Opinion ID: 2189758
Heading Depth: 1
Heading Rank: 2

Heading: offset of investment income

Text: The second issue raised by Appellant is whether DPW properly offset interest income against interest on capital indebtedness for fiscal years 1979, 1980 and 1981. Appellant received interest income from working capital funds temporarily held in savings accounts. These accounts were used to accumulate funds in order to liquidate short term operating loans. Appellant argues that the interest income earned on the savings accounts should be applied to offset interest expense on short-term operating loans. DPW interpreted the then existing regulation, Manual Section IV(D)(10)(e), as requiring that interest income first be offset against interest expense on capital indebtedness, with any remaining balance offset against interest expense on current indebtedness. Commonwealth Court found DPW's interpretation to be not plainly inconsistent with the wording of Manual Section IV(D)(10)(e) and therefore upheld DPW's policy as a valid interpretation of that regulation. Manual Section IV(D)(10)(e) provides that: e. Interest expense reduced by investment income, except when the investment income is derived from gifts or grants which are restricted by the donor and which are accounted for separately from other funds, will be recognized. 8 Pa.Bull. 2837 (1978). Appellant notes that investment income is not defined in the regulation and claims that it should therefore be interpreted according to federal policies and guidelines that apply to Medicare and Medicaid. [11] Finding federal guidelines controlling, Appellant argues that a distinction is made between interest on current versus capital indebtedness which is carried over to investment income. HIM 15, Section 202.1, 1 Medicare and Medicaid Guide (CCH) ¶ 4913. Appellant interprets the federal guidelines to mandate that short term investment income be offset against interest on current indebtedness and long term investment income to be offset against capital indebtedness. Appellant misconstrues the applicable federal guidelines. Investment income is defined in the Medicare Provider Reimbursement Manual as ... the aggregate net amount realized from dividends, interest, rental income, interest earned on temporary investment of withholding taxes, as well as all gains and losses. HIM 15, Section 202.2, 1 Medicare and Medicaid Guide (CCH) ¶ 4920. The federal guidelines do not differentiate investment income on the basis of its term. Additionally, no guideline provisions mandate how investment income is to be offset against interest expense  whether for current indebtedness or capital indebtedness. Appellant also asserts that DPW's policy interpretation is contrary to generally accepted accounting principles. No source citations are presented in support of this contention. Since the policies underlying applicable state regulations used to determine allowable cost reimbursement for skilled nursing and intermediate care facilities differ sharply from financial accounting requirements, the superficial appeal of this argument cannot sustain it. Compare, American Automobile Association v. United States, 367 U.S. 687, 692-93, 81 S.Ct. 1727, 1729-30, 6 L.Ed.2d 1109 (1961) (recognizing different treatment of income for tax purposes than by generally accepted accounting principles). The final issue raised by Appellant is that DPW's policy interpretation improperly promulgated a regulation. Appellant's reference is to a DPW memorandum dated April 23, 1980 which interprets Manual Section IV(D)(10)(e) whereby investment income is offset first against interest expense on capital indebtedness. [12] We disagree. DPW's interpretation of the offset rule does not constitute adoption of a new substantive regulation in contravention of The Commonwealth Documents Law, Act of July 31, 1968, P.L. 769, as amended 45 P.S. § 1102 et seq., since an agency may formulate interpretations of general applicability without publishing such opinions. [13] Compare Cheshire Hospital v. New Hampshire-Vermont Hospitalization Service, Inc. d/b/a Blue Cross/Blue Shield of New Hampshire-Vermont, 689 F.2d 1112 (1st Cir.1982) (Secretary's interpretation of offset rule does not constitute new substantive rule). Because we find that the increased depreciation based on this sale of assets could not be recognized, and DPW properly interpreted the then existing regulation so as to require that interest income first be offset against interest expense on capital indebtedness, the order of Commonwealth Court is affirmed. HUTCHINSON, Former Justice, did not participate in the consideration or decision of this case.