STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA LAND TRUST NUMBER 4368 ) OF THE BANK OF PALM BEACH AND ) TRUST COMPANY, d/b/a WOODLANDS ) CONVALESCENT CENTER, )

)

Petitioner, )

)

vs. ) CASE NO. 82-1894

)

DEPARTMENT OF HEALTH AND )

REHABILITATIVE SERVICES, )

)

Respondent. )

)

RECOMMENDED ORDER

Pursuant to notice, a formal hearing was held in the above case before the Division of Administrative Hearings by its duly designated Hearing Officer, DONALD R. ALEXANDER, on September 22, 1982, in Orlando, Florida.

APPEARANCES

For Petitioner: Karen L. Goldsmith, Esquire and

D. Andrew DeBevoise, Esquire Post Office Box 1980 Orlando, Florida 32802

For Respondent: Joseph L. Shields, Esquire

Building 3, Room 218

1317 Winewood Boulevard

Tallahassee, Florida 32301 BACKGROUND

In this proceeding, Petitioner, Florida Land Trust Number 4368 of the Bank of Palm Beach and Trust Company, d/b/a Woodlands Convalescent Center, has challenged certain adjustments to its 1978 medicaid cost report proposed by Respondent, Department of Health and Rehabilitative Services. The controversy arose when Respondent issued a letter dated May 28, 1982, wherein it concluded that Petitioner had overstated allowable expenses by $226,064, thereby resulting in overpayments totaling $22,616.

Petitioner requested a formal hearing pursuant to Subsection 120.57(1), Florida Statutes, to contest seven proposed adjustments. These included five adjustments to depreciation expense ($12,687), a medicare adjustment ($192,760), and an adjustment to return on equity capital ($12,541). 1/ The matter was forwarded by Respondent to the Division of Administrative Hearings on July 9, 1982, with a request that a Hearing Officer be assigned to conduct a hearing.

By notice of hearing dated September 2, 1982, the final hearing was set for September 22, 1982, in Orlando, Florida. By agreement of the parties, this

matter was heard on a consolidated basis with Case No. 82-1908. However, separate recommended orders are being entered.

At the final hearing, Petitioner presented the testimony of Dr. John A. McCoy, president of Health Care Associates, Inc., and offered Petitioner's Exhibits 1-17 and 19-23; all were received in evidence. Respondent presented the testimony of John T. Donaldson, audit review analyst with Respondent's Office of Audit and Quality Services, and offered Respondent's Exhibits 1-3; all were received except Exhibit 2 upon which a ruling was reserved.

There was no transcript of hearing in this proceeding. By agreement of the parties, the time for filing proposed findings of fact and conclusions of law was extended to October 25, 1982; the same were filed by Petitioner and Respondent on October 22 and 25, 1982, respectively, and have been considered by the under signed in the preparation of this order. Findings of fact not included in this order were considered irrelevant to the issues, immaterial to the results reached, or not supported by competent and substantial evidence.

The parties have also agreed to waive the requirement that a recommended order be filed within thirty days after the date of the hearing.

The issue herein is whether Petitioner is required to repay Respondent for medicaid overpayments allegedly received for calendar year 1978.

Based upon all the evidence, the following findings of fact are determined: FINDINGS OF FACT

1. Petitioner, Florida Land Trust Number 4368 of the Bank of Palm Beach and Trust Company, operates a nursing home facility in Lutz, Florida, under the name of Woodlands Convalescent Center (Woodlands). It is licensed by Respondent, Department of Health and Rehabilitative Services.

   
   

2. On October 15, 1976, Land Trust Agreement 4367 was executed whereby the Bank of Palm Beach and Trust Company took title to the land on which Petitioner's nursing home is located. Under the agreement, Charles B. Bland, Jr. and Stanford L. Hoye were each to receive 50 percent of the ". . .earnings, avails and proceeds of said real estate. . ." Land Trust Agreement 4366 was later executed by Bland and Hoye to permit the Bank to take title to any improvements erected on the land. The improvements constitute the present nursing facility. Both trusts are commonly known as Illinois Land Trusts, and legal and equitable title to the facility's assets rest within the trustee.

   
   

3. In late 1976, Bland and Hoye began construction of the present nursing home. Shortly thereafter, Dr. John A. McCoy was hired by Bland and Hoye to serve as president of Health Care Associates, Inc. (HCA), a firm owned by Bland and which manages Woodlands and other nursing facilities in the state. In addition to his salary with HCA, McCoy was offered an option to "purchase a 25 percent interest" in the Woodlands facility.

   
   

4. On April 1, 1978 McCoy exercised his option to purchase an interest in the facility. He agreed to pay Bland and Hoye an amount equal to 25 percent of the facility's equity value. This was determined by taking the current appraised value of the property less the outstanding first mortgage.

   
   

5. Under the terms of the agreement, McCoy gave Bland and Hoye promissory notes that matured in ten years at a stated percentage rate of five percent. The debt is repaid from that portion of profits that he would otherwise receive

   as a part-owner; however, he receives no distribution of profits until the notes are fully repaid.

   
   

6. After executing the promissory notes, McCoy received an assignment of beneficial interest in the Land Trusts including the right to 25 percent of the "earnings, avails and other proceeds of the real estate and including management and all other rights of beneficiaries" as set forth in the Agreements.

   
   

7. The indebtedness of McCoy to Bland and Hoye is reflected as a liability on McCoy's personal financial statements. Similarly, the indebtedness is shown as a note receivable (or asset) on the financial statements of Bland and Hoye.

   
   

8. If the acquisition by McCoy of a 25 percent interest in the Land Trusts constituted a partial change in ownership of the depreciable assets, a larger depreciable base may be used in computing depreciation expense. This is commonly referred to as using a "stepped up basis" for depreciation purposes and permits the facility to claim a higher depreciation expense allowance. Petitioner treated the transaction as a sale and accordingly claimed $4,563 in additional depreciation expense for 1978.

   
   

9. Respondent originally contended the acquisition was not an arms-length transaction and therefore could not qualify as a sale. It later changed its position and now contends the acquisition to be a transfer of personal property and analogous to a transfer of stock.

   
   

10. Applicable depreciation guidelines adopted by the American Hospital Association require that a 30-year life be used on fire-resistant structures and a 40-year life be used on all fireproof construction. Petitioner contends the structure of the facility is fire-resistant and therefore qualifies for a 30- year useful life. However, the structure was described by Petitioner as having masonry walls with steel studs, sheetrock glued on and steel bar joists. This type of construction places the structure within the category of "fireproofed" rather than "fire-resistant", and therefore the useful life of the building should be 40 years. Accordingly, depreciation expense should be reduced by

    $4,280.

    
    

11. The parties have agreed that the return on equity should be recomputed in accordance with any adjustments made herein.

    
    

    CONCLUSIONS OF LAW

    
    

12. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties thereto pursuant to Subsection 120.57(1), Florida Statutes.

    
    

13. In proceedings of this nature, Petitioner carries the burden of proof in establishing its entitlement to reimbursement of expenses incurred while participating in the medicaid program. See, e.g., Department of Transportation

    v. J.W.C. Construction Co., Inc., 396 So.2d 778 (Fla. 1st DCA 1981).

    
    

14. Requiring resolution herein are two issues. These include (a) whether a stepped-up basis or original cost should be used in computing depreciation expense, and (b) the appropriate useful life of the building. Each will be discussed separately hereinafter.

    
    

    1. Stepped-up basis versus original cost

15. Petitioner claims that a stepped-up basis for calculating depreciation expense should be used since a partial sale of the facility occurred in 1978. The validity of this contention turns upon whether the acquisition of a 25 percent beneficial interest in the land trusts constituted a sale of 25 percent of the depreciable assets of the facility.

    
    

16. If a change in ownership of depreciable assets actually occurred, a stepped-up basis may be used. See Florida Title XIX Long Term Care and Reimbursement Plan, Part III, G.3.b(2). But the transaction in question was merely a transfer of personal property by two beneficiaries to a third. This is true since the rights, interest and obligations of beneficiaries are not interests in real estate, but are expressly characterized as personal property. Goldman v. Mandell, 403 So.2d 511 (Fla. 5th DCA 1981); Taylor v. Richmond's New Approach Association, Inc., 351 So.2d 1094 (Fla. 2nd DCA 1977), cert. denied,

    313 So.2d 885 (Fla. 1978); Petitioner's Exhibit 19. Accordingly, the conveyance did not result in a transfer of depreciable assets between the parties, but only in a transfer of personal property. This being so, a stepped-up basis for calculating depreciation expense should not be used.

    
    

    1. Useful Life of Building

    
    

17. This issue concerns a determination as to the proper useful life to apply to the building of the facility for depreciation purposes. The evidence discloses that the composition of the structure falls within the category of a fireproofed structure, and that a 40-year life should be used.

    
    

18. Consistent with the agreement of the parties, the return on equity should be computed in a manner consistent with each of the foregoing adjustments.

    
    

19. The objection to Respondent's Exhibit 2 is hereby sustained.

    
    

20. A pleading styled "Petitioner's Response to Respondent's Memorandum of Law" has been disregarded since such a filing is not contemplated nor authorized by the Model Rules of Procedure.

RECOMMENDATION

Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petitioner's 1978 cost report be modified consistent with

the foregoing adjustments.

DONE and ENTERED this 10th day of November, 1982, in Tallahassee, Florida.

DONALD R. ALEXANDER

Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32301

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 10th day of November, 1982.

ENDNOTE

1/ These issues were subsequently narrowed by Petitioner to contesting three depreciation adjustments, determining the useful life of the building, and recomputing the return on equity.

COPIES FURNISHED:

Karen L. Goldsmith, Esquire and

D. Andrew DeBevoise, Esquire Post Office Box 1980 Orlando, Florida 32802

Joseph L. Shields, Esquire Building 3, Room 219

1317 Winewood Boulevard

Tallahassee, Florida 32301

Docket for Case No: 82-001894

Orders for Case No: 82-001894