Opinion ID: 1992669
Heading Depth: 2
Heading Rank: 3

Heading: Assignment of Useful Lives

Text: Appellants' contention is that, in assigning useful lives to Appellants' depreciable assets in the nursing homes, the DPW erred in relying on the useful lives assigned by the prior owner. Instead, Appellants claim that the DPW should have used an updated useful life (also known as relifing), based upon American Hospital Association (AHA) guidelines, less years of use. Appellants claim that since the Manual in effect at the time of the assignment was silent on the calculation method, HIM-15 should control. They also argue that DPW's methodology contravenes the step-up in basis, required by its own regulations. However, as the Commonwealth Court correctly observed, the DPW's regulations do not permit relifing. The court noted that it had previously considered the relifing issue in Grandview Health Homes, Inc. v. Commonwealth, Dep't of Pub. Welfare, 122 Pa.Commw. 356, 552 A.2d 720 (1988), where the facility raised the exact argument Appellants assert here. The court rejected the facility's position, holding that section IV.D.9.b. of the Manual controlled, Manual section IV.D.9.b clearly requires that the method and procedure used for computing depreciation must be consistent year-to-year. If asset lives were permitted to be changed, the method and procedure of calculating depreciation would not be consistent. Id. at 368, 552 A.2d at 726. Recognizing that Manual Section IV.D.9.a. conditions depreciation allowance on a requirement that asset lives be in accordance with IRS or AHA guidelines, id. at 369, 552 A.2d at 726, the Grandview court concluded that a new owner could assign new lives consistent with those guidelines if the prior owner did not do so. However, in applying Grandview to the present matter, the court noted that Appellants did not contend that the prior owner's lives were inconsistent with the applicable guidelines. As such, the court reasoned that the Grandview exception was inapplicable. Suburban, 146 Pa. Commw. at 139, 604 A.2d at 1190. We agree with the Commonwealth Court that, contrary to Appellants' position, section IV.D.9.b controls by requiring that [t]he method and procedure for computing depreciation must be applied from year-to-year on a consistent basis. The DPW has reasonably interpreted this provision to require that once a useful life has been established by an owner, it cannot be changed by that owner or any subsequent owner. Thus, the Manual is not silent on the DPW's useful life procedure, as Appellants assert. See Homestead Nursing & Convalescent Home v. Commonwealth, Dep't of Pub. Welfare, 135 Pa. Commw. 47, 51 n. 3, 579 A.2d 440, 444 n. 3 (1990) (premise that DPW's procedure does not follow from Manual is erroneous), appeal denied, 530 Pa. 648, 607 A.2d 257 (1992). [3] Appellants also claim that the DPW methodology applied here violates its own regulations concerning step-up in basis. See Manual section IV.D.9.f. (allowing increase in an asset's cost basis when it is sold). However, the DPW's methodology can result in greater depreciation to the new owner than would have been paid to the prior owner had the facility not been sold. [4] Further, the fact that application of section 9.f can in some instances result in the failure to permit total depreciation of the original cost basis of a facility. . . is not enough to warrant an invalidation of the rule by the court. Mountain Rest Nursing Home, Inc. v. Commonwealth, Dep't of Pub. Welfare, 73 Pa.Commw. 42, 48, 457 A.2d 600, 603 (1983). Again, the DPW's interpretation of its own regulations must be upheld unless clearly erroneous, inconsistent with regulation, or contrary to the underlying statutes. Here, the DPW's interpretation of section 9.a. is a reasonable one, assuring consistency in the method and procedure for computing depreciation between separate ownership periods. Thus, we agree with the Commonwealth Court that the DPW's computation of useful lives was proper.