## Facts

- John O. Finzer, Jr. and Elizabeth M. Finzer entered a 2002 residency agreement with CC‑Lake, Inc., operator of Classic Residence by Hyatt at the Glen, a continuing-care facility in Illinois.
- The agreement provided residential accommodations, meals, amenities, and access to assisted living and skilled nursing services if needed, subject to termination rights.
- The Finzers chose a large villa unit and paid an entrance fee of $723,800 plus monthly fees of about $4,665.
- All residents, regardless of unit size or entrance fee amount, had the same access to assisted living and nursing care.
- The agreement provided a substantial refund on termination (generally at least 90% of the entrance fee, and as high as 98% shortly after move-in), and the entrance fee was documented as a loan via a promissory note.
- Contract materials indicated medical services were covered by monthly fees; evidence showed entrance fees were used primarily for capital and financing purposes.
- In 2003, the facility sent a letter stating that, based on new actuarial data, 41% of the entrance fee could be treated as a deductible medical expense.
- The Finzers filed an amended 2002 return claiming an increased medical expense deduction based on the 41% figure; the IRS disallowed the additional deduction and denied a refund, prompting a refund suit under 28 U.S.C. § 1346 tried to the court.

## Issues

1. Whether the taxpayers proved that 41% of a refundable entrance fee paid under a life-care residency agreement was an amount paid “for medical care” deductible as a medical expense for the 2002 tax year.
2. Whether, given the contract’s allocation of medical services to monthly fees and the entrance fee’s refundability and loan-like structure, any portion of the entrance fee was properly deductible as medical care.

## Decision

- Judgment was entered for the United States after a bench trial.
- The court held the Finzers were not entitled to the increased medical expense deduction claimed on their amended 2002 return.
- The court found the Finzers did not carry their burden to show that 41% (or any identifiable portion) of the entrance fee was properly allocable to medical care.
- The IRS’s disallowance of the additional deduction and denial of the refund were upheld.

## Legal Principles

- Taxpayers bear the burden of proving entitlement to deductions and the amount of any allowable deduction in a refund suit.
- Medical expense deductions require proof that the payment was for “medical care,” not for housing, amenities, or other non-medical benefits.
- An asserted allocation percentage is insufficient without evidence explaining the method and linking the claimed portion to medical-care costs.
- Where all residents receive the same medical access regardless of entrance fee amount, a higher entrance fee tied to unit size and amenities is not shown to be a medical-care prepayment.
- Contractual allocation and economic substance matter: if medical services are covered by monthly fees and the entrance fee functions as a largely refundable, loan-like capital payment, treating the entrance fee as a current medical expense is improper.
- Administrative rulings allowing deductions for portions of entrance fees may be distinguishable when those fees are nonrefundable rather than substantially refundable.

## Conclusion

The court denied the refund because the Finzers failed to prove that any specified portion of their largely refundable, loan-structured entrance fee was paid for medical care, particularly where the agreement and evidence tied medical services to monthly fees and the entrance fee to housing and capital financing.


Finzer v. United States, 496 F. Supp. 2d 954 (N.D. Ill. 2007)