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EXHIBIT 8
[LETTERHEAD] KPMG PEAT MARWICK
September 25, 1996
PRIVATE & CONFIDENTIAL
Board of Directors
MOMED Holding Co.
0000 Xxxxxx Xxxxxxxxx
Xxxxx 000
Xx. Xxxxx, XX 00000
Board Members:
Pursuant to an Agreement and Plan of Merger dated June 11, 1996 (the
"Agreement"), MOMED Holding Co. ("MOMED"), MAIC Holdings, Inc. ("MAIC"), and
MOMED Acquisition, Inc. ("NEWCO") have agreed to the merger of MOMED with and
into NEWCO in accordance with the provisions of the Plan of Merger set forth in
the Agreement. Pursuant to section 4.8 of the Agreement, MOMED has engaged
KPMG Peat Marwick LLP ("KPMG") to render an opinion as to the material Federal
income tax consequences to the shareholders of MOMED resulting from the merger.
Our engagement letter dated July 2, 1996, executed by an authorized officer of
MOMED on July 8, 1996, limits the use of our opinion as follows:
"We understand that our opinion letter will be referred to in the
registration statement to be filed by MAIC to register under the
Securities Act of 1933 the shares of MAIC common stock to be issued
pursuant to the merger. After approval by the SEC, copies of the
prospectus and proxy statement contained in such registration
statement will be distributed to MOMED's shareholders, who are
estimated to number about 300. No other use of our opinion is
authorized or permitted."
Our opinion does not address any tax consequences to the holders of MOMED's
Class C nonvoting common stock.
Our opinion is based on the facts, representations, and assumptions set forth
below.
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FACTS
MOMED
MOMED is a holding company incorporated in the state of Missouri. MOMED's
primary subsidiary is Missouri Medical Insurance Company ("MOMEDICO"), a
Missouri-domiciled insurer engaged in the business of providing professional
liability insurance for physicians, dentists, and support technicians
practicing in the states of Missouri and Kansas.
MOMED has issued 739,584 shares of its $1 par value Class A common stock. The
Class A stock has one vote per share. Of the 739,584 issued Class A shares,
732,198 are presently outstanding, and 7,386 are held by MOMED as treasury
shares. MOMEDICO owns 60,144 of the outstanding Class A MOMED shares.(1)
MOMED's Class A stock is available for trading by a limited number of
marketmakers. At present, there are approximately 300 holders of MOMED's Class
A common stock.
At the date of the Agreement, MOMED also had outstanding 24,185 shares of Class
C nonvoting common stock. All of the Class C shares were owned by the Missouri
State Medical Association ("MSMA"). The Class C shares, which were issued on
August 16, 1994, were subject to an agreement whereby MSMA had an option to
sell, and MOMED had a requirement to purchase, Class C shares at a per share
consideration of $24.81, with the aggregate cash consideration not to exceed
$600,000 plus interest at Boatmen's National Bank's prime rate plus one
percent. MSMA could have exercised its options to sell the Class C shares as
follows:
Period Shares Amount
------ ------ ------
August 16, 1994 to August 15, 1995 4,031 $100,009
August 16, 1995 to August 15, 1996 4,031 $100,009
August 16, 1996 to August 15, 1997 8,062 $200,018
August 16, 1997 and after 8,061 $199,964
------ --------
24,185 $600,000
On the second and third anniversaries of the issuance of the Class C shares
(i.e., August 16, 1996 and 1997), MOMED had an option to purchase the Class C
shares not yet put to MOMED by MSMA for the same cash consideration as shown
above. Pursuant to the
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(1) For consolidated GAAP financial reporting purposes, the MOMED shares owned
by MOMEDICO also are classified as treasury shares.
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Agreement, MOMED redeemed the Class C shares on September 4, 1996 for an
aggregate consideration of $707,877.(2)
On February 24, 1995, MOMED's Board of Directors adopted a Shareholders'
Protection Rights Plan (the "Rights Plan"), and declared a dividend of one
common share purchase right for each outstanding share of Class A common stock
of record on March 6, 1995. In the event any person acquires 20 percent or
more of MOMED's outstanding common stock, each right will give the holder the
option to purchase one share of MOMED's common stock for $50. The rights expire
February 24, 2005, and may be redeemed by MOMED for $0.01 per right at any
time.(3)
MAIC
MAIC is a Delaware corporation which serves as a holding company for various
subsidiaries. Through its subsidiaries, MAIC is engaged in the business of
providing professional and general liability insurance for physicians and
surgeons, dentists, hospitals, and others engaged in the delivery of health
care.
As of December 31, 1995, MAIC had issued 9,376,956 shares of its $1 par value
common stock, of which 9,369,832 shares were outstanding. At that date, MAIC
had 2,723 shareholders of record. MAIC common stock trades on the NASDAQ
National Market Tier of the NASDAQ Stock Market.
AGREEMENT AND PLAN OF MERGER
For what has been represented to KPMG to be bona fide corporate business
reasons,(4) MOMED, MAIC, and NEWCO have entered into the Agreement to merge
MOMED with and into NEWCO. NEWCO, a Missouri corporation, has been organized
as a
--------------------------
(2) Sections 5.8(a) and 7.12 of the Agreement require MOMED, as a condition
precedent to closing, to take all necessary actions to cause MSMA to sell, and
MOMED to purchase, all of MOMED's Class C nonvoting common stock at an
aggregate price not exceeding $600,000 plus interest from August 16, 1994 at
one percent above the prime rate of Boatmen's National Bank.
(3) Pursuant to sections 5.8(b) and 7.10 of the Agreement, as a condition
precedent to closing, MOMED is required to take all necessary actions under
the Rights Plan to redeem the common share purchase rights issued under the
Rights Plan and, upon taking such action, to redeem and purchase all such
common share purchase rights at a price not to exceed $0.01 per right in
accordance with the Rights Plan. It is assumed, for purposes of this opinion,
that the redemption of the rights will be treated as a dividend distribution
for Federal income tax purposes.
(4) All representations to KPMG by the parties to the merger are set forth in
our letter dated September 18, 1996, which was executed by the parties on
September 20, 1996.
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wholly-owned subsidiary of MAIC to serve as a successor in interest to MOMED
pursuant to the Agreement.
The Plan of Merger, which is set forth in section 1 of the Agreement, includes
the following provisions:
- On the Effective Date (i.e., the date upon which a certificate of
merger is issued by the Missouri Secretary of State), MOMED shall be
merged with and into NEWCO in accordance with the Plan of Merger and
in compliance with the Missouri General Business Corporation Law.
NEWCO shall be the surviving corporation. The separate corporate
existence of MOMED from NEWCO shall cease upon the Effective Date.
NEWCO will change its name to MOMED Holding Co.
- Subject to conditions set forth below, each holder (other than
MOMEDICO) of the issued and outstanding shares of MOMED's Class A
common stock shall have the right to elect to have each of such
holder's shares converted as of the effective time of the merger into
either of the following (the "Merger Consideration"):
(i) 0.779 of a share of MAIC common stock for a share of
MOMED Class A common stock (the "Stock Election"); or
(ii) the right to receive $25.32 for a share of MOMED
Class A common stock (the "Cash Election").
- If no election is made as to the merger consideration to be received
with respect to any MOMED Class A share, the holder will be deemed to
have made the Cash Election, subject to the Proration provision
described below.
- Each share of MOMED Class A common stock owned by MOMED and each share
of MOMED Class C nonvoting common stock owned by MOMED or MOMEDICO
shall be canceled and retired and shall cease to exist, and no cash or
other consideration shall be delivered in exchange therefor.
- Each share of MOMED Class A common stock that is owned by MOMEDICO
shall be converted into 0.779 of a share of MAIC common stock.
- A Class A shareholder who exercises his right to demand payment for
and an appraisal of his Class A common shares ("Dissenters' Rights")
pursuant to the Missouri General Business Corporation Law shall not
have his shares converted into a right to receive Merger
Consideration, unless such holder fails to perfect or
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otherwise loses his Dissenters' Rights, in which case such holder
shall be treated as having made the Cash Election.
- Notwithstanding anything in the Agreement to the contrary, the number
of shares of MAIC common stock included in the Merger Consideration
issued in exchange for MOMED Class A shares (other than MOMED Class A
shares exchanged by MOMEDICO) shall not be more than 350,000 (the
"Stock Election Number") nor less than 275,000 (the "Cash Election
Number").
- If the MOMED Class A shareholders (other than MOMEDICO) make Stock
Elections which would result in issuance of a number of MAIC shares in
excess of the Stock Election Number, then the shares covered by each
Stock Election shall be ratably prorated down so that the total MAIC
shares to be issued to Class A shareholders other than MOMEDICO will
equal the Stock Election Number.
- If the MOMED Class A shareholders (other than MOMEDICO) make Cash
Elections which would result in issuance of a number of MAIC shares
less than the Cash Election Number, then the shares covered by each
Cash Election shall be ratably prorated down so that the total MAIC
shares to be issued to Class A shareholders other than MOMEDICO will
equal the Cash Election Number.
- No fractional shares of MAIC common stock shall be issued in exchange
for MOMED Class A common stock. In lieu of any such fractional share,
MAIC shall pay to each former holder of MOMED Class A shares who
otherwise would be entitled to receive a fractional share of MAIC
common stock an amount in cash determined by multiplying $32.50 by the
fraction of a share of MAIC stock to which such holder would otherwise
be entitled.
REPRESENTATIONS
In connection with the proposed transaction, the following additional
representations have been made to KPMG.(5) It is understood that KPMG has not
verified any representation, but it is relying on same in rendering its opinion.
(a) The parties to the merger negotiated an arm's-length exchange ratio
with the intention that the fair market value of the MAIC stock and
other consideration received by each MOMED shareholder will be
approximately equal to the fair market value of the MOMED stock
surrendered in the exchange.
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(5) See footnote 4, supra.
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(b) There is no plan or intention by the shareholders of MOMED who own 5
percent or more of the MOMED stock, and to the best of the knowledge
of the management of MOMED, there is no plan or intention on the part
of the remaining shareholders of MOMED to sell, exchange, or otherwise
dispose of a number of shares of MAIC stock received in the
transaction that would reduce the MOMED shareholders' ownership of
MAIC stock to a number of shares having a value, as of the date of the
transaction, of less than 50 percent of the value of all of the
formerly outstanding stock of MOMED as of the same date. For purposes
of this representation, shares of MOMED stock exchanged for cash and
other property, surrendered by dissenters, or exchanged for cash in
lieu of fractional shares will be treated as outstanding MOMED stock
on the date of the transaction. Moreover, shares of MOMED stock and
shares of MAIC stock held by MOMED shareholders and otherwise sold,
redeemed, or disposed of prior or subsequent to the transaction will
be considered in making this representation.
(c) NEWCO will acquire at least 90 percent of the fair market value of the
net assets and at least 70 percent of the fair market value of the
gross assets held by MOMED immediately prior to the transaction. For
purposes of this representation, amounts paid by MOMED to dissenters,
amounts paid by MOMED to shareholders who receive cash or other
property, MOMED assets used to pay its reorganization expenses, and
all redemptions and distributions (except for regular, normal
dividends) made by MOMED immediately preceding the transfer, will be
included as assets of MOMED held immediately prior to the transaction.
(d) Prior to the transaction, MAIC will be in control of NEWCO within the
meaning of section 368(c) of the Internal Revenue Code. Control,
within the meaning of section 368(c), means the ownership of stock
possessing at least 80 percent of the total combined voting power of
all classes of NEWCO stock entitled to vote and at least 80 percent of
the total number of shares of all other classes of stock of NEWCO.
(e) Following the transaction, NEWCO will not issue additional shares of
its stock that would result in MAIC losing control of NEWCO within the
meaning of section 368(c) of the Internal Revenue Code.
(f) MAIC has no plan or intention to reacquire any of its stock issued in
the transaction.
(g) MAIC has no plan or intention to liquidate NEWCO; to merge NEWCO with
and into another corporation; to sell or otherwise dispose of the
stock of NEWCO; or to cause NEWCO to sell or otherwise dispose of any
of the assets of MOMED acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers
described in section 368(a)(2)(C) of the Internal Revenue Code. A
transfer
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described in section 368(a)(2)(C) is a transfer of assets to a
corporation controlled by NEWCO.
(h) Following the transaction, NEWCO will continue the historic business
of MOMED or use a significant portion of MOMED's business assets in a
business.
(i) MAIC, NEWCO, MOMED and the shareholders of MOMED will pay their
respective expenses, if any, incurred in connection with the
transaction.
(j) No two parties to the transaction are investment companies as defined
in section 368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code.
(k) The fair market value of the assets of MOMED transferred to NEWCO will
equal or exceed the sum of the liabilities assumed by NEWCO, plus the
amount of liabilities, if any, to which the transferred assets are
subject.
(1) No stock of NEWCO will be issued in the transaction.
(m) The payment of cash in lieu of fractional shares of MAIC stock is
solely for the purpose of avoiding the expense and inconvenience to
MAIC of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will
be paid in the transaction to the MOMED shareholders instead of
issuing fractional shares of MAIC stock will not exceed 1 percent of
the total consideration that will be issued in the transaction to the
MOMED shareholders in exchange for their shares of MOMED stock. The
fractional share interests of each MOMED shareholder will be
aggregated and no MOMED shareholder will receive cash in an amount
equal to or greater than the value of one full share of MAIC stock.
(n) None of the compensation received by any shareholder-employees of
MOMED will be separate consideration for, or allocable to, any of
their shares of MOMED stock; none of the shares of MAIC stock received
by any shareholder-employees will be separate consideration for, or
allocable to, any employment agreement; and compensation paid to any
shareholder-employees will be for services actually rendered and will
be commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
(o) The proposed merger of MOMED with and into NEWCO (the "Merger") will
qualify as a statutory merger under applicable state law.
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DISCUSSION
GENERAL REQUIREMENTS OF A REORGANIZATION
Section 10.13 of the Agreement states that the parties intend that the Merger
shall constitute a "tax-free" reorganization. Treasury Regulation section
1.368-1(b) sets forth the purpose of the reorganization provisions of the
Code(6) as follows:
"Under the general rule, upon the exchange of property, gain or loss
must be accounted for if the new property differs in a material
particular, either in kind or in extent, from the old property. The
purpose of the reorganization provisions of the Code is to except from
the general rule certain specifically described exchanges incident to
such readjustments of corporate structures made in one of the
particular ways specified in the Code, as are required by business
exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms. Requisite to a
reorganization under the Code are a continuity of the business
enterprise under the modified corporate form, and. . . a continuity of
interest therein on the part of those persons who, directly or
indirectly, were the owners of the enterprise prior to the
reorganization. . . "
Thus, in general, in order to qualify as a reorganization, a transaction must
meet the business purpose requirement, the continuity of business enterprise
requirement, and the continuity of ownership interest requirement, in addition
to the specific requirements of the Code. Furthermore, Treasury Regulations
section 1.368-1(c) provides that there must be a plan of reorganization.
According to the regulation, "a plan of reorganization must contemplate the
bona fide execution of one of the transactions specifically described as a
reorganization in section 368(a) and for the bona fide consummation of each of
the requisite acts under which nonrecognition of gain is claimed."
1. BUSINESS PURPOSE
The business purpose requirement is a judicially-established requirement. In
our experience, when dealing with a commercially-motivated acquisitive
reorganization in which the parties are dealing at arm's-length and are not
owned by substantially the same shareholders, satisfying the business purpose
requirement is rarely a concern. This is particularly true where stock of the
acquirer or the target company, or both, are publicly
-------------------------
(6) Unless otherwise noted, all references to "the Code", or "Code section",
or "section", are to the Internal Revenue Code of 1986, as amended.
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traded. Moreover, the parties have represented that the Merger is being
undertaken for bona fide corporate business reasons. Accordingly, the business
purpose requirement will be satisfied in the Merger.
2. CONTINUITY OF BUSINESS ENTERPRISE
Continuity of business enterprise is discussed in Treasury Regulation section
1.368-1(d). Pursuant to this regulation, continuity of business enterprise
requires that the acquiring corporation either (1) continue the acquired
corporation's historic business, or (2) use a significant portion of the
acquired corporation's historic business assets in a business. The regulation
also states that the "application of this general rule to certain transactions,
such as mergers of holding companies, will depend on all facts and
circumstances."
In Revenue Ruling 85-197, 1985-2 CB 120, a holding company ("P") whose only
asset consisted of all the stock of an operating subsidiary ("S"), merged into
S and the P shareholders exchanged their P stock for S stock. The ruling
stated:
"For purposes of the continuity of business enterprise requirement,
the historic business of P is the business of S, its operating
subsidiary. Therefore, after the merger, S continues to conduct P's
historic business."
In the Merger, it has been represented that the acquiring company (NEWCO) will
either continue the business of the acquired company (MOMED), or use a
significant portion of its assets in a business. Accordingly, the continuity
of business enterprise requirement will be satisfied.
3. CONTINUITY OF OWNERSHIP INTEREST
Continuity of ownership interest is also a judicially-established requirement
applicable to acquisitive reorganizations. The purpose of this requirement is
to ensure that the historic shareholders of the target company maintain
(indirectly) a substantial part of their equity participation in the target
company following the acquisition. In general, to satisfy the continuity of
interest requirement, the historic shareholders of the acquired company must
(1) exchange at least 50 percent of their stock in the target company for stock
in the acquiring company (or the acquiring company's parent), (2) have the
unrestricted right to maintain ownership of such stock for some period of time
after the acquisition, and (3) either actually retain ownership of such stock
for some period of time after the acquisition or, in the event of an early
disposition, demonstrate that the early disposition was not pursuant to a plan
or arrangement that was in place at the time of the acquisition.
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The 50 percent minimum continuity requirement noted in the preceding paragraph
is a safe harbor provided by the Internal Revenue Service for purposes of
issuing private letter rulings (Revenue Procedure 77-37, 1977-2 CB 568; Revenue
Procedure 86-42, 1986-2 CB 722). Section 3.02 of Revenue Procedure 77-37
states:
"The 'continuity of interest' requirement...is satisfied if there is
continuing interest through stock ownership in the acquiring or
transferee corporation (or a corporation in 'control' thereof...) on
the part of the former shareholders of the acquired or transferor
corporation which is equal in value, as of the effective date of the
reorganization, to at least 50 percent of the value of all of the
formerly outstanding stock of the acquired or transferor corporation
of the same date. It is not necessary that each shareholder of the
acquired or transferor corporation receive in the exchange stock of
the acquiring or transferee corporation, or a corporation in 'control'
thereof, which is equal in value to at least 50 percent of the value
of his former stock interest in the acquired or transferor corporation,
so long as one or more of the shareholders of the acquired or
transferor corporation have a continuing interest through stock
ownership in the acquiring or transferee corporation (or a corporation
in 'control' thereof) which is, in the aggregate, equal in value to at
least 50 percent of the value of all of the formerly outstanding stock
of the acquired or transferor corporation. Sales, redemptions, and
other dispositions of stock occurring prior or subsequent to the
exchange which are part of the plan of reorganization will be
considered in determining whether there is a 50 percent continuing
interest through stock ownership as of the effective date of the
reorganization."
In the instant case, the Agreement provides that (1) the MOMED Class A
shareholders other than MOMEDICO will receive no fewer than 275,000 MAIC common
shares as Merger Consideration, and (2) the MOMED Class A shares owned by
MOMEDICO will be converted to 46,852 (60,144 times 0.779 to 1 conversion ratio)
MAIC common shares. Therefore, no fewer than 321,852 MAIC common shares will
be issued in the merger. At the conversion ratio of 0.779 to 1, this accounts
for 413,160 of MOMED's 732,198 outstanding Class A shares. Accordingly, a
maximum of 319,038 of MOMED's Class A shares will be exchanged for cash in the
merger. Pursuant to section 3.02 of Revenue Procedure 77-37, quoted above, the
50 percent continuity of interest test must also take into account the MOMED
Class C common stock that was redeemed as part of the transaction. The
redemption price of the Class C shares was $707,877. As a result, the maximum
amount of cash to be taken into account for continuity of interest purposes is
$8,785,919 (319,038 Class A shares x $25.32/share + $707,877 attributable to
the Class C shares). Accordingly, the parties to the Merger understand that
this opinion by KPMG is based on the assumption that the MAIC common stock
issued in the Merger (including the MAIC shares issued to MOMEDICO) is valued
at $8,785,919 or higher at
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the time of the Merger, so that the 50 percent continuity of interest safe
harbor will be satisfied.
SPECIFIC REQUIREMENTS OF A REORGANIZATION
Section 368 of the Code provides definitions relating to corporate
reorganizations. Code section 368(a)(1)(A) provides that the term
"reorganization" includes a statutory merger or consolidation. Treasury
Regulation section 1.368-2(b)(1) provides that in order to qualify as a
reorganization under section 368(a)(1)(A), the transaction must be a merger or
consolidation effected pursuant to the corporation laws of the United States or
a State or Territory or the District of Columbia.
Code section 368(a)(2)(D) provides rules relating to use of stock of a
controlling corporation in case of a statutory merger or consolidation - a
transaction commonly referred to as a "forward subsidiary merger". Pursuant to
section 368(a)(2)(D), the acquisition by one corporation, in exchange for stock
of a corporation (referred to as the "controlling corporation") which is in
control of the acquiring corporation, of substantially all of the properties of
another corporation shall not disqualify a transaction under section
368(a)(1)(A) if -
(i) no stock of the acquiring corporation is used in the
transaction, and
(ii) such transaction would have qualified under section
368(a)(1)(A) if the merger had been into the controlling
corporation.
Code section 368(c) defines "control" as ownership of stock possessing at least
80 percent of the total combined voting power of all classes of stock entitled
to vote and at least 80 percent of the total number of shares of all other
classes of stock of the corporation.
The Internal Revenue Service has defined a safe harbor for the "substantially
all" requirement of section 368(a)(2)(D) for purposes of obtaining a private
letter ruling. Section 3.01 of Revenue Procedure 77-37 provides:
"The 'substantially all' requirement...is satisfied if there is a
transfer...of assets representing at least 90 percent of the fair
market value of the net assets and at least 70 percent of the fair
market value of the gross assets held by the corporation immediately
prior to the transfer. All payments to dissenters and all redemptions
and distributions (except for regular, normal distributions) made by
the corporation immediately preceding the transfer and which are part
of the plan
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of reorganization will be considered as assets held by the corporation
immediately prior to the transaction."(7)
In Revenue Ruling 77-307, 1977-2 CB 117, the Internal Revenue Service held that
cash contributed by a parent corporation to a wholly-owned subsidiary, formed
for the purpose of effectuating a "reverse subsidiary merger" pursuant to Code
section 368(a)(2)(E), so that the subsidiary could, among other things, pay
cash in lieu of issuing fractional shares of parent stock to target company
shareholders, should not be taken into account in determining whether the
"substantially all" requirement of Code section 368(a)(2)(E) has been met.
TAX TREATMENT OF ACQUIRED COMPANY'S SHAREHOLDERS
Pursuant to section 354(a)(1) of the Code, no gain or loss is recognized if
stock or securities in a corporation a party to a reorganization are, in
pursuance of the plan of reorganization, exchanged solely for stock or
securities in such corporation or in another corporation a party to the
reorganization. Code section 368(b) provides that the term "a party to a
reorganization" includes both corporations in the case of a reorganization
resulting from the acquisition by one corporation of stock or properties of
another corporation. Furthermore, in the case of a reorganization qualifying
under section 368(a)(1)(A) by reason of section 368(a)(2)(D), the term "a party
to a reorganization" includes the controlling corporation referred to in
section 368(a)(2)(D).
Pursuant to Code section 356(a)(1), if section 354 would apply to an exchange
but for the fact that the property received in the exchange consists not only
of property permitted by section 354 to be received without the recognition of
gain, but also of other property or money,(8) then the gain, if any, to the
recipient is recognized, but in an amount not in excess of the sum of such
money and the fair market value of such other property. However, no loss from
the exchange may be recognized (Code section 356(c)).
Code section 356(a)(2) provides rules for the determination of the character of
any gain recognized under section 356(a)(1). Section 356(a)(2) states that if
an exchange described in section 356(a)(1) has the effect of the distribution
of a dividend, then each distributee treats as a dividend (i.e., ordinary
income) an amount of the gain recognized
--------------------------
(7) Accordingly, in the instant case, MOMED's pre-merger redemptions of its
Class C nonvoting common stock, and the common stock purchase rights issued
under the Rights Plan, must be taken into account in making the 90 percent/70
percent test. However, these redemptions will, in the aggregate, constitute
far less than ten percent of the fair market value of MOMED's net assets (as
measured by the value of the Merger Consideration) prior to the redemptions.
(8) Such other property or money is commonly referred to as "boot".
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under section 356(a)(1) as does not exceed his ratable share of the
corporation's undistributed earnings and profits. The remainder, if any, of
the gain is treated as gain from the exchange of property (i.e., capital gain
income).
In determining whether an exchange has the effect of a distribution of a
dividend, the standards of dividend equivalence under Code section 302(b) in
redemption transactions are applied. Code section 302(b) provides that
redemptions are treated as exchanges and, therefore, not as dividend
distributions, in the following circumstances:
(1) If the redemption is not essentially equivalent to a dividend.
In general, this test focuses on whether there has been a
"meaningful reduction" in the shareholder's voting power in
the corporation.
(2) If the redemption distribution is "substantially
disproportionate" to the shareholder. In order for a
distribution to be substantially disproportionate, (a) the
shareholder must own, immediately after the redemption, less
than 50 percent of the total combined voting power of all
classes of stock entitled to vote; and (b) the ratio which the
voting stock of the corporation owned by the shareholder
immediately after the redemption bears to all of the voting
stock of the corporation at such time, is less than 80 percent
of the ratio which the voting stock of the corporation owned
by the shareholder immediately before the redemption bears to
all of the voting stock of the corporation at such time.(9)
(3) If the redemption is in complete redemption of all of the
stock of the corporation owned by the individual.
In general, the constructive ownership rules of Code section 318 apply in
determining the ownership of stock for purposes of Code section 302(b).
In the case of Commissioner x. Xxxxx, 489 US 726 (1989), the US Supreme Court
held that, for purposes of Code section 356(a)(2), the Code section 302(b)
standards should be applied as if the target company's shareholders had
received solely stock of the acquiring corporation (or its parent) in the
reorganization, and a part of such stock was then redeemed by the issuing
corporation.
--------------------------
(9) No distribution is treated as substantially disproportionate unless the
shareholder's ownership of the common stock of the corporation (whether voting
or nonvoting) after and before the redemption also meets the 80 percent
requirement.
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In Revenue Ruling 74-515, 1974-2 CB 118, common stock was exchanged for common
stock and preferred stock was exchanged for cash under the terms of a statutory
merger agreement. The ruling held that the receipt of cash by the shareholders
who owned only preferred stock was a distribution in exchange for the stock
pursuant to section 302(a) by reason of the complete termination of interest
provision of section 302(b)(3), and that gain or loss is recognized to those
shareholders measured by the difference between the amount received in the
redemption and the cost or other basis of the stock.
In Revenue Ruling 66-365, 1966-2 CB 116, it was held that, in a reorganization
described in section 368(a)(1)(A), where a cash payment made by the acquiring
corporation was not separately bargained-for consideration, but was instead in
lieu of fractional share interests to which the shareholders of the acquired
corporation were entitled, such cash payment should be treated under Code
section 302 as in redemption of the fractional share interests. Therefore, the
ruling stated that each shareholder's redemption should be treated as a
distribution in full payment in exchange for his fractional share interest
under section 302(a), provided the redemption is not essentially equivalent to
a dividend. This position is further clarified by Revenue Procedure 77-41,
1977-2 CB 574. Under this revenue procedure, the issuance of cash in lieu of a
fractional share of stock pursuant to the terms of a reorganization will
qualify to be treated as a capital gain (loss) transaction under section 302(a)
if the cash distribution is undertaken solely for the purpose of saving the
corporation the expense and inconvenience of issuing and transferring
fractional shares, and is not separately bargained-for consideration.
Code section 358(a)(1) provides that in the case of an exchange to which
section 354 or 356 applies, the basis of the property to be received under such
section without the recognition of gain or loss is the same as that of the
property exchanged, decreased by (i) the fair market value of any other
property (except money) received by the taxpayer, (ii) the amount of any money
received by the taxpayer, and (iii) the amount of loss to the taxpayer which
was recognized on such exchange; and increased by (i) the amount which was
treated as a dividend, and (ii) the amount of gain to the taxpayer which was
recognized on the exchange (not including any portion of such gain which was
treated as a dividend).
Code section 1223(1) provides that in determining the period for which the
taxpayer has held property received in an exchange, there is included the
period for which he held the property exchanged if the property has, for
purposes of determining gain or loss from a sale or exchange, the same basis in
whole or in part in his hands as the property exchanged and the property
exchanged was a capital asset as defined in section 1221 or property described
in section 1231.
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OPINION
Based on the above facts, representations, and assumptions, including the
assumption that MAIC common stock issued in the Merger (including the MAIC
shares issued to MOMEDICO) is valued at $8,785,919 or higher at the time of the
Merger, it is our opinion that:
(1) The acquisition by NEWCO of substantially all of the assets of MOMED
solely in exchange for MAIC stock, cash, and the assumption by NEWCO of the
liabilities of MOMED plus the liabilities to which the MOMED assets may be
subject, will qualify as a reorganization under sections 368(a)(1)(A) and
368(a)(2)(D) of the Code. For this purpose, (a) "substantially all" means
at least 90 percent of the fair market value of the net assets and at least
70 percent of the fair market value of the gross assets of MOMED
immediately prior to the Merger; and (b) amounts used by MOMED to pay
reorganization expenses and dissenting shareholders, if any, will be
included as assets held by MOMED immediately prior to the Merger. Cash
paid by MAIC to MOMED shareholders in lieu of shares of MAIC stock will not
be taken into account in determining whether the "substantially all"
requirement of section 368(a)(2)(D) is met. Revenue Ruling 77-307. MOMED,
MAIC, and NEWCO will each be "a party to a reorganization" within the
meaning of section 368(b).
(2) A MOMED shareholder who receives solely MAIC common shares (including any
fractional share interest to which he may be entitled) will recognize no
gain or loss upon his exchange of MOMED stock solely for shares of MAIC
stock. Section 354(a) of the Code.
(3) If a MOMED shareholder receives both cash (other than cash in lieu of a
fractional share of MAIC stock) and MAIC stock in exchange for his MOMED
stock, gain will be recognized, but in an amount not in excess of the
amount of cash received. Section 356(a)(1) of the Code. If the exchange
has the effect of the distribution of a dividend (determined with the
application of section 318), then the amount of gain recognized that is not
in excess of the MOMED shareholder's ratable share of undistributed
earnings and profits of MOMED will be treated as a dividend. Section
356(a)(2) of the Code. The determination of whether the exchange has the
effect of the distribution of a dividend will be made on a shareholder by
shareholder basis in accordance with the principles enunciated in
Commissioner x. Xxxxx, 489 US 726 (1989). No loss will be recognized.
Section 356(c) of the Code.
(4) The basis of the MAIC stock received by the shareholders of MOMED
(including any fractional shares to which they may be entitled) will be
the same as the basis of the MOMED stock surrendered in exchange therefor
decreased by the amount of
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cash received by the shareholder and increased by the amount, if any, that
was treated as a dividend and the amount of gain recognized to the
shareholder on the exchange (not including any portion of such gain that
is treated as a dividend). Section 358(a)(1) of the Code.
(5) The holding period of the MAIC stock received by MOMED shareholders
(including any fractional shares to which they may be entitled) will
include the period during which the MOMED stock surrendered in exchange
therefor was held by the MOMED shareholders, provided that the MOMED stock
surrendered was a capital asset in the hands of the MOMED shareholders on
the date of the exchange. Section 1223(1) of the Code.
(6) If a shareholder makes a Cash Election or dissents to the transaction and
receives solely cash in exchange for MOMED stock, such cash will be treated
as having been received as a distribution in redemption of the MOMED stock,
subject to the provisions of section 302 of the Code. Where, as a result
of such distribution, a shareholder owns no MAIC stock, either directly or
by reason of the application of section 318, the redemption will be a
complete termination of interest within the meaning of section 302(b)(3)
and, provided neither MOMED nor MAIC is a collapsible corporation as
defined in section 341(b), such cash will be treated as a distribution in
full payment in exchange for his or her MOMED stock as provided in section
302(a). Such shareholders will recognize gain or loss under section 1001
measured by the difference between the amount of cash received and the
adjusted basis of the MOMED stock surrendered. Revenue Ruling 74-515.
(7) Cash received by shareholders of MOMED in lieu of fractional shares of
MAIC common stock will be treated as if the fractional shares were
actually issued by MAIC and then redeemed by MAIC for cash. These cash
payments will be treated as having been received in exchange for the
redeemed fractional share interests under section 302(a), provided
MAIC is not a collapsible corporation as defined in section 341(b).
Revenue Ruling 66-365 and Revenue Procedure 77-41.
*****
The opinions expressed above are rendered only with respect to the specific
matters discussed herein, and we express no opinion with respect to any other
Federal or state income tax or legal aspect of the transaction. If any of the
above-stated facts, circumstances, representations, or assumptions are not
entirely complete or accurate, it is imperative that we be informed
immediately, as the inaccuracy or incompleteness could have a material effect
on our conclusions. In rendering our opinion, we are relying upon the relevant
provisions of the Internal Revenue Code of 1986, as amended, the
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regulations thereunder, and judicial and administrative interpretations
thereof, which are subject to change or modification by subsequent legislative,
regulatory, administrative, or judicial decisions. Any such changes could also
have an effect on the validity of our opinion. KPMG does not undertake any
responsibility to update this opinion in the event of any such subsequent
change.
/s/ KPMG Peat Marwick LLP
