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Tax Research Project Paper

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Paper type: Project , Subject: Business

Shane Fitzgerald ACC 413-0001 – Concepts and Strategies of Taxation Research Memo RE: Deductions for medical expenses September 22, 2011 Facts:Janice was injured in an accident and prescribed 6 months of physical therapy in a swimming pool. She does not live within an hour of the nearest public pool and wants to build a pool in her backyard. Janice lives alone and her annual Adjusted Gross Income is $50,000. Issue: Is the cost to build and maintain a pool for Janice in part, or completely deductible as a medical expense?

Authorities: IRC Sec. 213 (a) (d) (1. ) Reg §1. 213-1 (e) (i) (ii) (iii) Rev. Rul. 83-33, 1983-1 CB 70, IRC Sec(s). 213 HAINES v. COMMISSIONER, 71 TC 644, Code Sec(s) 213 Conclusion: Janice will be allowed to deduct the amount of cost to build her pool which exceeds both the amount it will increase the value of her property and 7. 5% of her Adjusted Gross Income. She will also be able to deduct the cost to maintain the pool for the first year for a total medical expense deduction of $4,750. Analysis: IRC Sec. 13 (a) says that medical expenses paid during the year that were not covered by insurance are deductible, “to the extent that such expenses exceed 7. 5 percent of adjusted gross income. ” Janice’s Adjusted Gross Income is $50,000, thus she can only deduct medical expenses if they exceed $3,750. However, the cost to build her pool was a capital expenditure because it increased the value of her home. Capital expenditures are typically not deductible but in Janice’s case, Reg §1. 213-1 (e) (iii) says: capital expenditure which is related only to the sick person and is not related to permanent improvement or betterment of property, if it otherwise qualifies as an expenditure for medical care, shall be deductible… a capital expenditure for permanent improvement or betterment of property which would not ordinarily be for the purpose of medical care… may, nevertheless, qualify as a medical expense to the extent that the expenditure exceeds the increase in the value of the related property, if the particular expenditure is related directly to medical care.

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Her pool qualifies as a medical expense because of her doctor’s prescription. Under this regulation, the cost of her pool ($20,000) less the value added to her home ($12,000) will be deductible as a medical expense. This amount ($8,000) less the allowance of deduction ($3,750) leaves her with a total of $4,250 she can deduct for the construction of her pool. She can also deduct $500 this year for maintenance of her pool because, “expenditures for the operation or maintenance of the capital asset would also qualify provided that the medical reason for the capital expenditure still exists.

The entire amount of such operation and maintenance expenditures qualifies, even if none or only a portion of the original cost of the capital asset itself qualified” [Reg §1. 213-1 (e) (iii)]. In subsequent years she will not be able to deduct the maintenance cost unless her doctor renews her prescription of physical therapy in a swimming pool. The example used in Rev. Rul. 83-33, 1983-1 CB 70, IRC Sec(s). 213 is nearly identical to Janice’s case in which a physician prescribed physical therapy treatment by swimming and the individual constructed a pool for medical use. The courts have distinguished personal expenditures that are merely beneficial to the general health of the individual from those that have as their purpose medical care, the prevention or alleviation of a physical or mental defect or illness. ” The pool Janice will construct will provide her with the best treatment for her condition. In the case of HAINES v. COMMISSIONER, 71 TC 644, Code Sec(s) 213, the court ruled that the primary purpose of building a swimming pool was not directly related to the medical care required. The judge decided:

During the period special therapy for his leg was required, it could have been secured through other far less costly means; for example, the petitioner could have secured the necessary therapy at the hospital or he could have arranged to swim at a health club which was not far from his residence. The pool cost the petitioner over $19,000, and we cannot accept his contention that such amount was spent primarily for therapy for his leg in view of the limited need for such therapy and the alternatives which were then available.

The difference in Janice’s case is that she lives in a rural part of her state where there are no publicly available swimming pools within an hours commute and therefore building her own pool is necessary to treat her medical condition. In conclusion, Janice will be allowed to deduct the amount of cost to build her pool which exceeds both the amount it will increase the value of her property and 7. 5% of her Adjusted Gross Income. She will also be able to deduct the cost to maintain the pool for the first year for a total medical expense deduction of $4,750.

Attachments: § 213 Medical, dental, etc. , expenses. Internal Revenue Code (RIA) (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152 , determined without regard to subsections (b)(1) , (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7. 5 percent of adjusted gross income. Definitions. For purposes of this section — The term “medical care” means amounts paid— A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, (B) for transportation primarily for and essential to medical care referred to in subparagraph (A) for qualified long-term care services (as defined in section 7702B(c) ), or for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B(b) ).

In the case of a qualified long-term care insurance contract (as defined in section 7702B(b) ), only eligible long-term care premiums (as defined in paragraph (10) ) shall be taken into account under subparagraph (D) . Reg §1. 213-1. Medical, dental, etc. , expenses. (e) Definitions. (1) General. (I) The term “medical care” includes the diagnosis, cure, mitigation, treatment, or prevention of disease. Expenses paid for “medical care” shall include those paid for the purpose of affecting any structure or function of the body or for transportation primarily for and essential to medical care.

See subparagraph (4) of this paragraph for provisions relating to medical insurance. (ii) Amounts paid for operations or treatments affecting any portion of the body, including obstetrical expenses and expenses of therapy or X-ray treatments, are deemed to be for the purpose of affecting any structure or function of the body and are therefore paid for medical care. Amounts expended for illegal operations or treatments are not deductible. Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness.

Thus, payments for the following are payments for medical care: hospital services, nursing services (including nurse’s board where paid by the taxpayer), medical, laboratory, surgical, dental and other diagnostic and healing services, X-rays, medicine and drugs (as defined in subparagraph (2) of this paragraph, subject to the 1-percent limitation in paragraph (b) of this section), artificial teeth or limbs, and ambulance hire. However, an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.

Capital expenditures are generally not deductible for Federal income tax purposes. See section 263 and the regulations thereunder. However, an expenditure which otherwise qualifies as a medical expense under section 213 shall not be disqualified merely because it is a capital expenditure. For purposes of section 213 and this paragraph, a capital expenditure made by the taxpayer may qualify as a medical expense, if it has as its primary purpose the medical care (as defined in subdivisions (i) and (ii) of this subparagraph) of the taxpayer, his spouse, or his dependent.

Thus, a capital expenditure which is related only to the sick person and is not related to permanent improvement or betterment of property, if it otherwise qualifies as an expenditure for medical care, shall be deductible; for example, an expenditure for eye glasses, a seeing eye dog, artificial teeth and limbs, a wheel chair, crutches, an inclinator or an air conditioner which is detachable from the property and purchased only for the use of a sick person, etc.

Moreover, a capital expenditure for permanent improvement or betterment of property which would not ordinarily be for the purpose of medical care (within the meaning of this paragraph) may, nevertheless, qualify as a medical expense to the extent that the expenditure exceeds the increase in the value of the related property, if the particular expenditure is related directly to medical care. Such a situation could arise, for example, where a taxpayer is advised by a physician to install an elevator n his residence so that the taxpayer’s wife who is afflicted with heart disease will not be required to climb stairs. If the cost of installing the elevator is $1,000 and the increase in the value of the residence is determined to be only $700, the difference of $300, which is the amount in excess of the value enhancement, is deductible as a medical expense. If, however, by reason of this expenditure, it is determined that the value of the residence has not been increased, the entire cost of installing the elevator would qualify as a medical expense.

Expenditures made for the operation or maintenance of a capital asset are likewise deductible medical expenses if they have as their primary purpose the medical care (as defined in subdivisions (i) and (ii) of this subparagraph) of the taxpayer, his spouse, or his dependent. Normally, if a capital expenditure qualifies as a medical expense, expenditures for the operation or maintenance of the capital asset would also qualify provided that the medical reason for the capital expenditure still exists.

The entire amount of such operation and maintenance expenditures qualifies, even if none or only a portion of the original cost of the capital asset itself qualified. Rev. Rul. 83-33, 1983-1 CB 70 — IRC Sec. 213 Revenue Rulings (1954 – Present) Headnote: Rev. Rul. 83-33, 1983-1 CB 70 — IRC Sec. 213 Reference(s): Code Sec. 213; Reg § 1. 213-1 Medical expenses; swimming pool; capital expenditures.

Taxpayer’s cost of constructing a special exercise or “lap” swimming pool to treat severe osteoarthritis, to the extent the expenditure exceeds any resulting increase in the value of taxpayer’s related property, is deductible as a medical expense under section 213 of the Code. Rev. Ruls. 54-57 and 59-411 modified. Full Text: ISSUE Are expenditures for the costs of constructing, operating, and maintaining an exercise pool deductible as medical expenses under section 213 of the Internal Revenue Code?

FACTS A, an individual, has severe osteoarthritis, a degenerative disease that results in a progressive weakness and decreased use of the knees and legs. To slow the effects of this disease, A’s physician prescribed a treatment of swimming several times a day. A constructed an indoor “lap” pool in order to follow the prescribed, daily exercise. The pool, which is attached to A’s residence, is 8 feet wide by 36 feet long and varies in depth from approximately 3 feet to 5 feet. The pool does not have a diving board and is not suitable for general recreational use.

The stairs for the pool are specially designed with wider steps and smaller risers to enable A to safely enter and emerge from the pool. The ;Page 71; pool also has a hydrotherapy device to aid in A’s treatment. LAW AND ANALYSIS Section 213(a) of the Code allows a deduction in computing taxable income for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer’s spouse, or a dependent, subject to certain limitations.

The term “medical care” is defined by section 213(e) to include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, for the purpose of affecting any structure or function of the body, or for transportation primarily for and essential to these purposes. Section 1. 213-1(e)(1)(ii) of the Income Tax Regulations provides, in part, that deductions for expenditures for medical care allowable under section 213 of the Code will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness.

However, an expenditure that is merely beneficial to the general health of an individual is not an expenditure for medical care. Section 1. 213-1(e)(1)(iii) of the regulations provides, in part, that capital expenditures are generally not deductible for federal income tax purposes. See section 263 of the Code and the regulations thereunder. However, an expenditure that otherwise qualifies as a medical expense under section 213 shall not be disqualified merely because it is a capital expenditure.

Moreover, a capital expenditure for permanent improvement or betterment of property that would not ordinarily be for the purpose of medical care may, nevertheless, qualify as a medical expense to the extent that the expenditure exceeds the increase in the value of the related property, if the particular expenditure is related directly to medical care. The test whether a capital expenditure is deductible under section 213 of the Code as a medical expense is whether the expenditure is incurred for the primary purpose of, and is related directly to, the taxpayer’s medical care.

The courts have distinguished personal expenditures that are merely beneficial to the general health of the individual from those that have as their purpose medical care, the prevention or alleviation of a physical or mental defect or illness. Thus, not every expenditure prescribed by a physician or for the physical comfort of the individual will be considered a medical expense. Seymour v. Commissioner, 14 T. C. 1111 (1950).

For example, the costs of transportation expenses to and from a golf course where golf was recommended for a victim of pulmonary emphysema are not deductible. Altman v. Commissioner, 53 T. C. 487 (1969). The costs of vacations or athletic club fees, while beneficial to the general health of a taxpayer, are also nondeductible personal or living expenses under section 262 of the Code. Havey v. Commissioner, 12 T. C. 409 (1949). An expenditure that merely serves the convenience of the taxpayer is not considered a medical expense.

Worden v. Commissioner, T. C. M. 1981-366. Deductions under section 213(e) are confined strictly to expenditures for medical care. In the present situation, A’s physician prescribed swimming in order to alleviate A’s osteoarthritis. In order to follow the prescribed treatment, A constructed a shallow “lap” pool incorporating specially designed stairs for ease of entry and exit and a hydrotherapy device. The specially designed exercise pool is not suitable for general recreational use. HAINES v.

COMMISSIONER, 71 TC 644, Code Sec(s) 213. C. William Haines and Sara B. Haines, Petitionerv. Commissioner of Internal Revenue, Respondent Case Information: Code Sec(s): | 213[pg. 644] | Docket: | Docket No. 8474-76. | Date Issued: | 01/25/1979 | Judge: | Opinion by SIMPSON, J. | Tax Year(s): | Year 1972. | Disposition: | Decision for Commissioner. | HEADNOTE 1. MEDICAL EXPENSES—Definition of medical care—special home improvements for disabled persons and preventive medicine—deduction denied.

Medical expense deduction denied for cost of swimming pool taxpayer built in his home. Expenses incurred in building pool were not primarily related to his medical care. Need for special therapy for taxpayer’s leg continued for only limited period of time. Having pool at home was mere convenience, not necessity. Since pool was not enclosed, taxpayer had access to it for only 6 months out of the year and it contained no equipment to help him with his physical therapy. Reference(s): 1979 P-H Fed. ¶16,432(10). Code Sec. 213 .

OPINION Therefore, under the regulations, the test is whether the petitioner’s expenditures were incurred for the “primary purpose” of, and were “related directly to,” his medical care. See Ferris v. Commissioner, 582 F. 2d 1112 (7th Cir. 1978), revg. and remanding on another issue a Memorandum Opinion of this Court; Havey v. Commissioner, 12 T. C. 409, 412 (1949). In light of all the facts and circumstances of this case, we must hold that the expenses the petitioner incurred in building a swimming pool were not for the primary purpose of, and were not related directly to, his medical care.

Undoubtedly, swimming was beneficial to his condition, but such evidence is insufficient to establish that the primary purpose of the building of his own pool was related directly to his medical care. Cf. Ferris v. Commissioner, supra. The need for special therapy for his leg [pg. 648]continued for only a limited period of time. Although he remains limited as to the forms of exercise in which he can engage, his present practice of swimming as a means of exercise is not significantly different than the activities of many others who prefer that form of exercise for its undoubted advantages.

During the period special therapy for his leg was required, it could have been secured through other far less costly means; for example, the petitioner could have secured the necessary therapy at the hospital or he could have arranged to swim at a health club which was not far from his residence. The pool cost the petitioner over $19,000, and we cannot accept his contention that such amount was spent primarily for therapy for his leg in view of the limited need for such therapy and the alternatives which were then available.

Moreover, even the testimony of the petitioner’s physician does not support his contention that his own swimming pool was a medical necessity for him. When asked his reason for recommending swimming to the petitioner, the doctor stated: “Well, he was having to go over to the hospital daily for quite a while there to get the exercises, and then they’d put him in a whirlpool, and I felt, and had the personal reasons for—to advise him to build a pool himself so he could swim when he had occasion to swim. ” (Emphasis added. ) The doctor’s statements do not indicate a medical exigency for the petitioner’s nstallation of his own pool. InSeymour v. Commissioner, 14 T. C. 1111, 1117 (1950), we said: “The statute deals with ‘expenses paid for medical care of the taxpayer. ‘ Not every expenditure prescribed by a physician is to be catalogued under this term, nor is every expense that may be incurred for the physical comfort of a party a medical expense. ” Having a swimming pool at his home made it more convenient for the petitioner to exercise in a pool, but an expenditure that merely serves the convenience of the taxpayer cannot be treated as a medical expense.

Seymour v. Commissioner, supra at 1117. Other circumstances in this case also indicate that the petitioner’s swimming pool was not built for the “primary purpose” of his medical care. He testified that he had access to his pool only from April to October; thus, its use was not available to him for approximately one-half of each year. He also testified that he would like to have enclosed the pool, but the additional cost of doing so was too great. However, in Ferris[pg. 649] v. Commissioner, supra, where the taxpayer, a resident of Madison, Wis. was required to swim twice a day for the rest of her life, the pool was enclosed, and it was agreed that the costs of the enclosure were deductible. If swimming in his own pool was required for the treatment of the petitioner’s broken leg, it does seem that such treatment should have been available for more than one-half of the year, and the fact that the pool was not available for such a large portion of the time provides further evidence that its construction was not required for medical purposes.

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