or 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.
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
TAX COURT MODIFIES METHOD
While the Tax Court approved use of the percentage allocation method, it modified the approach used by both parties. Instead of allowing a percentage of the fees each resident paid, it held that the percentage had to be based on the number of community residents and a weighted average of their monthly service fees. Otherwise, occupants of larger units would receive a higher deduction based solely on the higher fees charged for such units, without regard to occupancy.
The court also denied the Bakers’ medical expense deduction for use of AFVW’s pool, spa and exercise facility. The court noted that the facilities were available to all residents and their families for recreational use, and the taxpayers had failed to establish the portion of their use for medical purposes. If such amenities are merely beneficial to a taxpayer’s health, no deduction is available.
For more information, see the Tax Clinic, edited by Mike Koppel, in the December 2004 issue of The Tax Adviser.
—Lesli S. Laffie, editor