Deductibility of retirement community fees.

• Author: Pflanz, Thomas

The Tax Court's decision in Delbert L. Baker, 122 TC 143 (2004), provides additional taxpayer flexibility in determining the portion of continuing care retirement community fees deductible as Sec. 213 medical expenses.

Facts

Delbert Baker and his wife were residents at Air Force Village West, Inc. (AFVW), a California retirement community. The Bakers executed an agreement entitling them to lifetime residency at the facility. AFVW provided four levels of living accommodations and service: (1) independent living; (2) assisted living; (3) special care; and (4) 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 to determine the medical deduction portion of the residents' monthly fees. The committee concluded that approximately 40% of the fees were attributable to medical care.

IRS's Stance

Oil audit, the IRS disallowed a portion of the Bakers' medical deduction. Using a percentage allocation method (which was consistent with its prior rulings), the Service permitted only 19.01% of the monthly fees as a medical deduction. Also, it completely disallowed additional deductions for the taxpayers' use of AFVW's pool, spa and exercise facility.

Tax Court's Decision

At trial, the Service switched gears aim claimed that the allowable medical deduction had to be based on actuarial calculations, taking into consideration healthcare utilization and longevity. The Tax Court disagreed, concluding that the Bakers had produced enough credible evidence to shift the burden of proof to the Service under Sec. 7491. The court cited the IRS's 35-year history of allowing the use of the percentage method. According to the Tax Court, the actuarial method is "so complex as to defy full explanation."

Use of percentage method: While the Tax Court approved use of the percentage method, it modified the approach used by both parties. Instead of allowing a percentage of the fees paid by...