There’s lots going on in the tax world this week. And much of it bores me, so take from that what you will.
But the case of Finzer v. United States, No. 06-C-2176, about medical expenses and assisted living facilities caught my eye because, well, lots of folks that I know are considering assisted living facilities. My aunt and uncle lived in one eons ago, in the 1980s. They were sooo ahead of their time. Now, assisted living facilities are almost trendy and a number of older folks are looking at them as attractive options.
This case involved the Finzers, who paid an entrance fee for an Illinois assistance living facility, Classic Residence by Hyatt – this is not your grandmother’s nursing home! Classic Residence informed the Finzers that almost 20% of the fee (in their case, $136,798) might qualify as a deductible medical expense. Relying on this information, the Finzers deducted the amount in 2002 and went about their way.
A year later, the Finzers got another letter from Classic Residence informing them that 41% of the fee might be deductible as a medical expenses. The couple did what anyone in a similar situation would do: they filed an amended return claiming an increased medical expense deduction.
The refund was denied by the IRS. The Finzers sued in court and lost.
The court found that though the Finzers paid $723,800 for their Classic Residence unit, they would have received the same access to medical care had they selected a smaller unit that required an entrance fee of only $275,000. In other words, the size of the apartment (and thus, the size of the fee) did not directly impact the amount of medical care provided. The percentage-based computation did not, then, adequately reflect the medical expense.
Additionally, the residency agreement that the Finzers signed with Classic Residence states that the proceeds of the entrance fees are not used to provide services (such as medical expenses) to the residents. There is no evidence that any portion of the Finzers’ entrance fee was used to pay medical expenses; in fact, the entrance fee is actually structured as a loan. Hyatt testified that they usually returned about 90% of the fee to the residents.
Taking all of this into consideration, the Finzers were not able to prove that 41% adequately reflected the actual amount attributable to medical expenses.
I feel for the Finzers, I really do. They clearly acted upon information provided to them by Hyatt. And the thing I don’t get is this: where were Hyatt’s attorneys? If the entrance fee is structured as a loan (which apparently is spelled out quite specifically in the agreement), and is typically refunded, how in the world did they arrive at this 41% figure as a medical expense? Or even the 18.9% figure before that? It sounds like either insanely bad lawyering or poor judgment on the part of Hyatt. Either way, it’s bad news for the Finzers. I hope that they are at least compensated, in part, by Hyatt for relying on this advice.
As for the rest of us? What should we take from this? Well, for one, medical expenses have to be related to, um, medical expenses. Any other thoughts?
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