Opinion ID: 1992669
Heading Depth: 2
Heading Rank: 1

Heading: Allocation of Purchase Price

Text: Appellants first contend that the DPW erred in allocating the purchase prices of the nursing homes according to the prior owner's allocations. Instead, Appellants assert that the DPW should have used the values assigned by the independent appraisers at the approximate time of the sale. Appellants base their argument on the fact that section IV.D.9.f of the Manual, which governs reimbursement of a long term care facility's depreciation on capital assets, is silent as to allocation of costs to groups of assets. The section provides: The cost basis for depreciable assets of a facility purchased as an ongoing operation shall be the lesser of the purchase price or the fair market value based on the lessor of at least two bona fide appraisals at the time of the sale and less any straight line depreciation by the prior owner. According to Appellants, the DPW's interpretation is illogical because the prudent purchaser who buys assets at less than fair market value ends up having its reimbursement determined by the prior owner's allocation. This in turn violates federal mandates to assure rates that are reasonable and adequate to meet costs incurred by efficiently and economically run facilities. See 42 U.S.C § 1396a(a)(13)(A). However, as the Commonwealth Court correctly observed, the Manual requires the assignment of a cost basis according to the lesser of the purchase price or the fair market price as appraised. Suburban, 146 Pa.Commw. at 134, 604 A.2d at 1187. Thus, the DPW properly rejected the tendered appraisals because, given that the appraisals were correctly rejected in determining the cost basis, section IV D(9)(f) does not require that the cost basis for the three asset categories, included in the total assets, be determined based upon these appraisals. Id. Since the transaction documents in connection with the purchases did not allow a literal interpretation of section IV.D.9.f of the Manual, and in the absence of any applicable provision in HIM-15, it was quite reasonable, as the Commonwealth Court noted, to use the prior owner's listed costs. Clearly, the failure of the transaction documents to make an allocation of the purchase price could not deprive DPW of the benefit of the provisions of section IV.D.9.f of the Manual which specified that the cost basis shall be the lesser of the purchase price or the fair market value . . . . (emphasis added). Where the purchase price (or allocated purchase price) cannot be determined from the transaction documents, the method adopted by the DPW in the instant case is reasonable because of the consistency it affords. [2]