Judges: K. N. AYERS
Agency: Agency for Health Care Administration
Latest Update: Feb. 27, 1978
Summary: Petitioner entitled to separate reports of provider costs, same basis as predecessor in title, and a limited corporate officer reimbursement.
77-0665.PDFSTATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
SUNSET NURSING HOMES, INC. )
)
Petitioner, )
)
vs. ) CASE NO. 77-665
)
DEPARTMENT OF HEALTH AND )
REHABILITATIVE SERVICES, )
)
Respondent. )
)
RECOMMENDED ORDER
Pursuant to notice, the Division of Administrative Hearings by its duly designated Hearing Officer, K. N. Ayers, held a public hearing in the above styled case on December 14, 1977, at Coral Gables, Florida.
APPEARANCES
For Petitioner: Elliott S. Shaw, Esquire
100 North Biscayne Boulevard, Suite 607 Miami, Florida 33132
For Respondent: Leonard Helfand, Esquire
District XI
Department of Health and Rehabilitative Services
1320 South Dixie Highway Coral Gables, Florida 33146
James Mahorner, Esquire General Counsel Department of Health and
Rehabilitative Services
1323 Winewood Boulevard, Room 406
Tallahassee, Florida 32301
By letter dated March 17, 1977, Sunset Nursing Homes, Inc. (Sunset or Petitioner) protests the action of the Department of Health and Rehabilitative Services in disallowing various expenses relating to compensation of corporate officers and depreciation as well as requiring the three facilities operated by Sunset to be reported as separate providers, and requested a hearing.
Petitioner contends that the exchange agreement in which its owners exchanged property in the Chicago area for the property in the Miami area here involved was an arms length transaction and the values recited in this exchange agreement are truly representative of the fair value of the properties; that the compensation paid its two corporate officers is a fully justifiable expense; and that, since the three nursing homes here involved are owned and operated by the same corporate entity, they should be allowed to submit a consolidated report,
at least to the extent that any over payments made to one of these homes could be offset by costs in excess of the maximum allowable from Medicare patients at the other two nursing homes.
Respondent, on the other hand, contends that the basis for depreciation is the historical cost of the properties; that the compensation paid the corporate officers (and principal owners) of $93,606 and $80,582 respectively, for the fiscal year ending April 30, 1976, is excessive and unreasonable; and that since each nursing home is carried for license and all other purposes as a provider (of services) the rules and regulations require separate and not consolidated reports.
Three witnesses were called by Petitioner, two witnesses were called by the Respondent and seven exhibits were admitted into evidence. The lease of the Chicago property was originally offered as a late filed exhibit and assigned Exhibit No. 6. Later during the hearing a copy was produced marked and admitted as Exhibit No. 7. Objection to Exhibit No. 9 was sustained.
Near the conclusion of the hearing the parties stipulated that they would submit expert testimony in the form of depositions to the Hearing Officer respecting the fair market value of the Chicago property here involved at the time of the exchange in January, 1973. Such testimony was due by January 13, 1978. The attorney for Petitioner in a letter dated January 10, 1978, addressed to an attorney for the Respondent purported to stipulate to an extension of 20 days in which to present the evidence requested. That time too has passed without such evidence being received. After considering all evidence submitted, I submit the following:
FINDINGS OF FACT
In 1950 Donald Freund acquired property in Chicago on which ice constructed an apartment building. The property was held in trust with his wife as beneficiary of the trust. In 1560 the building was remodeled and converted into a nursing home at a cost of approximately $600,000. By lease dated May 8, 1963 (Exhibits 6 and 7) this property was leased to Sunset Nursing Home, Inc., a Delaware corporation, for a term of 28 years at a rental of $75,000 per year with provision for increases over the $75,000 of up to $9,000 per year if the lessee made net profits before taxes in excess of $45,000.
In January 1973 the Chicago nursing home had a depreciated or book value of approximately $230,000 and a first mortgage lien against it of some
$466,000.
On January 18, 1963 after several months of negotiations Freund entered into an exchange agreement (Exhibit 1) with National Health Services, Inc., a Delaware corporation, in which the Chicago nursing home with its $466,000-odd mortgage was exchanged for three nursing homes in the Miami area encumbered by mortgages totaling approximately $3,425,000 (Exhibit 1). All properties were operated as nursing homes at the time of this exchange. This was considered by the parties to be a tax free exchange of like properties.
Exhibit 1 recited that the parties had agreed that for exchange purposes the Chicago property had a value of $1,445,000 and the Miami properties a value of $4,400,000. The three nursing homes acquired by Freund in this exchange are known as the North Miami Convalescent Home, Ramsey Nursing Home and Hialeah Convalescent Home. At the hearing it was testified that six mortgages
including a wrap around on the three homes acquired existed upon acquisition in the amount of $2,971,553.
Since the mortgage on the Chicago property exceeded the basis at the time of the exchange Freund was required to pay capital gains taxes to IRS, but that fact is not relevant to the issues here involved.
After acquiring the Miami nursing homes they were apparently transferred by Freund to Sunset Nursing Homes, Inc. (Sunset), a Florida corporation, and the Petitioner herein. No evidence of this transfer was presented at the hearing; however, the testimony was uncontradicted that Donald Freund, his son, Bruce Freund, and his wife, each own one third of the stock outstanding in Sunset Nursing Homes, Inc. and that the principal assets of Sunset Nursing Home, Inc. are the three nursing homes in North Miami, Hialeah and Dade County. Donald Freund is president of Sunset and for the fiscal year ending April 30, 1976, he received compensation of $93,606 and his son received
$80,582.
The combined annual salaries of the president and vice president of a corporation operating 100 nursing homes in a chain headquartered in Tacoma, Washington is $173,000.
Professional Medical Group headquartered in Virginia Beach, Virginia, pays its chief executive officer $100,000 per year and its next four top executives together received $120,000. In addition to owning and managing some
30 nursing homes in Southeast United States, they provide computer services to many other nursing homes in the area.
The maximum compensation allowed by HEW for a nursing home owner is
$24,000 per year regardless if he owns more than one nursing home. The Department of Health and Rehabilitative Services has here stipulated that Sunset would be allowed $48,000 compensation for its executives exclusive of the current salaries paid to the individual nursing home supervisors.
Donald Freund also owns six nursing homes in Georgia and his testimony (Tr. p. 43) was that these nursing homes are not owned by Sunset.
Sunset Nursing Homes, Inc. is the sole shareholder of Sunshine, a management company that provides management services to both the Florida and Georgia nursing homes and pays the salaries of the Freunds. The total salaries paid to the Freunds was charged to Sunset as an operating expense. The appropriateness of this charge is contested by Respondent.
Donald Freund testified that he spends most of his time supervising the operation of the three nursing homes owned by Sunset. His son Bruce spends approximately 60 percent of his time supervising the 6 nursing homes in Georgia and 40 percent on the Florida homes. No evidence was presented regarding the charges made by Sunshine for the management services it provides the Georgia homes.
Each of the nursing homes owned by Sunset are separately licensed and each is designated as a provider. Infraction of rules by one of these nursing homes that could lead to revocation of that nursing home's license would not affect the licenses issued to the other two homes owned by Sunset.
Petitioner's contention that the three homes owned by Sunset should be allowed to submit a consolidated report was supported only by the testimony that
it would be more equitable to allow such reporting because the $98,000 overpayment allegedly made to Hialeah Convalescent Home resulted from it being the only one of the three whose allowable costs were below the caps established by HEW and Florida (HRS). The operating costs for the other two homes exceeded the maximum amount payable to them by some $173,000. These costs were computed using the expenses of salaries and depreciations here contested.
The original report submitted by Sunset carried the three nursing homes at historical costs or its predecessor in title's book value. It is Sunset's attempt to change the depreciable value of these properties to the "fair market" value that is one of the issues here involved.
All other multiple nursing homes owned by individuals or corporations submit separate reports for each nursing home and are not permitted to file consolidated reports.
CONCLUSIONS OF LAW
Rules and regulations applicable to provider assets are contained in the Provider Reimbursement Manual (HIM-15). For facilities acquired as ongoing operations on or after August 1, 1970, these rules provide:
The cost basis of a facility acquired as an ongoing operation in a bona fide sale on or after August 1, 1970, is limited to the lowest of the following: (a) fair market value of the tangible assets purchased, subject to the limitations given below applicable to the depreciable assets purchased (e.g. the provision limiting cost basis to the current reproduction cost of the asset, depreciated on a straight-line basis over its useful life to the time of sale),
(b) price paid by the purchaser (i.e. actual cost), or (c) fair market value of the facility at the time of sale.
Where the purchaser acquires the facility in a sale not bona fide, the cost basis is also limited by (d) the seller's cost basis, less accumulated depreciation, if this is lower than (a), (b), and (c) above.
The only evidence presented with respect to the exchange of property here involved was Exhibit 1. No appraisals, no assessed values for tax purposes, and no reproduction costs were presented. The only evidence of the value of the two properties exchanged was the self-serving declaration in Exhibit 1 that the parties agreed that "for exchange purposes" the value of the Chicago property was $1,445,000 and the Miami property was $4,400,000 with each subject to mortgages.
Assuming arguendo that this exchange constituted a bona fide sale and absent any evidence of reproduction costs, the basis of the assets acquired by Petitioner far ascertaining costs of provider services is the lower of the price paid by the purchaser or the fair market value of the property. The parties to the exchange here involved traded their equities in similar properties. Presumably, the equity of Freund in the Chicago property was the fair value of
the property less the existing mortgage. However, the "capital" he put in the Miami property was the book value of the Chicago property. He realized no capital gains on the exchange.
Both properties were comprised of nursing homes and operating costs of these homes were used to calculate costs of providing services. If two providers each having a fair market value of $1 ,000,000 and a depreciated book value of $400,000 are exchanged in a tax free exchange of like property, would each be allowed to use the fair market value as the basis for computing costs? Or would they each have to assume the historical costs of the "sellers"? The answer to these questions may depend upon whether such an exchange of property is a bona fide sale as that term is used in the regulations.
A bona fide sale contemplates an arms length transaction in which property is transferred from a willing seller to a willing buyer at a price mutually agreeable to both. Stated slightly differently a bona fide sale contemplates a sale and purchase at fair market value. The "sale" here involved constituted a tax free exchange of property and no evidence was presented that the "agreed upon" value of each property was, in fact, the fair market value of the facility at the time of the exchange.
This exchange of property was not a bona fide sale as that term is intended in the regulations. Since the sale was not bona fide the cost basis is further limited by the seller's cost basis less accumulated depreciation.
Other regulations supporting the above conclusions are contained in Section 104.10 of HIM-15 wherein historical costs is defined as:
Historical cost is the cost incurred by the present owner in acquiring the asset and to prepare it for use. Generally such costs include costs that would be capitalized under generally accepted accounting principles . . . . For depreciable assets acquired after July 1970, the
historical cost shall not exceed the lower of (1) current reproduction costs adjusted for straight-line depreciation over the life of the asset to the time of the purchase, or
(2) fair market value at the time of the purchase.
Where an appraisal of a proprietary provider's depreciable assets is necessary
because its property records do not adequately reflect the cost of the facility, the cost based on the appraisal may not exceed the capitalized cost basis of the asset used for federal income tax purposes.
At the time of the exchange the Chicago property had a book or depreciated value of some $230,000. This was the basis for the property for federal income tax purposes, and even if appraisals of the fair market value of the property had been submitted, the above quoted regulation appears to limit the appraised value to the basis for federal income tax purposes.
Section 10.411, HIM-15 would also appear applicable to the transactions occurring in this case. That section provides in part:
When an asset is acquired by trading in an asset that was depreciated under the program the cost of the new asset would be the sum
of the undepreciated balance of the old asset and the cash paid or to be paid.
Freund here exchanged an asset with a negative basis for federal income tax purposes for similar depreciable assets. It could perhaps be argued that under the historical cost concepts above quoted Petitioner's historical cost for the assets acquired is the seller's basis plus Freund's negative basis which constituted the "cash paid" for the new asset.
42 CFR 405.426 provides that a reasonable allowance of compensation for services of owners is an allowable cost, providing the services are actually performed in a necessary function and provides the following definitions.
Compensation. Compensation means the total benefit received by the owner for the services he renders to the institution.
It includes:
Salary amounts paid for managerial, administrative, professional , and other services.
Amounts paid by the institution for the personal benefit of the proprietor.
The cost of assets and services which the proprietor receives from the institution.
Deferred compensation.
Reasonableness. Reasonableness requires that the compensation allowance:
Be such an amount as would ordinarily be paid for comparable services by comparable institutions.
Depend upon the facts and circumstances of each case.
Necessary. Necessary requires that the function:
Be such that had the owner not rendered the services, the institution would have had to employ another person to perform the services.
Be pertinent to the operation and sound conduct of the institution.
These regulations also provide that in corporate providers the salaries of owners who are also employees are subject to the same requirements of reasonableness.
Had the facilities of Sunset been owned by an individual the compensation of the owner/manager would have been limited to $24,000 per year.
The two corporate owners whose salaries are disputed here as allowable costs were paid a total compensation of $174,168 in the year ending April 30, 1976. This was part of the management fee charged by the wholly owned corporation Sunshine to the parent Sunset which also owns the three facilities. The evidence was somewhat vague with respect to the necessity of the services provided by the Freunds and that all of their time was devoted to the homes owned by Sunset. Furthermore, no evidence was presented by Petitioner to show that such compensation was reasonable. Evidence was submitted that similar management compensation paid in other corporations involved substantially more facilities in much larger geographic areas.
Respondent's stipulation that total compensation for the corporate officers of $48,000 per year would be accepted for computing the costs of provider services appears generous and should be accepted. Corporate officers' compensation should be commensurate with the value of the services provided and not determined by the ownership of stock.
Respondent's final contention that consolidated reports for the three facilities should be allowed is contrary to the regulations and to the concept that each facility is a separate and distinct provider of services which must stand on its own in computing its costs of providing services.
From the foregoing it is concluded that the Petitioner failed to show that the exchange of property was a bona fide sale or the fair market value of the assets acquired. The basis for computing the depreciation of the assets are therefore the basis of the seller at the time the assets were acquired by Sunset. The compensation paid the corporate officers of nearly $175,000 per year was shown to be neither reasonable nor necessary. A total compensation of
$48,000 is an appropriate maximum annual compensation for these services. The contention of Sunset that consolidated reports be submitted for the facilities should be disallowed. It is, therefore
RECOMMENDED that the basis for computation of depreciation of the depreciable assets of Sunset Nursing Homes, Inc. be the same basis as its predecessor in title; that the compensation of the corporate officers of Sunset be limited to $48,000 per year; and that each nursing home owned by Sunset submit separate costs of provider services and not consolidated reports.
DONE and ENTERED this 17th day of February, 1978, in Tallahassee, Florida.
K. N. AYERS Hearing Officer
Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304
(904) 488-9675
COPIES FURNISHED:
Elliott S. Shaw, Esquire
Suite 607, 100 North Biscayne Blvd.
Miami, Florida 33132
Leonard Helfand, Esquire District XI, Office of HRS 1320 S. Dixie Highway
Coral Gables, Florida 33146
James Mahorner, Esquire General Counsel Department of Health and
Rehabilitative Services 1323 Winewood Boulevard
Tallahassee, Florida 32301
Docket for Case No: 77-000665
Orders for Case No: 77-000665
| Issue Date |
Document |
Summary |
|
Feb. 22, 1978 |
Agency Final Order
|
|
|
Feb. 17, 1978 |
Recommended Order
|
Petitioner entitled to separate reports of provider costs, same basis as predecessor in title, and a limited corporate officer reimbursement.
|
