[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR413.134]

[Page 628-642]
 
                         TITLE 42--PUBLIC HEALTH
 
                    CHAPTER IV--CENTERS FOR MEDICARE
                          & MEDICAID SERVICES,
                        DEPARTMENT OF HEALTH AND
                             HUMAN SERVICES
 
 PART 413_PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR 
 
                     Subpart G_Capital-Related Costs
 
Sec. 413.134  Depreciation: Allowance for depreciation based on asset 
costs.

    (a) Principle. An appropriate allowance for depreciation on 
buildings and equipment used in the provision of patient care is an 
allowable cost. The depreciation must be--
    (1) Identifiable and recorded in the provider's accounting records;
    (2) Based on the historical cost of the asset, except as specified 
in paragraph (j) of this section regarding donated assets; and
    (3) Prorated over the estimated useful life of the asset using--
    (i) The straight-line method; or
    (ii) Accelerated depreciation under a declining balance method (not 
to exceed double the straight-line rate) or the sum-of-the-years' digits 
method in the following situations:
    (A) Depreciable assets for which accelerated depreciation was used 
for Medicare purposes before August 1, 1970, including those assets for 
which a timely request to change from straight-line depreciation to 
accelerated depreciation was received by an intermediary before August 
1, 1970;
    (B) Depreciable assets acquired before August 1, 1970, if no 
election to use straight-line or accelerated depreciation was in effect 
on August 1, 1970, and the provider was participating in the program on 
August 1, 1970;
    (C) Depreciable assets of a provider if construction of such 
depreciable asset began before February 5, 1970, and the provider was 
participating in the program on February 5, 1970; or

[[Page 629]]

    (D) Depreciable assets of a provider if a valid written contract was 
entered into by a provider participating in the program before February 
5, 1970, for construction, acquisition, or for the permanent financing 
thereof, and such contract was binding on a provider on February 5, 
1970, and at all times thereafter; or
    (iii) A declining balance method, not to exceed 150 percent of the 
straight-line rate, for a depreciable asset acquired after July 31, 
1970; however, this declining balance method may be used only if the 
cash flow from depreciation on the total assets of the institution 
during the reporting period, including straight-line depreciation on the 
assets in question, is insufficient (assuming funding of available 
capital not required currently for amortization and assuming reasonable 
interest income on such funds) to supply the funds required to meet the 
reasonable principal amortization schedules on the capital debts related 
to the provider's total depreciable assets. For each depreciable asset 
for which a provider requests authorization to use a declining balance 
method for Medicare reimbursement purposes, but not to exceed 150 
percent of the straight-line rate, the provider must demonstrate to the 
intermediary's satisfaction that the required cash flow need exists. For 
each depreciable asset in which a provider justifies the use of 
accelerated depreciation, the intermediary must give written approval 
for the use of a depreciation method other than straight-line before 
basing any interim payment on this accelerated depreciation or making 
its reasonable cost determination which includes an allowance for such 
depreciation.
    (b) General rules--(1) Historical cost. Historical cost is the cost 
incurred by the present owner in acquiring the asset.
    (i) All providers--(A) Depreciable assets acquired after July 31, 
1970 and before December 1, 1997. For depreciable assets acquired after 
July 31, 1970 and before December 1, 1997, and for a hospital or an SNF, 
acquired before July 18, 1984, the historical cost may not exceed the 
lower of current reproduction cost adjusted for straight-line 
depreciation over the life of the asset to the time of the purchase or 
the fair market value of the asset at the time of its purchase.
    (B) Depreciable assets acquired on or after December 1, 1997. For 
depreciable assets acquired on or after December 1, 1997, the historical 
cost of the asset that will be recognized under this program must not 
exceed the historical cost less depreciation allowed to the owner of 
record as of August 5, 1997 (or if an asset did not exist as of August 
5, 1997, the first owner of record after August 5, 1997). For this 
paragraph (b)(1)(i)(B), the following apply:
    (1) An asset that was not in existence as of August 5, 1997 includes 
an asset that physically existed but was not owned by a provider 
participating in the Medicare program as of that date.
    (2) The acquisition cost to the owner of record is subject to the 
limitation on historical costs described in paragraphs (g) (1), (2), and 
(3) of this section, and is reduced by any depreciation taken by the 
owner of record. The limitation on historical cost is also applied to 
the purchase of land, which is a capital asset that is neither 
depreciable nor amortizable under any circumstances. (See Sec. Sec. 
413.153(d) and 413.157(b) for application of the limitation to the cost 
of land for purposes of determining the allowable interest expense.)
    (3) Acquisition cost to the owner of record includes the costs of 
betterment or improvements that extend the estimated useful life of an 
asset at least 2 years beyond its original estimated useful life or that 
increase the productivity of an asset significantly over its original 
productivity.
    (4) For assets acquired prior to a provider's entrance into the 
Medicare program, the acquisition cost to the owner of record is the 
historical cost when acquired, rather than when the provider entered the 
program.
    (5) For assets subject to the optional depreciation allowance as 
described in Sec. 413.139, the acquisition cost to the owner of record 
is the historical cost established for those assets when the provider 
changed to actual depreciation as described in Sec. 413.139(e). If the 
provider did not change to actual depreciation, as described in Sec. 
413.139(e), for optional allowance assets, the acquisition cost to the 
owner of record is

[[Page 630]]

based on the provider's recorded historical cost of the asset when 
acquired. If the provider has no historical cost records for optional 
allowance assets, the acquisition cost to the owner of record is 
established by appraisal.
    (6) The historical cost of an asset acquired on or after July 18, 
1984 may not include costs attributable to the negotiation or settlement 
of the sale or purchase (by acquisition, merger, or consolidation) of 
any capital asset for which any payment was previously made under the 
Medicare program. The costs to be excluded include, but are not limited 
to, appraisal costs (except those incurred at the request of the 
intermediary under paragraph (f)(2)(iv) of this section), legal fees, 
accounting and administrative costs, travel costs, and the costs of 
feasibility studies.
    (ii) Hospitals and SNFs only. (A) For assets acquired on or after 
July 18, 1984 and before December 1, 1997 and not subject to an 
enforceable agreement entered into before July 18, 1984, historical cost 
may not exceed the lowest of the following:
    (1) The allowable acquisition cost of the asset to the owner of 
record as of July 18, 1984 (or, in the case of an asset not in existence 
as of July 18, 1984, the first owner of record of the asset after that 
date);
    (2) The acquisition cost of the asset to the new owner; or
    (3) The fair market value of the asset on the date of acquisition.
    (B) For purposes of applying paragraph (b)(1)(ii)(A) of this 
section, an asset not in existence as of July 18, 1984 includes any 
asset that physically existed, but was not owned by a hospital or SNF 
participating in the Medicare program as of July 18, 1984.
    (C) The acquisition cost to the owner of record is subject to any 
limitation on historical costs described in paragraphs (b)(1)(i) or 
(g)(1) and (2) of this section, and is not reduced by any depreciation 
taken by the owner of record. This limitation on historical cost is also 
applied to the purchase of land, a capital asset that is neither 
depreciable nor amortizable under any circumstances. (See Sec. Sec. 
413.153(d) and 413.157(b) for application of the limitation to the cost 
of land for purposes of determining allowable interest expense and 
return on equity capital or proprietary providers.)
    (D) Acquisition cost to the owner of record includes the costs of 
betterments or improvements that extend the estimated useful life of an 
asset at least two years beyond its original estimated useful life or 
increase the productivity of an asset significantly over its original 
productivity.
    (E) For assets acquired prior to a hospital's or SNF's entrance into 
the Medicare program, the acquisition cost to the owner of record is the 
historical cost of the asset when acquired, rather than when the 
hospital or SNF entered the program.
    (F) For assets subject to the optional depreciation allowance as 
described in Sec. 413.139, the acquisition cost to the owner of record 
is the historical cost established for those assets when the hospital or 
SNF changed to actual depreciation as described in Sec. 413.139(e). If 
the hospital or SNF did not change to actual depreciation, as described 
in Sec. 413.139(e), for optional allowance assets, the acquisition cost 
to the owner of record is established by reference to the hospital's or 
SNF's recorded historical cost of the asset when acquired. If the 
hospital or SNF has no historical cost records for optional allowance 
assets, the acquisition cost to the owner of record is established by 
appraisal.
    (G) The historical cost of an asset acquired on or after July 18, 
1984 may not include costs attributable to the negotiation or settlement 
of the sale or purchase (by acquisition, merger, or consolidation) of 
any capital asset for which any payment was previously made under the 
Medicare program. The costs to be excluded include, but are not limited 
to, appraisal costs (except those incurred at the request of the 
intermediary under paragraph (f)(2)(iv) of this section), legal fees, 
accounting and administrative costs, travel costs, and the costs of 
feasibility studies.
    (iii) Hospital-based providers other than SNFs and SNF-based 
providers. For changes of ownership that involve assets of a hospital-
based provider other than a SNF, or assets of a SNF-based provider, the 
provisions of paragraph (b)(1)(ii) of this section are not applicable. A 
reasonable allocation of the purchase price must be made, so that the

[[Page 631]]

hospital-based provider other than a SNF, or a SNF-based provider, is 
not affected by the limitations described in paragraph (b)(1)(ii) of 
this section. The historical cost of assets of providers other than 
hospitals and SNFs is governed by paragraph (b)(1)(i) of this section.
    (2) Fair market value. Fair market value is the price that the asset 
would bring by bona fide bargaining between well-informed buyers and 
sellers at the date of acquisition. Usually the fair market price is the 
price that bona fide sales have been consummated for assets of like 
type, quality, and quantity in a particular market at the time of 
acquisition.
    (3) The straight-line method. Under the straight-line method of 
depreciation, the cost or other basis (for example, fair market value in 
the case of donated assets) of the asset, less its estimated salvage 
value, if any, is determined first. Then this amount is distributed in 
equal amounts over the period of the estimated useful life of the asset.
    (4) Declining balance method. Under the declining balance method, 
the annual depreciation allowance is computed by multiplying the 
undepreciated cost of the asset each year by a uniform rate up to double 
the straight-line rate or 150 percent, as the case may be (see paragraph 
(a)(3) of this section for limitations on use of accelerated methods of 
depreciation).
    (5) Sum-of-the-years' digits method. Under the sum-of-the-years' 
digits method, the annual depreciation allowance is computed by 
multiplying the depreciable cost basis (cost less salvage value) by a 
constantly decreasing fraction. The numerator of the fraction is 
represented by the remaining years of useful life of the asset at the 
beginning of each year, and the denominator is always represented by the 
sum of the years' digits of useful life at the time of acquisition.
    (6) Current reproduction cost. Current reproduction cost is the cost 
at current prices, in a particular locality or market area, of 
reproducing an item of property or a group of assets. Where depreciable 
assets are concerned, this means the reasonable cost to have built, 
reproduce in kind, or, in the case of equipment or similar assets, to 
purchase in the competitive market.
    (7) Useful life. The estimated useful life of a depreciable asset is 
its normal operating or service life to the provider, subject to the 
provisions in paragraph (b)(7)(i) of this section. Factors to be 
considered in determining useful life include normal wear and tear; 
obsolescence due to normal economic and technological changes; climatic 
and other local conditions; and the provider's policy for repairs and 
replacement.
    (i) Initial selection of useful life. In selecting a proper useful 
life for computing depreciation under the Medicare program, providers 
must use the useful life guidelines published by CMS. If CMS has not 
published applicable useful life guidelines, providers must use--
    (A) The edition of the American Hospital Association useful life 
guidelines, as specified in CMS Medicare program manuals; or
    (B) A different useful life specifically requested by the provider 
and approved by the intermediary. A different useful life may be 
approved by the intermediary if the provider's request is properly 
supported by acceptable factors that affect the determination of useful 
life. However, such factors as an expected early sale, retirement, 
demolition or abandonment of an asset, or termination of the provider 
from the Medicare program may not be used.
    (ii) Application of guidelines. The provisions concerning the 
selection of useful life guidelines described in paragraph (b)(7)(i) of 
this section apply to assets acquired on or after January 1, 1981. For 
assets acquired before January 1, 1981, providers must use the useful 
life guidelines published by the American Hospital Association in its 
1973 edition of Chart of Accounts for Hospitals, or those published by 
the Internal Revenue Service, or those approved for use by 
intermediaries as provided in paragraph (b)(7)(i)(B) of this section.
    (iii) Changing useful life. A change in the estimated useful life 
may be made if clear and convincing evidence justifies a redetermination 
of the useful life used by the provider. Such a change must be approved 
by the intermediary in writing, and the factors cited in

[[Page 632]]

paragraphs (b)(7) and (b)(7)(i) of this section are applicable in making 
such redeterminations of useful life. If the request is approved, the 
change is effective with the reporting period immediately following the 
period in which the provider's request is submitted for approval.
    (8) Donated asset. An asset is considered donated when the provider 
acquires the asset without making payment in the form of cash, new debt, 
assumed debt, property or services. Except as provided in paragraph 
(j)(3) of this section, if a provider makes payment in any form to 
acquire an asset, the payment is considered the purchase price for the 
purpose of determining allowable historical cost.
    (9) Net book value. The net book value of an asset is the 
depreciable basis used for the Medicare program by the asset's last 
participating owner less depreciation recognized under the Medicare 
program.
    (c) Recording of depreciation. Appropriate recording of depreciation 
includes the identification of the depreciable assets in use, the 
assets' historical costs, the assets' dates of acquisition, the method 
of depreciation, estimated useful lives, and the assets' accumulated 
depreciation.
    (d) Depreciation methods--(1) General. Proration of the cost of an 
asset over its useful life is allowed on the straight-line method, or, 
when permitted under paragraph (a)(3) of this section, the declining 
balance or the sum-of-the-years' digits methods. One method may be used 
on a single asset or group of assets and another method on others. In 
applying the declining balance or sum-of-the-years' digits method to an 
asset that is not new, the undepreciated cost of the asset is treated as 
the cost of a new asset in computing depreciation.
    (2) Change in method. Prior to August 1, 1970, a provider may change 
from the straight-line method to an accelerated method or vice versa, 
upon advance approval from the intermediary on a prospective basis with 
the request being made before the end of the first month of the 
prospective reporting period. Only one such change with respect to a 
particular asset may be made by a provider. Effective with August 1, 
1970, a provider may only change from an accelerated method or optional 
method (see Sec. 413.139) to the straight-line method. Such a change 
may be made without intermediary approval and the basis for depreciation 
is the undepreciated cost reduced by the salvage value. Thereafter, once 
straight-line depreciation is selected for a particular asset, an 
accelerated method may not be established for that asset.
    (3) Recovery of accelerated depreciation--(i) General. If a provider 
who has used an accelerated method of depreciation for any of its assets 
terminates participation in the program, or if the Medicare proportion 
of its allowable costs decreases so that cumulatively substantially more 
depreciation was paid than would have been paid using the straight-line 
method of depreciation, the excess of reimbursable cost determined by 
using accelerated depreciation methods and paid under the program over 
the reimbursable cost that would have been determined and paid under the 
program by using the straight-line method of depreciation, will be 
recovered as an offset to current reimbursement due or, if the provider 
has terminated participation in the program, as an overpayment. In this 
determination of excess payment, recognition will be given to the 
effects the adjustment to straight-line depreciation would have on the 
return on equity capital and on the allowance in lieu of specific 
recognition of other costs in the respective years.
    (ii) Transaction between related organizations--(A) General. If the 
termination of the provider agreement is due to a change in provider 
ownership, as defined in Sec. 489.18 of this chapter, resulting from a 
transaction between related organizations, as defined in Sec. 413.17, 
and the criteria in paragraph (b) of this section are met, the excess of 
reimbursable cost, as determined in paragraph (d)(3)(i) of this section 
may not be recovered if there is a continuation of participation by the 
facility in the Medicare program.
    (B) Criteria. The following criteria must be met if the recovery of 
excess reimbursable cost is not to be made:
    (1) The termination of the provider agreement is due to a change in 
ownership of the provider resulting from a

[[Page 633]]

transaction between related organizations.
    (2) The successor provider continues to participate in the Medicare 
program.
    (3) Control and the extent of the financial interest of the owners 
of the provider before and after the termination remain the same; that 
is, the successor owners acquire the same per-centage of control or 
financial investment as the transferors had.
    (4) All assets and liabilities of the terminated provider are 
transferred to the related successor participating provider.
    (C) Effect of transaction. In transactions meeting the criteria 
specified in paragraph (d)(3)(ii)(B) of this section, the provision 
concerning recovery of excess reimbursable cost (Sec. 413.134(d)(3)(i)) 
is not applied, and the transaction is treated as follows:
    (1) The successor provider must record the historical cost and 
accumulated depreciation and the method of depreciation recognized under 
the Medicare program, and these are considered as incurred by the 
successor provider for Medicare purposes.
    (2) The Medicare program's utilization of the terminated provider is 
considered as having been incurred by the successor provider for 
Medicare purposes.
    (3) The equity capital of the terminated provider as of the closing 
of its final cost reporting period must be wholly contained in the 
equity capital of the successor provider as of the beginning of its 
first cost reporting period.
    (e) Funding of depreciation. Although funding of depreciation is not 
required, it is strongly recommended that providers use this mechanism 
as a means of conserving funds for replacement of depreciable assets. 
Funded depreciation account funds must be placed in readily marketable 
investments of the type that assures the availability and conservation 
of the funds. Additions to the funded depreciation account must remain 
in the account for at least 6 months to be considered valid funding 
transactions.
    (1) Incentive. As an incentive for funding, investment income on 
funded depreciation is not treated as a reduction of allowable interest 
expense provided such investment income is deposited in, and becomes 
part of, the funded depreciation account at the time of receipt by the 
provider. Investment income earned on deposits before the 6-month period 
elapses are not offset unless the deposits are withdrawn for an improper 
purpose during this period. If a provider transfers assets of the funded 
depreciation account to a related organization (for example, pooling of 
several chain organization providers' funded depreciation accounts at 
the chain home office for investment purposes), these assets shall be 
treated as the provider's funds and are subject to all the requirements 
specified in paragraph (e) of this section.
    (2) Availability of funded depreciation. (i) CMS considers funded 
depreciation available for use in the acquisition or replacement of 
depreciable assets related to patient care unless the funded 
depreciation funds have been committed by contract for the acquisition 
of depreciable assets related to the furnishing of patient care or for 
other capital purposes related to patient care.
    (ii) Borrowing for a purpose for which funded depreciation account 
funds should have been used makes the borrowing unnecessary to the 
extent that funded depreciation account funds were available at the time 
of the borrowing. Available funds in the funded depreciation account, to 
the extent of the unnecessary borrowing, are called ``tainted'' funds. 
Interest expense incurred on borrowing for a capital purpose is not an 
allowable cost to the extent that funded depreciation account funds were 
available at the time of the borrowing.
    (iii) A provider can remove the ``unnecessary'' characterization of 
borrowing, and thereby cure tainted funded depreciation, by using the 
tainted funds for a proper purpose described in paragraph (e)(3)(i) of 
this section. However, any funded depreciation that existed at the time 
of the unnecessary borrowing and is not classified as tainted must be 
used before any of the tainted funds.
    (iv) When only a portion of the borrowing is considered unnecessary 
under paragraph (e)(2)(ii) of this section, subsequent repayments of 
such borrowing from general funds are applied first to

[[Page 634]]

the allowable portion of the borrowing and then, when all of the 
allowable borrowing is repaid, to the unallowable portion of the 
borrowing. When funds from the funded depreciation account are used for 
the repayment of the unnecessary borrowing, an equivalent amount of 
tainted funds is cured without regard to the provisions of paragraphs 
(e)(2)(ii) and (e)(3)(i)(C) of this section. Similarly, where general 
funds are used to pay for the unallowable borrowing after the necessary 
borrowing has been repaid, an equivalent amount of tainted funded 
depreciation is cured without regard to the provisions of paragraphs 
(e)(2)(ii) and (e)(3)(i)(C) of this section.
    (3) Withdrawals of funded depreciation--(i) Proper withdrawals. (A) 
Withdrawals from funded depreciation are considered proper if made 
either for the acquisition or replacement of depreciable assets related 
to the furnishing of patient care or for other capital purposes related 
to patient care.
    (B) First-in, first-out basis. Proper withdrawals from funded 
depreciation are made on a first-in, first-out basis.
    (C) Exception. If CMS determines that a borrowing is unnecessary 
because of the existence of available funded depreciation, and 
additional deposits have been made to funded depreciation after the 
occurrence of the unnecessary borrowing, withdrawals made after the date 
of the additional deposits are deemed to be made on a last-in, first-out 
basis.
    (ii) Improper withdrawals. (A) Withdrawals from funded depreciation 
that do not meet the requirements for proper withdrawals under the 
provisions in paragraph (e)(3)(i)(A) of this section are considered 
improper withdrawals.
    (B) Improper withdrawals from funded depreciation are made on a 
last-in, first-out basis. If improper withdrawals are made, interest 
expense is reduced in accordance with section Sec. 413.153(c)(3).
    (C) Improper withdrawals will result in the offset of otherwise 
allowable interest expense under the offset provisions in Sec. 
413.153(c)(3).
    (4) Loans from funded depreciation. (i) When the general fund of the 
provider borrows from the funded depreciation to obtain working capital 
for normal operating expenses to furnish patient care, interest incurred 
by the general fund is an allowable operating cost only if the interest 
expense is supported by documents that evidence that the funds were 
borrowed and that payment of interest and repayment of the funds are 
required, is separately identified in the provider's accounting records, 
and meets the necessary and proper tests described in Sec. Sec. 
413.153(b)(2) and (b)(3). However, if the general fund of the provider 
borrows from the funded depreciation account to acquire depreciable 
assets used in furnishing patient care, or for other capital purposes 
related to patient care, interest expense paid by the general fund to 
the funded depreciation account is not an allowable cost. Providers are 
expected to use the funded depreciation for these purposes.
    (ii) Loans from funded depreciation to the general fund are 
considered investments of funded depreciation, but do not have to meet 
the readily marketable test described in paragraph (e) of this section. 
Loans made from funded depreciation are subject to the requirement that 
funded depreciation must be available for the acquisition of depreciable 
assets used to furnish patient care, or for other capital purposes 
related to patient care. Costs incurred to secure lines of credit from 
lending institutions to ensure such availability are not allowable 
costs.
    (iii) Funding of depreciation from general funds will not be 
recognized to the extent of any outstanding loans from the funded 
depreciation account to the general fund. Deposits from the general fund 
into the funded depreciation account must be first applied to reduce any 
loans outstanding from the funded depreciation to the general fund. When 
the loans are repaid in full, general funds deposited in the funded 
depreciation account are considered as repayments of the general fund. 
Therefore, any subsequent interest expense of the general fund paid to 
the funded depreciation fund is not an allowable cost.
    (iv) A provider may loan its funded depreciation to a related 
organization for any purpose subject to the following conditions:

[[Page 635]]

    (A) Authorization for such a loan by the provider's appropriate 
managing body of the provider, such as Board of Trustees or Board of 
Directors, must be on file.
    (B) The funded depreciation loaned must remain available, as 
specified in paragraph (e)(2) of this section, to the provider making 
the loan. Costs incurred for lines of credit to assure such availability 
are not allowable costs. During the period of time that the loan is 
outstanding, if the provider making the loan resorts to outside 
borrowing for a purpose for which its funded depreciation should have 
been used, interest expense on an amount of the outside borrowing up to 
the amount of the funded depreciation that should have been available 
would be disallowed as unnecessary.
    (C) Such loans shall be considered investments of the provider's 
funded depreciation, but the requirement that funded depreciation be 
invested in readily marketable investments as required in paragraph (e) 
of this section is waived for such loans.
    (D) The funded depreciation account must earn interest on such loans 
at a rate that does not exceed the rate that would be charged for a 
comparable loan from an independent lending institution. This investment 
income will not be used to reduce the provider's interest expense if all 
the other conditions in paragraph (e) of this section are met. If the 
entity borrowing the funds is another provider participating in the 
Medicare program, the interest expense incurred on such loans would be 
allowable if the loan meets all of the interest expense requirements 
specified in Sec. 413.153. (For purposes of Sec. 413.153(b)(3)(ii), 
such loans are not considered to be with a related lender.)
    (f) Gains and losses on disposal of assets--(1) General. Depreciable 
assets may be disposed of through sale, scrapping, trade-in, exchange, 
demolition, abandonment, condemnation, fire, theft, or other casualty. 
If disposal of a depreciable asset, including the sale or scrapping of 
an asset before December 1, 1997, results in a gain or loss, an 
adjustment is necessary in the provider's allowable cost. (No gain or 
loss is recognized on either the sale or the scrapping of an asset that 
occurs on or after December 1, 1997.) The amount of a gain included in 
the determination of allowable cost is limited to the amount of 
depreciation previously included in Medicare allowable costs. The amount 
of a loss to be included is limited to the undepreciated basis of the 
asset permitted under the program. The treatment of the gain or loss 
depends upon the manner of disposition of the asset, as specified in 
paragraphs (f)(2) through (6) of this section. The gain or loss on the 
disposition of depreciable assets has no retroactive effect on a 
proprietary provider's equity capital for years prior to the year of 
disposition.
    (2) Bona fide sale or scrapping before December 1, 1997. For the 
bona fide sale or scrapping of depreciable assets before December 1, 
1997, the following apply:
    (i) Except as specified in paragraph (f)(3) of this section, gains 
and losses realized from the bona fide sale or scrapping of depreciable 
assets are included in the determination of allowable cost only if the 
sale or scrapping occurs while the provider is participating in 
Medicare. The extent to which such gains and losses are included is 
calculated by prorating the basis for depreciation of the asset in 
accordance with the proportion of the asset's useful life for which the 
provider participated in Medicare. For purposes of this paragraph 
(f)(2)(i), scrapping refers to the physical removal from the provider's 
premises of tangible personal properties that are no longer useful for 
their intended purpose and are only salable for their scrap or junk 
value.
    (ii) If the total amount of gains or losses realized from bona fide 
sales or scrapping does not exceed $5,000 within the cost reporting 
period or if the provider's cumulative utilization under the Medicare 
program is less than 5 percent, the net amount of gains or losses 
realized from sale or scrapping will be allowed as a depreciation 
adjustment in the period of disposal. For purposes of this paragraph 
(f)(2)(ii), the provider's cumulative Medicare utilization precentage is 
determined by comparing the cumulative total of the Medicare inpatient 
days for all reporting periods in which depreciation on the asset 
disposed of was claimed under

[[Page 636]]

the Medicare program to the cumulative total of inpatient days of the 
participating provider for the same reporting periods.
    (iii) If the conditions specified in paragraph (f)(2)(ii) of this 
section are not met, the adjustment to reimbursable cost in the 
reporting period of asset disposition is calculated as follows:
    (A) The total amount of gains or losses shall be allocated to all 
reporting periods under the Medicare program, based on the ratio of the 
depreciation allowed on the assets in each reporting period to the total 
depreciation allowed under the Medicare program.
    (B) The results of this allocation are multiplied by the ratio of 
Medicare reimbursable cost to total allowable cost for each reporting 
period.
    (C) The results of this multiplication are then added.
    (D) Effective for cost reporting periods beginning on or after 
October 1, 1991, no adjustment will be made for the portion of gains or 
losses allocated to inpatient hospital services for which the hospital 
was paid under the fully prospective payment methodology as described in 
Sec. 412.340 of this chapter or under the hold-harmless methodology 
based on the Federal rate as described in Sec. 412.344(a)(1) of this 
chapter for new capital costs or in Sec. 412.344(a)(2) of this chapter.
    (iv) If a provider sells more than one asset for a lump sum sales 
price, the gain or loss on the sale of each depreciable asset must be 
determined by allocating the lump sum sales price among all the assets 
sold, in accordance with the fair market value of each asset as it was 
used by the provider at the time of sale. If the buyer and seller cannot 
agree on an allocation of the sales price, or if they do agree but there 
is insufficient documentation of the current fair market value of each 
asset, the intermediary for the selling provider will require an 
appraisal by an independent appraisal expert to establish the fair 
market value of each asset and will make an allocation of the sales 
price in accordance with the appraisal.
    (3) Sale within 1 year after termination. Gains and losses realized 
from a bona fide sale of depreciable assets within 1 year immediately 
following the date on which the provider terminates participation in the 
Medicare program are also included in the determination of allowable 
cost, in accordance with the procedure specified in paragraph (f)(2) of 
this section. However, if several assets are sold for a lump sum sales 
price, the determination of fair market value must be based on the 
appraised value of the assets as they were last used by the provider 
while participating in the Medicare program.
    (4) Exchange, trade-in or donation. Gains or losses realized from 
the exchange, trade-in, or donation of depreciable assets are not 
included in the determination of allowable cost. When the disposition of 
an asset is by means of exchange or trade-in, the historical cost of the 
new asset is the sum of the undepreciated cost of the asset disposed of 
and the additional cash or other assets transferred (or to be 
transferred) to acquire the new asset. However, if the asset disposed of 
was acquired by the provider before its participation in the Medicare 
program and the sum of the undepreciated cost and the cash or other 
assets transferred (or to be transferred) exceed the list price or fair 
market value of the new asset, the historical cost of the new asset is 
limited to the lower of its list price or fair market value.
    (5) Demolition or abandonment. (i) For purposes of this section, the 
term ``abandonment'' means the permanent retirement of an asset for any 
future purpose, not merely the provider's ceasing to use the asset for 
patient care purposes. To claim an abandonment under the Medicare 
program, the provider must have relinquished all rights, title, claim, 
and possession of the asset with the intention of never reclaiming it or 
resuming its ownership, possession, or enjoyment.
    (ii) If losses resulting from the demolition or abandonment of 
depreciable assets do not exceed $5,000 within the cost-reporting 
period, the losses are to be allowed in the period of disposal.
    (iii) If losses exceed $5,000 and, at the date of disposition, the 
demolished or abandoned assets are at least 80 percent depreciated as 
computed under the straight-line method, such losses

[[Page 637]]

are includable in the determination of allowable cost under the Medicare 
program in the period of disposal and the procedure provided in 
paragraph (f)(2)(iii) of this section must be used in determining the 
adjustment to reimbursable cost.
    (iv) Losses in excess of $5,000 resulting from the demolition or 
abandonment of assets, which at the date of disposition are not 80 
percent depreciated as computed under the straight-line method, must be 
capitalized as a deferred charge and amortized as follows:
    (A) If the State Health Planning and Development Agency (SHPDA) 
designated under section 1521 of the Public Health Service Act approves 
the demolition or abandonment of a depreciable asset as being consistent 
with the health systems plan of the health service area in which the 
provider is located, the net loss realized shall be capitalized as a 
deferred charge and amortized over the remaining life of the demolished 
or abandoned asset, or at the rate of $5,000 per year, whichever is 
greater. If no SHPDA exists or if such agency is unable or unwilling to 
perform this function, the provider must submit a request for approval 
to the intermediary. The intermediary, after reviewing this request and 
before issuing the approval, will submit the request along with its 
recommendation to the appropriate Regional Office for its approval.
    (B) If a provider fails to obtain approval as specified in paragraph 
(f)(5)(iv)(A) of this section, a loss is not allowable unless the 
demolished or abandoned asset is replaced. If the asset is replaced, the 
loss resulting from the unapproved demolition or abandonment must be 
capitalized as a deferred charge and amortized over the estimated useful 
life of the replacement asset or at the rate of $5,000 per year, 
whichever is greater.
    (v) If a loss resulting from the demolition or abandonment is 
deferred and amortized and the provider terminates its participation in 
the Medicare program or ceases to use a replacement asset in the 
provision of patient care services, the unamortized deferred charge 
remaining at that time must not be included in determining allowable 
cost under the Medicare program.
    (vi) Losses on demolition must include the demolition cost incurred 
by the provider for razing and removal of the asset, less any salvage 
value recovered by the provider. However, if a provider demolishes a 
depreciable asset for the purpose of preparing land for future sale, the 
net demolition cost incurred by the provider (razing and removal costs 
less salvage recovered) is considered a capital expenditure and added to 
the historical basis of the land.
    (vii) If a provider purchases land on which there is a building, no 
depreciation will be allowed under the Medicare program unless the 
building is used in providing patient care. If the building is 
demolished, the entire purchase price and demolition cost shall be 
considered the historical cost of the land. If the building is used for 
patient care, but demolished within 5 years of purchase, the entire 
purchase price, less allowed depreciation, plus demolition cost will be 
considered the historical cost of the land.
    (6) Involuntary conversion. (i) Losses resulting from the 
involuntary conversion of depreciable assets, such as condemnation, 
fire, theft, or other casualty, are generally included in the 
determination of allowable cost on a deferred basis if the asset is 
restored or replaced. However, losses resulting from a provider's 
imprudent management of its depreciable assets, such as the failure to 
obtain proper insurance coverage, are not included in the determination 
of allowable cost.
    (ii) The net allowable loss from involuntary conversion must consist 
of the undepreciated cost of unrecovered book value of the asset, less 
amounts received from insurance proceeds gifts, and grants received from 
local, State, or Federal government, or any other source as a result of 
the involuntary conversion.
    (iii) If the asset is replaced and the net allowable loss in any 
cost-reporting period does not exceed $5,000, the entire amount must be 
included in allowable cost in the period in which the loss is incurred. 
If the asset is replaced and the net allowable loss in any cost-
reporting period exceeds $5,000, the loss must be capitalized as a 
deferred

[[Page 638]]

charge and amortized over the useful life of the replacement or restored 
asset. If a replaced or restored asset ceases to be used in the 
provision of patient care services or the provider terminates its 
participation in the Medicare program, the unamortized deferred charge 
remaining at that time will not be included in determining allowable 
cost under the Medicare program.
    (iv) If the provider fails to replace or restore an involuntarily 
converted asset, the loss is not included in determining allowable cost. 
However, if the provider intends to replace or restore the asset but is 
unable to do so because the designated SHPDA finds such replacement or 
restoration to be inconsistent with the health systems plan of the 
provider's health service area, the loss is allowable so long as the 
provider continues to participate in Medicare. In this case, the loss 
must be capitalized as a deferred charge and amortized over the 
remaining life of the involuntarily converted asset, or at the rate of 
$5,000 per year, whichever is greater.
    (v) If a gain is realized from an involuntary conversion of 
depreciable assets, the net amount realized reduces the basis of the 
restored or replacement asset. If the asset is not restored or replaced, 
the gain is to be treated in accordance with paragraph (f)(2) of this 
section.
    (7) Effect on equity capital. The unrecovered loss entered on the 
books of the provider as a deferred charge, in accordance with 
paragraphs (f) (5) and (6) of this section, is not includable in the 
computation of equity capital under Sec. 413.157.
    (8) Sale of replacement or restored assets. If a provider sells a 
replacement or restored asset while participating in the Medicare 
program or within 1 year immediately following the date on which it 
terminates its participation in the Medicare program, the unrecovered 
loss entered on the books of the provider as a deferred charge in 
accordance with paragraphs (f) (5) and (6) of this section will not be 
included in determining the gain or loss realized from the sale of the 
replacement or restored asset. However, if the sale of such asset is 
made to a related organization, as defined in Sec. 413.17, and the 
purchasing organization continues as a provider in the Medicare program, 
the remaining deferred charge representing the unrecovered depreciable 
basis of the demolished, abandoned or destroyed asset must continue to 
be amortized over the remaining expected useful life of the replacement 
or restored asset. If the sale is made to an unrelated organization, 
further amortization of the deferred charge is not allowed.
    (g) Establishment of cost basis on purchase of facility as an 
ongoing operation--(1) Assets acquired after July 1, 1966 and before 
August 1, 1970. The cost basis for the assets of a facility purchased as 
an ongoing operation after July 1, 1966, and before August 1, 1970, is 
the lowest of the--
    (i) Total price paid for the facility by the purchaser, as allocated 
to the individual assets of the facility;
    (ii) Total fair market value of the facility at the time of the 
sale, as allocated to the individual assets; or
    (iii) Combined fair market value of the individually identified 
assets at the time of the sale.
    (2) Assets acquired after July 31, 1970 and, for hospitals and SNFs, 
before July 18, 1984. For depreciable assets acquired after July 31, 
1970 and, for hospitals and SNFs, before July 18, 1984, in addition to 
the limitations specified in paragraph (g)(1) of this section, the cost 
basis of the depreciable assets may not exceed the current reproduction 
cost depreciated on a straight-line basis over the life of the asset to 
the time of the sale.
    (3) Assets acquired by hospitals and SNFs on or after July 18, 1984 
and not subject to an enforceable agreement entered into before that 
date. Subject to paragraphs (b)(1)(ii) (B) through (G) and (b)(1)(iii) 
of this section, historical cost may not exceed the lowest of the 
following:
    (i) The allowable acquisition cost of the asset to the owner of 
record as of July 18, 1984 (or, in the case of an asset not in existence 
as of July 18, 1984, the first owner of record of the asset);
    (ii) The acquisition cost to the new owner; or
    (iii) The fair market value of the asset on the date of acquisition.

[[Page 639]]

    (4) Assets acquired by all providers on or after December 1, 1997. 
Subject to the provisions of paragraph (b)(1)(i)(A) of this section, the 
historical cost may not exceed the historical cost of the asset, as 
recognized under the Medicare program, less depreciation allowed, to the 
owner of record as of August 5, 1997 (or for an asset not in existence 
as of August 5, 1997, the first owner of record after August 5, 1997).
    (5) Transactions other than bona fide. If the purchaser cannot 
demonstrate that the sale was bona fide, in addition to the limitations 
specified in paragraph (g)(1), (2), and (3) of this section, the 
purchaser's cost basis may not exceed the seller's cost basis, less 
accumulated depreciation.
    (h) Sale and leaseback agreements and other lease transactions. (1) 
For sale and leaseback agreements for all providers, and for sale and 
leaseback agreements for hospitals and SNFs entered into before October 
23, 1992, a provider may include in its allowable costs incurred rental 
charges, as specified in a sale and leaseback agreement with a 
nonrelated purchaser involving plant facilities or equipment, only if--
    (i) The rental charges are reasonable based on consideration of 
rental charges of comparable facilities and market conditions in the 
area; the type, expected life, condition, and value of the facilities or 
equipment rented; and other provisions of the rental agreement;
    (ii) Adequate alternate facilities or equipment that would serve the 
purpose are not or were not available at lower cost; and
    (iii) The leasing was based on economic and technical 
considerations.
    (2) If the conditions of paragraph (h)(1) of this section are not 
met, the amount a provider may include in its allowable costs as rental 
or lease expense under a sale and leaseback agreement may not exceed the 
amount that the provider would have included in its allowable costs had 
the provider retained legal title to the facilities or equipment such as 
interest expense on mortgages, taxes, depreciation, and insurance costs.
    (3) For hospitals and SNFs entering into sale and leaseback 
agreements on or after October 23, 1992, the amount a provider may 
include in its allowable costs as rental or lease expense may not exceed 
the amount that the provider would have included in its allowable costs 
had the provider retained legal title to the facilities or equipment, 
such as interest expense on mortgages, taxes, depreciation, and 
insurance costs (the costs of ownership). This limitation applies both 
on an annual basis and over the useful life of the asset.
    (i) If in the early years of the lease, the annual rental or lease 
costs are less than the annual costs of ownership, but in the later 
years of the lease the annual rental or lease costs are more than the 
annual costs of ownership, in the years that the annual rental or lease 
costs are more than the costs of ownership the provider may include in 
allowable costs annually the actual amount of rental or lease costs. The 
aggregate rental or lease costs included in allowable costs may not 
exceed the aggregate costs of ownership that would have been included in 
allowable costs over the useful life of the asset had the provider 
retained legal title to the asset.
    (ii) If in the early years of the lease, the annual rental or lease 
costs exceed the annual costs of ownership, but in the later years of 
the lease the annual rental or lease costs are less than the annual 
costs of ownership, the provider may carry forward amounts of rental or 
lease costs that were not included in allowable costs in the early years 
of the lease due to the costs of ownership limitation, and include these 
amounts in allowable costs in the years of the lease when the annual 
rental or lease costs are less than the annual costs of ownership. In 
any given year the amount of actual annual rental or lease costs plus 
the amount carried forward to that year may not exceed the amount of the 
costs of ownership for that year.
    (iii) In the aggregate, the amount of rental or lease costs included 
in allowable costs may not exceed the amount of the costs of ownership 
that the provider could have included in allowable costs had the 
provider retained legal title to the asset.
    (4) For lease transactions of all providers entered into before 
October 23,

[[Page 640]]

1992, a lease that meets the following conditions establishes a virtual 
purchase:
    (i) The rental charge exceeds rental charges of comparable 
facilities or equipment in the area.
    (ii) The term of the lease is less than the useful life of the 
facilities or equipment.
    (iii) The provider has the option to renew the lease at a 
significantly reduced rental, or the provider has the right to purchase 
the facilities or equipment at a price that appears to be significantly 
less than what the fair market value of the facilities or equipment 
would be at the time acquisition by the provider is permitted.
    (5)(i) If a lease is a virtual purchase under paragraph (h)(4) of 
this section, the rental charge is includable in allowable costs only to 
the extent that it does not exceed the amount that the provider would 
have included in allowable costs if it had legal title to the asset (the 
cost of ownership), such as straight-line depreciation, insurance, and 
interest. For purposes of computing the limitation on allowable rental 
cost in this paragraph, a provider may not include accelerated 
depreciation.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as rental expense is considered a deferred charge and 
must be capitalized as part of the historical cost of the asset when the 
asset is purchased.
    (iii) If an asset is returned to the owner instead of being 
purchased, the deferred charge may be expensed in the year the asset is 
returned.
    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be expensed to the extent of increasing the 
reduced rental to an amount not in excess of the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time at a reduced lease cost and the option to purchase no longer 
exists, the deferred charge may be expensed to the extent of increasing 
the reduced rental to a fair rental value.
    (6) For lease transactions entered into on or after October 23, 
1992, a lease that meets any one of the following conditions establishes 
a virtual purchase:
    (i) The lease transfers title of the facilities or equipment to the 
lessee during the lease term.
    (ii) The lease contains a bargain purchase option.
    (iii) The lease term is 75 percent or more of the useful life of the 
facilities or equipment. This provision is not applicable if the lease 
begins in the last 25 percent of the useful life of the facilities or 
equipment.
    (iv) The present value of the minimum lease payments (that is, 
payments to be made during the lease term, including bargain purchase 
option, guaranteed residual value, or penalties for failure to renew) 
equals 90 percent or more of the fair market value of the leased 
property. This provision is not applicable if the lease begins in the 
last 25 percent of the useful life of the facilities or equipment. The 
present value is computed using the lessee's incremental borrowing rate, 
unless the interest rate implicit in the lease is known and is less than 
the lessee's incremental borrowing rate, in which case, the interest 
rate implicit in the lease is used.
    (7)(i) If a lease is a virtual purchase under paragraph (h)(6) of 
this section, the rental charge is includable in allowable costs only to 
the extent that it does not exceed the amount that the provider would 
have included in allowable costs if it had legal title to the asset (the 
costs of ownership), such as straight-line depreciation, insurance, and 
interest. For purposes of computing the limitation on allowable rental 
cost as described in this paragraph, a provider may not include 
accelerated depreciation in its allowable costs.
    (ii) The difference between the amount of rent paid and the amount 
of rent allowed as rental expense is considered a deferred charge and is 
capitalized as part of the historical cost of the asset when the asset 
is purchased.
    (iii) If an asset is returned to the owner instead of being 
purchased, the deferred charge may be expensed in the year the asset is 
returned.

[[Page 641]]

    (iv) If the term of the lease is extended for an additional period 
of time at a reduced lease cost and the option to purchase still exists, 
the deferred charge may be expensed to the extent of increasing the 
reduced rental to an amount not in excess of the cost of ownership.
    (v) If the term of the lease is extended for an additional period of 
time at a reduced lease cost and the option to purchase no longer 
exists, the deferred charge may be expensed to the extent of increasing 
the reduced rental to a fair rental value.
    (vi) If the lessee becomes the owner of the leased asset (either by 
operation of the lease or by other means), the amount considered as 
depreciation, for the purpose of having computed the limitation 
expressed in paragraph (h)(7)(i) of this section, must be used in 
calculating the limitation on adjustments to depreciation for the 
purpose of determining any gain or loss upon disposal of an asset under 
paragraph (f) of this section.
    (i) Intergovernmental transfer of facilities. The basis for 
depreciation of assets transferred under appropriate legal authority 
from one governmental entity to another is as follows:
    (1) The historical cost incurred by the present owner in acquiring 
the asset under a bona fide sale. The historical cost may not exceed the 
lower of current reproduction cost adjusted for straight-line 
depreciation over the life of the asset to the time of the purchase of 
fair market value at the time of the purchase.
    (2) The fair market value at the time of donation under a bona fide 
donation of the asset (subject to the limitations set forth under 
paragraph (i) of this section). An asset is considered donated when a 
governmental entity acquires the asset without assuming the functions 
for which the transferor used the asset or making any payment for it in 
the form of cash, property, or services.
    (3) If neither paragraph (h) (1) nor (2) of this section applies, 
for example, the transfer was solely to facilitate administration or to 
reallocate jurisdictional responsibility, or the transfer constituted a 
taking over in whole or in part of the function of one governmental 
entity by another governmental entity, the basis for depreciation is--
    (i) With respect to an asset on which the transferor has claimed 
depreciation under the Medicare program, the transferor's basis under 
the Medicare program prior to the transfer. The method of depreciation 
used by the transferee may be the same as that used by the transferor, 
or the transferee may change the method, as permitted under paragraph 
(d)(2) of this section; or
    (ii) With respect to an asset on which the transferor has not 
claimed depreciation under the Medicare program, the cost incurred by 
the transferor in acquiring the asset (not to exceed the basis that 
would have been recognized had the transferor participated in the 
Medicare program) less depreciation calculated on the straight-line 
basis over the life of the asset to the time of transfer.
    (j) Basis of assets donated to a provider--(1) Assets not used or 
depreciated under the Medicare program. If an asset has never been used 
or depreciated under the Medicare program and is donated to a provider, 
the basis for the purpose of calculating depreciation and equity capital 
(if applicable) is the fair market value of the asset at the time of 
donation.
    (2) Assets used or depreciated under the Medicare program. If an 
asset has been used or depreciated under the Medicare program and is 
donated to a provider, the basis for the purpose of calculating 
depreciation and equity capital (if applicable) is the lesser of--
    (i) The fair market value at the time of donation; or
    (ii) The net book value in the hands of the owner last participating 
in the Medicare program.
    (3) Transfers of State hospitals to nonprofit corporations without 
monetary consideration. If a State transfers a hospital to a nonprofit 
corporation without monetary consideration on or after July 18, 1984, 
the depreciable basis of the assets to the new owner is the net book 
value of the assets as recorded on the State's books at the time of the 
transfer. For purposes of this section, monetary consideration includes 
cash, new debt, and assumed debt.

[[Page 642]]

    (k) Transactions involving a provider's capital stock--(1) 
Acquisition of capital stock of a provider. If the capital stock of a 
provider is acquired, the provider's assets may not be revalued. For 
example, if Corporation A purchases the capital stock of Corporation B, 
the provider, Corporation B continues to be the provider after the 
purchase and Corporation A is merely the stockholder. Corporation B's 
assets may not be revalued.
    (2) Statutory merger. A statutory merger is a combination of two or 
more corporations under the corporation laws of the State, with one of 
the corporations surviving. The surviving corporation acquires the 
assets and liabilities of the merged corporation(s) by operation of 
State law. The effect of a statutory merger upon Medicare reimbursement 
is as follows:
    (i) Statutory merger between unrelated parties. If the statutory 
merger is between two or more corporations that are unrelated (as 
specified in Sec. 413.17), the assets of the merged corporation(s) 
acquired by the surviving corporation may be revalued in accordance with 
paragraph (g) of this section. If the merged corporation was a provider 
before the merger, then it is subject to the provisions of paragraphs 
(d)(3) and (f) of this section concerning recovery of accelerated 
depreciation and the realization of gains and losses. The basis of the 
assets owned by the surviving corporation are unaffected by the 
transaction. An example of this type of transaction is one in which 
Corporation A, a nonprovider, and Corporation B, the provider, are 
combined by a statutory merger, with Corporation A being the surviving 
corporation. In such a case the assets of Corporation B acquired by 
Corporation A may be revalued in accordance with paragraph (g) of this 
section.
    (ii) Statutory merger between related parties. If the statutory 
merger is between two or more related corporations (as specified in 
Sec. 413.17), no revaluation of assets is permitted for those assets 
acquired by the surviving corporation. An example of this type of 
transaction is one in which Corporation A purchase the capital stock of 
Corporation B, the provider. Immediately after the acquisition of the 
capital stock of Corporation B, there is a statutory merger of 
Corporation B and Corporation A, with Corporation A being the surviving 
corporation. Under these circumstances, at the time of the merger the 
transaction is one between related parties and is not a basis for 
revaluation of the provider's assets.
    (3) Consolidation. A consolidation is the combination of two or more 
corporations resulting in the creation of a new corporate entity. If at 
least one of the original corporations is a provider, the effect of a 
consolidation upon Medicare reimbursement for the provider is as 
follows:
    (i) Consolidation between unrelated parties. If the consolidation is 
between two or more corporations that are unrelated (as specified in 
Sec. 413.17), the assets of the provider corporation(s) may be revalued 
in accordance with paragraph (g) of this section.
    (ii) Consolidation between related parties. If the consolidation is 
between two or more related corporations (as specified in Sec. 413.17), 
no revaluation of provider assets is permitted.

[51 FR 34793, Sept. 30, 1986, as amended at 56 FR 43456, Aug. 30, 1991; 
57 FR 3017, Jan. 27, 1992; 57 FR 39830, Sept. 1, 1992; 57 FR 43919, 
Sept. 23, 1992; 58 FR 17528, Apr. 5, 1993; 59 FR 45401, Sept. 1, 1994; 
63 FR 1382, Jan. 9, 1998; 65 FR 8662, Feb. 22, 2000]