Estate of Lillian Baral, (2011) 137 TC No. 1
The Tax Court has held that payments made to caregivers for providing physician-ordered assistance and supervision to a patient suffering from dementia qualified as long-term care services under Code Sec. 7702B(c) and were thus deductible amounts paid for medical care under Code Sec. 213(d)(1)(C).
Background. Under Code Sec. 213, expenses for medical care, not compensated for by insurance or otherwise, may be claimed as an itemized deduction to the extent they exceed 7.5% of adjusted gross income (AGI). (For tax years beginning after Dec. 31, 2012, medical expenses will be deductible to the extent they exceed 10% of AGI.) Medical care generally is defined broadly as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, and amounts paid for qualified long-term care services under Code Sec. 7702B(c). (Code Sec. 213(d)(1))
“Qualified long-term care services” are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which: (i) are required by a “chronically ill” individual; and (ii) are provided under a plan of care prescribed by a licensed health care practitioner. (Code Sec. 7702B(c)(1))
A chronically ill individual is one who has been certified within the previous 12 months by a licensed health care practitioner as: (i) being unable to perform, without “substantial assistance” from another individual, at least two activities of daily living for at least 90 days due to a loss of functional capacity; (ii) having a similar level of disability as determined under IRS regs prescribed in consultation with the Dept of Health and Human Services; or (iii) requiring “substantial supervision” to protect the individual from threats to health and safety due to “severe cognitive impairment,” even if the individual is physically able. (Code Sec. 7702B(c)(2)) Severe cognitive impairment includes Alzheimer's disease and other similar forms of irreversible dementia. (Notice 97-31, 1997-1 CB 417)
Facts. Lillian Baral was diagnosed with dementia sometime around 2004. The first time she was hospitalized that year, her medical records showed that she had not been compliant with taking her prescription medicines. The second time, she was evaluated so as to determine whether it was safe for her to live alone.
Ms. Baral's primary physician evaluated her in 2006 and determined that her ability to communicate orally was impaired, she was confused, she required assistance with activities of daily living, she required supervision due to her memory deficit, she was at risk of falling and couldn't be left alone, and she required baseline homecare services. Accordingly, the physician determined that she required assistance and supervision 24 hours a day for medical reasons and for her safety.
David Baral, Ms. Baral's brother, handled all of decedent's personal and financial affairs under a power of attorney during the last years of her life and wrote checks from her bank account to pay her bills. Pursuant to the physician's determination, he ultimately hired a primary caregiver to provide Ms. Baral with the necessary assistance. A second caregiver provided backup services during the primary caregiver's time off.
For 2007, the year at issue, Mr. Baral paid the primary caregiver $40,760, and the secondary caregiver $8,820, for their services.
Ms. Baral received a total of $94,229 in various income and capital gains during 2007. However, no return was filed by her or on her behalf. IRS filed a substitute for return, allowing her a personal exemption and standard deduction, and found a $17,681 deficiency and imposed associated penalties.
Ms. Baral died on Aug. 28, 2008, and Mr. Baral is the administrator of her estate.
Caregiver expenses held deductible. The Tax Court examined the language of Code Sec. 7702B and Code Sec. 213 and determined that the amounts paid to the caregivers were qualified long-term care services deductible under Code Sec. 213(d)(1)(C).
Although the caregivers weren't licensed healthcare providers, and the payments to them were not for the diagnosis, cure, mitigation, treatment, or prevention of Ms. Baral's disease, the payments nonetheless satisfied the requirements to be considered qualified long-term care services.
Ms. Baral's physician stated in the 2006 evaluation that she suffered from severe dementia and required assistance with activities of daily living. As early as 2004, her cognitive impairment prevented her from properly taking her medicine, thus posing a risk to her health. The physician further certified that Ms. Baral required substantial supervision to protect her from threats to her health and safety due to her severe cognitive impairment. Accordingly, the Tax Court found that Ms. Baral was a chronically ill individual under Code Sec. 7702B(c)(2)(A).
The Court then found that the caregivers' 24-hour services qualified as “maintenance or personal care services” under Code Sec. 7702B(c)(3). Mr. Baral hired the caregivers to provide the 24-hour care that the physician had determined was necessary to protect Ms. Baral's health and safety from dementia-related threats, and the physician had also determined that Ms. Baral required constant supervision due to her memory deficit. Therefore, the services were provided on account of Ms. Baral's diminished capacity and pursuant to a plan of care prescribed by her physician, a licensed health care practitioner, and thus qualified under Code Sec. 7702B(c).
References: For expenditures that qualify as medical care expenses, see FTC 2d/FIN ¶K-2100; United States Tax Reporter ¶2134.04; TaxDesk ¶346,003; TG ¶18800.