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Finzer v. United States

March 7, 2007

JOHN O. FINZER, JR. AND ELIZABETH M. FINZER, PLAINTIFFS,
v.
UNITED STATES*FN1, DEFENDANT.



The opinion of the court was delivered by: Matthew F. Kennelly, District Judge

MEMORANDUM OPINION AND ORDER

John and Elizabeth Finzer bring this action to obtain a refund that the Internal Revenue Service (IRS) disallowed for amounts they claimed as medical expenses on their amended 2002 federal income tax return. The United States has moved for summary judgment. For the following reasons, the Court denies defendant's motion.

Facts

Because the defendant has moved for summary judgment, the Court views the facts in the light most favorable to the plaintiffs and draws reasonable inferences in their favor. See DeValk Lincoln Mercury, Inc. v. Ford Motor Co., 811 F.2d 326, 329 (7th Cir. 1987).

In 2002, John and Elizabeth Finzer entered into a residency agreement with Classic Residence by Hyatt, a lifetime care facility located in Glenview, Illinois (Hyatt). Hyatt is a retirement community licensed under the Illinois Life Care Facilities Act (210 ILCS 40/1-12) that provides life care services to individuals aged sixty-two years and older. Under the agreement, the Finzers receive residential accommodations and assisted living and skilled nursing services if needed. The agreement will remain in effect for the rest of their lives unless terminated by the Finzers upon sixty days notice, or by Hyatt for one of the causes enumerated in the agreement. In exchange for the services provided by Hyatt, the Finzers paid an entrance fee of $726,300. They are also required to make monthly payments for as long as they live at Hyatt. The monthly payments, currently $4,665, may be increased or decreased by Hyatt upon sixty days written notice.

The Finzers' agreement specifies the services included in the monthly fee, among which is "a long-term care program providing assisted living, memory support and skilled nursing care . . . ." Def. R. 56.1 Stat., Ex. 1 at 5. The agreement does not, however, delineate specifically how the entrance fee and monthly fees are allocated among the various services provided by Hyatt. The Illinois Life Care Facilities Act, however, defines "entrance fee" as "an initial or deferred transfer to a provider of a sum of money or property, made or promised to be made by a person entering into a life care contract, which assures a resident of services pursuant to a life care contract." 210 ILCS 40/2(g). The Act defines a "life care contract" as a contract to provide to a person for the duration of such person's life or for a term in excess of one year, nursing services, medical services or personal care services, in addition to maintenance services for such person in a facility, conditioned upon the transfer of an entrance fee to the provider of such services in addition to or in lieu of the payment of regular periodic charges for the care and services involved.

Id. § 2(c).

In February 2003, Hyatt sent the Finzers a letter regarding the potential tax deductibility of their entrance fee. Hyatt stated that 18.9% of the entrance fee may qualify for deduction as a medical expense. The Finzers thereafter filed their 2002 tax return, claiming $146,339 in medical expenses, of which $136,798 relate to the entrance fee.*fn2 Pursuant to the Internal Revenue Code, medical deductions are capped at 7.5% of a taxpayer's adjusted gross income. Accordingly, the Finzers claimed a medical deduction of $92,420.

Sometime after the Finzers filed their 2002 return, Hyatt sent them another letter regarding the potential deductibility of their entrance fee. Hyatt told the Finzers that for the 2003 tax year, it calculated the percentage of the monthly fees and entrance fees related to medical costs based on actuarial information and statistics. In previous years (including 2002), it had based the calculations on historical operating costs. Hyatt stated that if it had used the 2003 actuarial methodology in 2002, 41% of the entrance fee could have been claimed as a medical deduction instead of 18.9%. Based on this information, the Finzers filed an amended 2002 return that increased their total itemized deductions by $159,960. The Finzers sought a $43,178 refund, which the IRS denied. The Finzers then filed this suit.

Discussion

When a district court rules on a motion for summary judgment, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Entry of summary judgment is appropriate only when the pleadings, depositions, answers to interrogatories, admissions, and affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c).

In a tax refund case, the taxpayer bears the burden of proving that the IRS's assessment of taxes was erroneous and of showing the correct amount he is entitled to recover. See United States v. Janis, 428 U.S. 433, 440 (1976). In its motion for summary judgment, the government contends that no portion of the entrance fee is deductible as a medical expense. It supports this contention with several arguments. The government claims that there is no evidence that any portion of the entrance fee was paid for medical care. It claims that because the entrance fee can be partially refunded under certain circumstances, the taxpayers are precluded from characterizing a portion of the fee as a medical expense. The government also points to the provision of the residential agreement stating that the monthly fee includes medical care as evidence that the entrance fee must cover something different. Finally, the government points out that the residential agreement specifies that if a resident is unable to pay the monthly fee, those charges may be deferred and charged against any potential refund of the entrance fee to which the resident might otherwise be entitled. The government argues that because the entrance fee is available to reimburse Hyatt for any deferred monthly payments, it is inconsistent to treat any portion of that fee as a medical expense.

The IRS has issued several revenue rulings that address situations similar to the one at issue in this case and that support the deductibility of a portion of a fee similar to the one the Finzers paid. In 1975, the IRS ruled that a taxpayer who paid a lump-sum life-care fee to a retirement home may deduct as a medical expense that portion of the fee allocable to the retirement home's obligation to provide medical care. Rev. Rul. 75-302, 1975-2 C.B. 86. The IRS made a similar ruling the following year. See Rev. Rul. 76-481, 1976-2 C.B. 82.

The government contends that the Finzers' case is distinguishable from these revenue rulings because "the life-care fee in those rulings was paid in consideration for the promise of lifetime care while in the instant case, no evidence has been presented to support the contention that some portion of the entrance fee was" allocated to medical care. Def. Mem. at 4. Not so. The lifetime care contract states that the "use of the accommodations in the Community and the right to receive the services described in this Agreement are contingent upon Your payment of" the entrance fee and the monthly fees. Def. Mem., Ex. 1 at 5-6 (emphasis added). This indicates that the entrance fee is partially allocable to medical care, as that is one of the "services ...


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