Opinion ID: 2189758
Heading Depth: 1
Heading Rank: 1

Heading: cost basis and depreciation

Text: DPW's field auditor disallowed Fair Winds Manor, Inc.'s claim on its 1981 medical assistance cost report for $21,935 in depreciation. This amount reflected the increased cost basis of the real estate purchased by the Blairs. [6] The basis of the field auditor's decision was that a determination of the cost basis of assets, as provided by Manual Section IV(D)(9)(f) cannot recognize the re-valuation of an asset based on a related party purchase. 8 Pa.Bull. 2836 (1978). Manual Section IV(D)(9)(f) 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 lesser of at least two bonafide [sic] appraisals at the time of the sale and less any straight line depreciation by the prior owner. The sale must be an arm's length transaction consummated in the open market between nonrelated parties in a normal buyer-seller relationship. 8 Pa.Bull. 2836 (1978) (emphasis added). On appeal to DPW's Office of Hearings and Appeals, the Attorney Examiner stated that the partnership buy out must meet each and every requirement of the last sentence of paragraph (f) for the cost to be recognized for depreciation purposes. The Attorney Examiner determined that a normal buyer-seller relationship did not exist, therefore the sale assets could not be recognized for a step-up in the cost basis of the realty and a corresponding increase in depreciation allowance. [7] Commonwealth Court affirmed the order of DPW, finding the department's interpretation of Manual Section IV(D)(9)(f) to be in accord with the section's plain language. Appellant argues that it is entitled to a stepped-up cost basis in the real estate and a corresponding increase in depreciation allowance because the Blairs acquired the partnership assets (real estate) as the result of bona fide arm's length negotiations. Appellant also contends that Commonwealth Court's and DPW's decisions misconstrue the intent and purpose of the Social Security Act which establishes the federal/state program of medical assistance. 42 U.S.C. § 1396(a)(13)(A). The focus on subsection (f) of Manual Section IV(D)(9) is misplaced. In Department of Public Welfare v. Forbes Health System, 492 Pa. 77, 81, 422 A.2d 480, 482 (1980), we enunciated a two step analysis for review of an administrative agency's interpretation of its own regulations. This analysis provides that: First, [i]n construing administrative regulations, `the ultimate criterion is the administrative interpretation, which becomes of controlling weight unless it is plainly erroneous or inconsistent with the regulation.' . . . Second, the regulations must be consistent with the statute under which they were promulgated. In this case, DPW has interpreted its administrative regulation, Manual Section IV(D)(9)(f), as applicable to the Blair's acquisition of the partnership's real estate. For this subsection of the regulation to apply, however, the initial requirements of Manual Section IV(D)(9) must first be satisfied. Those requirements include: 9. Depreciation allowance. Depreciation on capital assets including assets for normal standby or emergency use in which the facility is the record title holder and which assets are used to provide covered services to Medical Assistance recipients, is an allowance cost subject to the following conditions: 8 Pa.Bull. 2836 (1978) (emphasis added). Thus, in order to claim depreciation on capital assets under this subsection not only must the asset be used to provide covered services to Medical Assistance recipients but the facility must also be the record title holder of the asset. [8] Fair Winds Manor, Inc., while a skilled nursing and intermediate care facility, did not hold title to the physical plant and real estate it occupied. As of November 6, 1980, the record title holder of that depreciable capital asset was the Blairs as tenants by the entirety. Since one of the Manual Section IV(D)(9) requirements could not be met, the plain language of the regulation precludes application of subsection (f) regardless of whether or not the sale was in a normal buyer-seller relationship. [9] Although we find DPW's application of Manual Section IV(D)(9)(f) to this case to be plainly erroneous based on the plain language of the regulation, and such an interpretation will not control to deny a step-up in cost basis in other cases, we affirm the order of Commonwealth Court on the alternative reasons stated. [10]