Tax Court Clarifies Deductibility of Long-Term Care Expenses

Jul 29, 2011   

Long-term health care can be expensive, but fortunately many of those expenses are tax deductible.  Two recent Tax Court decisions shed light on when such caregiver services are deductible.  In Estate of Lillian Baral, 137 T.C. 1 (2011), the Court held that payments to non-medical caregivers are deductible as long as the patient is “chronically ill” and the doctor deems that caregivers are necessary due to the patients illness.  Second, in Estate of Olivo v. Commr, T.C.M. 2011-163, the court ruled that caregiver services given to a family are presumed to be gratuitous without a written agreement to the contrary. 

Ordinarily, under IRC § 213, certain unreimbursed medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income. In 2012, the threshold will rise to 10 percent of adjusted gross income. Medical expenses can include amounts paid for diagnosis, cure, mitigation, treatment, or prevention of disease, and amounts paid for qualified long-term care services.  Id.

Estate of Lillian Baral

In Estate of Lillian Baral, an elderly Lillian Baral was diagnosed with dementia.  Baral, 137 T.C. at 4. Because Ms. Barals physician determined that she required 24-hour care, her brother hired unlicensed caregivers to provide the prescribed assistance.  Id. at 5.  The IRS later argued that the $49,580 expense did not qualify as a deductible long-term health care expense.  Id. at 7. 

Following her death, Ms. Barals estate appealed the matter to the Tax Court.  The Tax Court held that the services provided by the caregivers were “necessary” services, “provided pursuant to a plan of care prescribed by a licensed practitioner,” and therefore were qualified long-term care services under IRC § 7702B(c) and qualified medical expenses under IRC § 213(d)(1)(C). Id. at 12.

Estate of Olivo v. Commissioner

In Estate of Olivo v. Commr, Anthony Olivo nearly abandoned his struggling legal practice to provide full-time care for his mother, the decedent. Olivo at 3. Mr. Olivo kept meticulous records of the extensive care he provided, which lasted approximately from 1993 to 2004. Id. at 5. According to Mr. Olivo, the decedent offered to pay him for his services; they orally agreed on a rate of $400 per day, to be paid after her death.  The agreement was never reduced to writing.  Id. at 10.

Subsequently, on the estates tax return, Mr. Olivo claimed for the estate a $44,200 statutory administrators commission, $50,000 estimated attorneys fees, and a $1,240,000 debt owed to him as compensation for his caregiver services. Id. at 7. Mr. Olivo subsequently became the administrator of the estate.  When the IRS disallowed the deduction, he filed a petition with the Tax Court.

The Tax Court agreed with the IRS.  Because Mr. Olivo could not provide any evidence other than his own self-serving oral testimony as proof of the agreement with the decedent, the Tax Court rejected Mr. Olivos $1.240 million compensation claim.  The Court held that, without corroborating evidence of the alleged agreement, the estate was not entitled to deduct the Mr. Olivos claim for compensation pursuant to the agreement. Id. at 12.

Alternatively, Mr. Olivo argued that he was entitled to compensation under quasi-contract.  Applying New Jersey law, the Court presumed that “services rendered to a family member living in the same household are rendered gratuitously.” Id. at 14. Here, too, the Court found that Mr. Olivo failed to satisfy his burden of proving the oral agreement by “clear and convincing evidence” or even by the less exacting “preponderance of the evidence” standard.  Id. at 15.

Thus, even though Mr. Olivo took extraordinary care of his mother during her final years, the estate was not entitled to deduct the medical compensation expense, and Mr. Olivo was not entitled to claim compensation for his services.  However, if he had taken time to properly memorialize the alleged agreement, the Court might have ruled differently.

These two Tax Court cases are noteworthy because they clarify which medical expenses are deductible and how you can plan such expenses more advantageously for yourself or for a family member.   Moreover, Olivo reiterates the need to be prudent about keeping written records of all agreements, especially where estate matters are concerned.

The attorneys at Fuerst Ittleman have a wealth of experience in all areas of tax planning and asset protection.  To find out more, contact an attorney at contact@fidjlaw.com