Appeal from the Order of the Commonwealth Court of Pennsylvania Entered August 28, 1986, at No. 64 C.D. 1985, Affirming the Order of Office of Hearings and Appeals, Department of Public Welfare, Entered December 11, 1984, at Docket Nos. 23-80-184, 23-81-140, 23-82-265.
Nix, C.j., and Larsen, Flaherty, McDermott, Zappala and Papadakos, JJ. Hutchinson, Former Justice, did not participate in the consideration or decision of this case.
Fair Winds Manor, Inc. (Appellant) a privately owned skilled nursing and intermediate care facility, appeals a Commonwealth Court order 100 Pa. Commw. 139, 514 A.2d 642, affirming an order of the Director, Office of Hearings and Appeals (Director) of the Pennsylvania Department of Public Welfare (DPW). The Director's order denied Appellant's exceptions to DPW audit findings that disallowed certain Medical Assistance reimbursements.*fn1 We granted
the Appellant's petition for allowance of appeal to review DPW's denial of a step-up basis for depreciation of leased facilities and DPW's audit protocol of offsetting interest income from working capital against capital interest expense.*fn2 For the reasons that follow, we affirm.
In 1958, Charles and Helena Brown acquired real estate for use as a nursing home. They also owned all of the stock of Fair Winds Manor, Inc., which has been the nursing home's service provider since 1964. In 1967 Charles and Helena Brown transferred title to the subject property from their own name to a partnership -- Fair Winds Farm. Fair Winds Manor, Inc. in turn leased the property from Fair Winds Farm. The partners of Fair Winds Farm were Charles and Helena Brown and their three children Alfred, Nadine, and Zarah Brown Blair. The children were later each given a one-fifth interest in Fair Winds Manor, Inc. In 1972 Nadine Brown sold her one-fifth share in Fair Winds Manor, Inc. to her brother-in-law Kenneth Blair. Alfred Brown transferred his one-fifth interest in Fair Winds Manor, Inc. to Fair Winds Farm that same year.
On July 1, 1979 the real estate that had been transferred to Fair Winds Farm in 1967 was purchased by the newly formed Four Winds, Ltd.*fn3 Utilizing funds from their Four Winds, Ltd. partnership account(s), Kenneth and Zarah Brown Blair purchased the remaining sixty percent of Fair Winds Manor, Inc.'s outstanding stock in November, 1979,
thereby obtaining sole ownership of that corporation.*fn4 Fair Winds Manor, Inc. continued to lease the realty from Four Winds, Ltd.
During this period it was determined that alterations would have to be made to the existing structure of the facility in order to remedy Life Safety Code deficiencies. Kenneth Blair contacted the Nursing Home Loan Agency of the Commonwealth of Pennsylvania (Agency) to ascertain the availability of funds required for construction. The Agency required as a loan condition the personal guarantees of Four Winds, Ltd.'s general partners. Alfred and Marlene Brown would not personally guarantee the loan. Faced with this refusal, and thereby the certainty of discontinuing the facility's operation, Kenneth and Zarah Brown Blair purchased the interest of Alfred and Marlene Brown as well as Charles and Helena Brown in Four Winds, Ltd. on November 6, 1980. The result of this transaction was that Four Winds, Ltd. was dissolved and the subject property was titled in Kenneth and Zarah Brown Blair as tenants by the entirety. Consequently, Fair Winds Manor, Inc. now leased the realty from Kenneth and Zarah Brown Blair. The purchase of Four Winds, Ltd. also ensured that Fair Winds Manor, Inc. would receive the funds necessary to remedy Life Safety Code deficiencies from the Agency.*fn5
COST BASIS AND DEPRECIATION
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.*fn6 The ...