Academic journal article Journal of Accountancy

From the Tax Adviser: Deducting Retirement Community Fees: Medical Deductions for Elderly Clients

Academic journal article Journal of Accountancy

From the Tax Adviser: Deducting Retirement Community Fees: Medical Deductions for Elderly Clients

Article excerpt

For clients living in health care retirement communities, the Tax Court's decision in Delbert L. Baker, 122 TC 143 (2004), provides additional flexibility in determining the portion of fees deductible as IRC section 213 medical expenses. CPAs should take note of the ruling.

BACKGROUND

Delbert Baker and his wife had an agreement with Air Force Village West Inc. (AFVW), a California retirement community, entitling them to lifetime residency. AFVW provided four levels of living accommodations and service, ranging from independent living to skilled nursing care.

Mr. Baker was a member of an ad hoc committee of AFVW residents using certified financial data provided by the community's vice president of finance; he used the information to determine that approximately 40% of the couple's monthly fees was attributable to medical care. Thus, the Bakers deducted that percentage of their costs on their 1997 and 1998 returns.

IRS CHALLENGES PERCENTAGE

On audit, the service disallowed a portion of the Bakers' medical deductions. Using a percentage allocation method (consistent with previous rulings), the IRS permitted only 19.01% of the monthly fees as a medical deduction.

TAX COURT MODIFIES METHOD

At trial the IRS switched gears and claimed the allowable medical deduction, instead, had to be based on actuarial calculations, taking into consideration health care utilization and longevity. The Tax Court disagreed, calling the actuarial method "so complex as to defy full explanation." It concluded the certified financial data the Bakers had produced was sufficient to shift the burden of proof to the service under ItLC section 7491. …

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