and profits of a corporation remain the property of the corporation until severed from corporate assets and distributed as dividends; until that time, stockholders have no property interest therein.

Consequently, as a general rule, the property of a corporation is not subject to the control or disposition by its individual members or stockholders. The stockholders cannot convey or encumber such property or authorize a conveyance or encumbrance thereof on behalf of the corporation, inasmuch as the corporation must act through its proper agents and in the prescribed way, and the stockholders must exercise their control over the corporation at regularly called meetings.

During the course of the hearing, considerable testimony was offered by the claimant relating to Sections 104.14 and 1214 of the Provider Reimbursement Manual. These sections, as is here pertinent, state the following:

"104.14 Purchase of Facility as an On-Going Operation.—

A. In establishing the historical cost of assets where an on-going facility is purchased through a bona-fide sale after July 1 1966, and prior to August 1970, the sale price or portion thereof attributable to the asset must not exceed the fair market value of the asset at the time of the sale. For depreciable assets acquired after July 1970, the cost basis of the depreciable assets shall not exceed the lower of the current reproduction cost adjusted for straight-line depreciation over the life of the assets to the time of the sale, or the fair market value of the tangible assets purchased.

B. If the facility was being operated under the program at the time of sale, the sale price used by the seller in computing gain or loss for the final cost report must agree with the historical cost used by the new provider in computing depreciation. However, where the basis for depreciation to the purchaser for an asset acquired after July 1970 is limited to the lower of current reproduction cost (adjusted for straight line depreciation from the time of asset acquisition to the time of the sale) or the fair market value, the basis for computing gain or loss to the seller is the sale price.

C. If a purchaser cannot demonstrate that the sale was bona fide, the lesser of the seller's net book value or sale price shall be used by the purchaser as the historical cost of the asset."


Goodwill purchased in the acquisition of an existing organization is includable in the provider's equity capital. The amount of good will is determined in accordance with generally accepted accounting principles.

However, goodwill which has not been purchased but has been internally generated as, for example, from a reorganization of the provider, is not includable in the provider's equity capital."

After careful consideration, the Panel concludes that these provisions relate to the computation of depreciation and the determination of equity capital with respect to corporate assets or property owned by the corporation itself. These provisions do not appear to have application in a situation where the only interest in the corporation is represented by ownership of corporate stock. In its deliberations, the Panel unanimously agreed that the transaction which occurred on July 1, 1968, resulted in the acquisition by the claimant, M, only of the corporate stock of the provider. The corporate property or assets were still owned by the provider. With ownership of the corporate property vested in the provider, only that legal entity, not M, could avail itself of the provisions under Section 104.14 and 1214 of the Provider Reimbursement Manual.

At the hearing, the claimant vigorously contended that a 100 percent ownership of the facility in its entirety was transferred and the mode of change is irrelevant. During its post-hearing consideration of this controversy, information was brought to the attention of the Panel that, although the claimant did acquire 100 percent ownership of the corporate stock on July 1, 1968, the acquisition of the corporate property or assets did not occur until November 24, 1970. This transaction presents to the Panel one basic question—if, as the claimant contends, there was, in fact, a 100 percent change in ownership of the facility in its entirety, including the corporate property, on July 1, 1968, what property or interest would still remain and be available to convey to M on November 24, 1970?

The Panel further recognizes that if the corporate property of the provider had been conveyed to M on July 1, 1968, a problem would have been presented with regard to Section 405.625, Subpart F of Regulations No. 5. That section reads as follows:

"405.625 Transfer of Provider Ownership: General.—

(a) A transfer of ownership of a provider of services participating in the health insurance program under an agreement with the Secretary will, under the conditions discussed in ยง405.626, render such agreement invalid as between the Secretary and the transferee. In order for the new entity to participate in the program it must be established that it meets the conditions for participation appropriate to the hospital, extended care facility or home health agency, or rehabilitation agency or clinic, as the case may be (see Subparts J, K, and L of this Part 405) and that it meets the requirements of Title VI of the Civil Rights Act of 1964 (78 Stat. 252; P.L. 88-352). (b) A participating provider contemplating or negotiating a change of ownership must advise the Secretary of such a contingency to assure, if the successor owner desires to participate in the program, continued payment to the hospital, extended care facility or home health agency, rehabilitation agency, or clinic on behalf of individual entitled under title XVIII of the Act.

If the July 1, 1968, transaction had resulted in a change of ownership in the corporate property, under the provisions of this regulation, the original provider's agreement with the Secretary would have rendered invalid as to the transferee, which would have been required to meet the applicable Title XVIII conditions of participation. Since there was no recertification required or anticipated immediately subsequent to July 1, 1968, there is doubt in the minds of the panel members that an actual change in ownership of corporate property was intended upon the acquisition of the corporate stock.

In addition, the claimant places great emphasis on its contention that in the type of transaction that occurred on July 1, 1968, the "substance" is more important than the "form" of the transaction. Based upon this premise, the claimant contended that the excess paid over book value for the provider's stock should be allocable to the provider and includable in the provider's cost report when computing depreciation and return on equity, as provided for in the Medicare regulations.

In reference to law and legal proceedings, courts have often referred to "form" as the antithesis of "substance." "Form" relates to technical details regardless of substance, while "substance" is that which is essential to the transaction.

It is the opinion of the Panel that the substance of the July 1, 1968, transaction was of such a nature that application of depreciation and return on equity guidelines are precluded. If on that date the claimant had acquired ownership of the property or assets of the provider, rather than just its corporate stock, then the "substance" of the transaction would have permitted the application of guidelines related to depreciation and return on equity. As to the return on equity question, Section 2150.4D of the Provider Reimbursement Manual specifically indicates that the home office's investment in the stock of the provider, as well as loans made to finance such investments, are not considered as elements of equity for the purpose of computing equity capital.

For the reasons stated, it is the judgment of the Hearing Officer Panel that the Intermediary properly applied the appropriate provisions of the Medicare law, the regulations issued pursuant thereto, and other instructions as those provisions relate to the facts presented by this case. Therefore, after carefully considering all the evidence presented during these proceedings and after evaluating that evidence in a light most favorable to the claimant, the panel members unanimously arrive at but one conclusion—the Intermediary's determination must be affirmed.