Taxpayer May Deduct as a Medical Expense a Portion of Maintenance Payments in a Continuing Care Retirement Community

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Mr. Baker, retiring from the Air Force, decided to take advantage of a retirement community built to accommodate retiring former members of the United States Air Force.  He and his wife moved to a continuing care retirement community (the “Community”) and entered into a residence agreement, which covered the Bakers use of the Community including its medical facilities, gym, pool, and spa, among other amenities.

The Bakers did not need care and essentially resided in the independent living section of the Community.  They paid $2,170 a month as a service fee for 1997 and $2,254 a month as a service fee for 1998.  The Community calculated the portion of the monthly fees paid by residents of the independent living section that were allocable to medical expenses.  A group of residents, on their own, calculated a somewhat higher amount to be allocated to medical expenses for independent living folks.

The IRS did not accept the allocation and hired an actuary who prepared a report.  The Tax Court, after reviewing the various reports and the calculations concluded (not surprisingly) that each report had its shortcomings but that the IRS’ actuary report was far too complicated to be justified.  The Court concluded that so long as an allocation using a percentage method bore some reasonable relationship to the actual costs incurred, the Court would accept it.  In other words, a percentage method is acceptable.  Also, it came as no surprise that the costs associated with the use and maintenance of the pool, gym and spa were not part of a medical expense deduction.

Accountants should first review the actual medical expenses incurred.  Then those expenditures should be broken down on some reasonable basis so that one could determine what portion was reasonably allocable to people living in independent living quarters.  It appears that so long as the allocation appears to be reasonable, it will be accepted.  See Baker v.  Commissioner, 122 TC No.  8 (February 19, 2004)

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