GAB Decision 018
June 4, 1976 Eunice Kennedy Shriver Center for Mental Retardation, Inc.;
Docket No. 75-1 DeGeorge, Francis; Malone, Thomas Mason, Malcolm
This is a case with a unique set of facts not likely to be repeated
and this decision is therefore not intended to set any general
precedent.
Grantee seeks a use allowance for the use of property to which it
does not have legal title but which it constructively owns. On the
basis of this constructive ownership we hold that the use allowance is a
permissible element in grantee's indirect cost proposal.
The case arises out of a partnership arrangement between Commonwealth
of Massachusetts and the grantee for the operation of a research center
for mental retardation and related aspects of human development pursuant
to Federal grants under Public Law 88-164 and other authority. To
accomplish this national project the Commonwealth of Massachusetts
provided both land and matching monies and agreed to vest complete
operational responsibility in the grantee.
Under the terms of an earlier construction grant the Commonwealth is
committed to use the building and equipment in question for at least 20
years for the current project and for 50 years in similar projects.
The grantee thus has long term responsibility and control over these
assets. The grantee pays to the Commonwealth an annual charge
determined by a formula to cover maintenance costs but does not pay rent
for the use of this property which is committed to its use.
The grantee has claimed in its indirect cost proposal for the fiscal
year ending May 31, 1973 a use allowance on the building owned by the
Commonwealth but occupied by the grantee under the operating grants.
The grantee claims a use allowance only on that portion of the assets
funded by the Commonwealth and not on the portion funded by Federal
monies. The basic rule (promulgated September 19, 1973 as 45 CFR Part
74 Appendix F, G.10, but reflecting earlier HEW practice) is that
non-profit institutions may be compensated for the use of buildings and
equipment through use allowances when depreciation or other equivalent
costs are not considered. Computation of the use allowance must exclude
any portion of the cost borne by or donated by the Federal Government,
irrespective of where title was originally vested or where it presently
resides and must also exclude the cost of grounds. Nothing in these
rules expressly precludes a use allowance where the use of the space
furnished is donated by a third party, particularly where, as here, the
third party is, in a substantial sense, a continuing partner in the
venture.
It is of course clear that the grantee may count the use of the
property toward its matching or non-Federal share of the cost of the
grant program. In addition, if the operating grant had been made
jointly to the Commonwealth and the Center there would be no doubt about
the right to the allowance. (Grant Administration Manual Chapter 1-75
(5-3-68) now GAM 6-120-20.A.2 (12-18-74)). Although the reality of the
partnership arrangement seems clear, the fact that the grant was applied
for in the name of the Center and made to the Center rather than to the
Commonwealth and the Center jointly, is the cause of the grantee's
difficulty in obtaining recognition of the use allowance.
In the case of the equipment owned by the Commonwealth and made
available for the use of the Center, a use allowance was accepted
because the equipment was treated as "constructively donated." On
exactly parallel facts it would appear that the real property should
also be treated for this grant purpose as constructively owned by the
grantee.
The Regional director has concluded, however, that in the case of the
real property the fact that legal title remains in the Commonwealth
precludes recognition of a use allowance. He considered that the
shorter useful life of the personal property and the lesser formalities
customarily attending transfer of personal property required that
distinction. The Regional Director had requested the views of the
Regional Counsel's Office and has furnished us with the opinion of the
Assistant Regional Counsel, who supports this view.
The Assistant Regional Attorney also commented, however, that,
practically, the grantee could be said to "constructively own the
property." He noted that the Commonwealth has a commitment to HEW that
the property be used for the stated purposes and that, since the Center
appears to be the only suitable agency to carry out this purpose, the
Center's use of the property essentially enhances title of the
Commonwealth, noting that it is questionable whether a replacement could
be found if the Center was to terminate its operation and consequently
whether a complete title to the building would remain with the
Commonwealth if no replacement were found.
The Assistant Regional Attorney commented that these considerations
would be justification for granting a use allowance, observing that the
project and the State-grantee relationship are unique.
We concur in this view and believe that this practical analysis is
the one that should be applied, particularly since only a formalistic
change in the form of a grant would have been necessary to achieve, with
undoubted legal propriety, a result which is recognized to be equitable.
In response to our Order to Show Cause dated January 13, 1976, the
Regional Director expressed the view that a grantee must own the
buildings and equipment to be compensated for use allowance. He adds
that the cost principles (45 CFR Part 74) would be violated if the
grantee is compensated for the costs of a third party. We do not
believe that the cost principles contain any such requirement explicitly
or that their underlying purpose would be offended by recognition of a
use allowance for the donated use of property in the unusual context of
the partnership arrangement here involved.
In any event, if ownership is required this must not be taken in any
formalistic sense. It should be enough that in a practical sense the
grantee may be considered to "constructively own the property" which
the
Regional attorney's Office found to be a fair construction of this
unusual situation, just as in the case of the personal property
constructive ownership was found and was considered an adequate basis
for a use allowance under the same provision of the cost principles.
The grantee considers that the commitment made to it by the
Commonwealth amounts to a 20 year estate in the property and that a use
allowance based on the fair market value of the interest contributed by
the Commonwealth at the time of its donation is appropriate. This
analysis, consistent with the comments cited above of the Regional
Attorney's Office appears unopposed since no adverse comment was
received in response to our direct invitation to comment (Order to Show
Cause; Response of Regional Director).
The grantee advises us that to the best of its knowledge recognition
of a use allowance would not violate the matching requirements of any
prior grant to the Commonwealth or constitute a double use of the same
item. Although invited to comment on this aspect also, the Regional
Director has furnished no suggestion that it is not accurate and we
accept it as true.
To avoid misunderstanding, we note that the Grants Administration
Manual provides a special rule concerning use allowance in the cases of
foundations established by universities. The establishement of such
foundations affiliated with universities, to receive grants for which
the university itself may be ineligible or which may subject the grantee
to requirements from which the university wishes to be free, presents
special problems and has given rise to special rules which appear to
have been made deliberately sharp to prevent confusion, administrative
uncertainty, or abuse. Under the rule there applicable (Grants
Administration Manual former Chapter 1-75 now Chapter 6-120), the
university and the foundation must file a joint application unless the
foundation is actually charged and is legally obligated to pay for the
benefits conferred by the university. If these strict tests are not
met, use allowance is not permitted although the value of the use would
nevertheless be acceptable for cost sharing or matching purposes. The
reasons for this rule are not articulated and must be gathered from the
history of the problem involved. In the present case as noted above, a
joint application was not made and the foundation is not actually
charged for use of the property. The affiliated organization rule
however, is not applicable to this situation and, although it has an
obvious analogy, the present situation and, although it has an obvious
analogy, the present situation is sufficiently special that a decision
in this case will not undercut the treatment of university-affiliated
research organizations which are governed by Chapter 6-120.
CONCLUSIONS
We therefore conclude that the grantee constructively owns the
property to the extent of a 20 year estate; that the equities of the
situation favor the grantee; that the formalistic absence of the
Commonwealth as a joint grantee should not affect the substance of the
relationship; and that the uniqueness of the situation makes the
decision in this case one which will not establish a precedent that
might undercut other related policies.
The grantee should be permitted a use allowance based upon the fair
value of its 20 year estate in the property. The determination of the
use allowance will necessarily require negotiation in good faith between
the indirect cost negotiators of the Department and the grantee. To
this extent, the appeal is allowed.
OCTOBER 04, 1983