## Facts

- Delbert L. Baker and Margaret J. Baker resided in a nonprofit continuing care retirement community (CCRC), Air Force Village West (AFVW), in Riverside, California.
- AFVW provided multiple levels of care, from independent living through skilled nursing, under a residence agreement intended to furnish lifetime housing and access to care.
- In 1997 and 1998, the Bakers lived in independent living units and paid monthly service fees (about $2,170 in 1997 and $2,254 in 1998) covering both medical-related services/facilities and nonmedical amenities.
- AFVW had internal calculations allocating a portion of monthly fees to medical care using a percentage-of-cost approach; an ad hoc resident committee (including Mr. Baker) computed a higher medical-care percentage than AFVW’s finance officer.
- The Bakers claimed medical expense deductions under I.R.C. § 213 for the medical-care portion of their monthly fees using the committee’s higher allocation.
- The Bakers also claimed additional § 213 deductions tied to Mr. Baker’s use of the pool, spa, and exercise facilities, assertedly for medically recommended exercise.
- The IRS issued a notice of deficiency allowing only a lower medical allocation and disallowing the pool/spa/exercise-related deductions; later, the IRS argued an actuarial method was the only permissible allocation method and yielded a lower deductible amount.

## Issues

1. Whether taxpayers must use an actuarial method to determine the portion of CCRC monthly service fees allocable to “medical care” under I.R.C. § 213, or may instead use a percentage-of-cost method based on the CCRC’s financial data.
2. If a percentage method is permissible, what portion of the Bakers’ 1997 and 1998 monthly service fees was properly allocable to medical care and deductible under § 213.
3. Whether the Bakers could deduct amounts attributable to use of AFVW’s pool, spa, and exercise facilities as medical care expenses under § 213.
4. Whether the burden of proof on the allocation issue shifted to the Commissioner under I.R.C. § 7491(a).

## Decision

- The Tax Court held that an actuarial method was not mandatory; a properly constructed percentage method could be used to allocate CCRC fees between medical and nonmedical components for § 213 purposes.
- The court held that the burden of proof shifted to the Commissioner on the factual allocation issue under § 7491(a) because the taxpayers satisfied substantiation/cooperation requirements and introduced credible evidence.
- Using AFVW’s financial data and a refined percentage approach, the court determined the deductible medical-care portions of the Bakers’ monthly service fees were $7,766 for 1997 and $8,476 for 1998.
- The court denied any § 213 deduction for pool/spa/exercise facility use because the costs were not shown to be specifically for medical care and were not substantiated or segregated from general recreational availability.

## Legal Principles

- I.R.C. § 213 permits deductions for expenses paid for “medical care,” but taxpayers must reasonably allocate bundled CCRC fees between medical and nonmedical components.
- No statute or controlling authority requires an actuarial-only allocation; a percentage-of-cost method grounded in credible provider financial data may reasonably approximate the medical-care component.
- A percentage allocation must avoid distortion; allocating medical costs based solely on an individual’s higher monthly lodging charge can be improper where medical services are not tied to unit size or price.
- Under I.R.C. § 7491(a), the burden of proof shifts to the Commissioner on a factual issue when the taxpayer produces credible evidence and meets substantiation, recordkeeping, and cooperation requirements.
- Expenses that are merely beneficial to general health, or that are inseparable from broadly available recreational amenities without substantiated medical-specific costs, are not deductible as medical care under § 213.

## Conclusion

The Tax Court permitted allocation of CCRC monthly fees to medical care using a refined percentage-of-cost method and shifted the burden of proof to the IRS under § 7491(a), but it disallowed deductions for pool/spa/exercise amenities because the taxpayers did not show segregable medical-care costs.


Baker v. Commissioner, 122 T.C. 143 (2004)