Rev. Rul. 75-302

Advice has been requested whether any portion of a lump-sum life-care fee paid by a taxpayer to a retirement home is deductible by him as an expense for medical care under section 213 of the Internal Revenue Code of 1954, under the circumstances described below.

A taxpayer, 78 years of age, entered into an agreement with a retirement home under which he became entitled to live in the home and to receive lifetime care. In consideration for the promise of the lifetime care that he desired, the taxpayer agreed to pay 170x dollars in a lump-sum as the life-care fee. The fee was calculated without regard to any similar contracts with other patients at the institution and assured the taxpayer lifetime care at no additional cost and, therefore, was not medical insurance. The retirement home demonstrated that the life-care fee of 170x dollars included 51x dollars to cover the home's obligation to provide medical care, medicine, and hospitalization, and gave the taxpayer a separate statement to that effect. The allocation made by the retirement home was found to be appropriate in this case, since it was made on the basis of prior experience, which showed that the cost of furnishing these items averaged about 30 percent of its life-care budget.

The agreement further provided that in the event a member terminated his membership he would, under certain circumstances, be entitled to a refund of a portion of the life-care fee paid. Such refund would be computed in accordance with a specified formula that included a penalty provision.

Section 213(a) of the Code allows as a deduction expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, and dependents, subject to certain limitations.

Rev. Rul. 54-457, 1954-2 C.B. 100, states that when a university charges a student a lump-sum fee that includes his education, board, medical care, etc., the portion of the charge that is allocable to medical care is considered a proper medical expense deduction, if there is a breakdown showing the amount of the fee that is allocable to medical care, or such information is readily available from the university. The principle in that Revenue Ruling, relating to allocation of the fee, is equally applicable to the instant case.

In Robert S. Bassett, 26 T.C. 619 (1956), a deduction was denied for an advance payment to a hospital for medical services to be rendered in subsequent years. The facts in the present case are distinguishable from those in the Bassett case since, in the present case, there is an obligation to pay a specified amount, a condition imposed by the institution for its agreement to provide lifetime care. Furthermore, the taxpayer's right to a refund is conditional and is subject to a penalty provision.

In the instant case, as evidenced by the agreement, the obligation to pay was incurred at the time payment was made in return for the retirement home's promise to provide lifetime care, and the payment was made in order to secure medical services despite the fact that the medical services were not to be performed until a future time if at all.

Accordingly, the portion of the lump-sum life-care fee payment, made by the taxpayer pursuant to a contract, that was properly allocable to his medical care, is deductible as an expense for medical care in the year paid, subject to the limitations prescribed in section 213 of the Code.

Section 1.213-1(g)(1) of the Income Tax Regulations provides, in part, that when reimbursement from insurance or otherwise for medical expenses is received in a taxable year subsequent to a year in which a deduction was claimed on account of such expenses, the reimbursements must be included in gross income in such subsequent year to the extent attributable to (and not in excess of) deductions allowed under section 213 of the Code for any prior taxable year.

Thus, any refund of the life-care fee that may be received by the taxpayer in a later year must be included in gross income for such later year to the extent attributable to (and not in excess of) deductions allowed under section 213 of the Code for any prior taxable year.