Rev. Rul. 76-481

Advice has been requested whether, under the circumstances described below, any portion of the founder's fee and the monthly fee paid by individuals in connection with their residence at a retirement home under a life-care contract is deductible by the individuals as an expense for medical care under section 213 of the Internal Revenue Code of 1954.

The taxpayers entered into an agreement with a retirement home under which they became entitled to live in the home and to receive lifetime care that includes specified residential accommodations, meals, and medical care. In consideration for the promise of the lifetime care that they desired, the taxpayers agreed to pay a founder's fee of 4,000x dollars upon commencing residence at the home and a monthly fee of 8x dollars.

The fees were calculated without regard to any similar contracts with other patients at the institution and were not medical insurance. The agreement further provided that in the event the taxpayers chose to terminate residence they would, under certain circumstances, be entitled to a refund of a portion of the founder's fee paid. Such refund would be computed in accordance with a specified formula that included a penalty provision.

The home had not been in operation for a sufficient length of time to demonstrate from its own financial experience what portion of the fees are allocable to medical care of the residents. However, the home used long-term financial information from a comparable retirement home. The home demonstrated that 15 percent of the monthly fee will be used to discharge the home's obligations to provide medical care to its residents, that 10 percent of the founder's fee will be used to provide such care, and that five percent of the founder's fee will be used for construction of the health facilities for the home. The home gave the taxpayers separate statements to that effect.

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 and the taxpayer's spouse and dependents, subject to certain limitations.

Rev. Rul. 67-185, 1967-1 C.B. 70, holds that where taxpayers pay a monthly life-care fee to a retirement home and prove, on the basis of the home's experience, that a specific portion of the fee covers the costs of providing medical care for them, that portion of the fee is deductible by them as a medical expense in the year paid.

Rev. Rul. 75-302, 1975-2 C.B. 86, involves a taxpayer who, pursuant to a contract with a retirement home to provide lifetime care, including medical care, was required to pay a lump-sum life-care fee, a portion of which was refundable under certain limited circumstances. The home demonstrated, on the basis of its prior experience, that a certain portion of the payment was allocable to the home's obligation to provide medical care to the taxpayer. Rev. Rul. 75-302 holds that, under those circumstances, the portion of the lump-sum life-care fee payment that was properly allocable to the taxpayer's medical care was deductible as an expense for medical care in the year paid, subject to the limitations in section 213 of the Code, and that any refund of the entry fee that is 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 for any prior taxable year.

Rev. Rul. 68-525, 1968-2 C.B. 112, involves a married couple who, as a condition for receiving a retirement home's promise to provide lifetime care that includes medical care, were required to pay a lump-sum payment that was apportioned between the cost of constructing the infirmary and the residential facilities, and a monthly life-care fee. Rev. Rul. 68-525 holds that the lump-sum payment does not qualify as a medical expense deductible under section 213 of the Code since it is attributable to the construction of the infirmary and residential facility and is not to provide medical care; however, a portion of the monthly fee may be deductible as an expense for medical care in accordance with Rev. Rul. 67-185.

In the instant case, the obligation to pay the founder's fee was incurred at the time payment was made in return for the retirement home's promise to provide lifetime care, and 10 percent of 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 founder's fee (10 percent, or 400x dollars) paid by the taxpayers pursuant to the contract that is properly allocable to their 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.

In addition, the portion of the monthly fee (15 percent or 1.2x dollars) paid by the taxpayers that is properly allocable to medical care is also deductible as an expense for medical care in the year paid, subject to the limitations prescribed in section 213 of the Code.

However, the portion of the founder's fee (5 percent or 200x dollars) used to construct the health facilities does not qualify as a medical expense deductible under section 213 of the Code. Rev. Rul. 68-525.

Further, any refund of the founder's fee that is received by the taxpayer in a later year must be included in the gross income for such later year to the extent attributable to (and not in excess of) deductions previously allowed under section 213 of the Code.