RE: Deductibility of Health Expense Portion of Entry Fee and Monthly Service Fee

Richland Place, Inc. is a Tennessee nonprofit corporation that provides independent cooperative living arrangements and health care services and facilities for its residents. Richland Place is in essence a continuing care retirement community for the aged.

You have requested our opinion whether residents of Richland may deduct from their adjusted gross income for federal income tax purposes that portion of the "Entry Fee" and monthly "Service Fee" that can be allocated to healthcare costs. We are of the opinion that residents of Richland who enter into agreements with Richland to receive lifetime medical care in exchange for payment of an Entry Fee and a monthly Service Fee may deduct in the year paid that portion of the fees paid to Richland and not compensated for by insurance or otherwise that is properly allocable to medical care as defined in Section 213 of the Internal Revenue Code of 1986, as amended. The deduction for medical expenses under section 213 is, however, subject to a number of limitations which may impact its usefulness for a particular taxpayer, and each resident should be advised to consult with his or her own tax advisor regarding this matter.

Our opinion is based on the fact as stated and on the documents, representations, and statements which you have given to us. In particular, we have reviewed the "Richland Place Residency & Care Agreement," the charter of Richland, and the determination letter issued by the Internal Revenue Service (the "Service" or "IRS"). Any inaccuracy in or changes to these facts, representations, statements, and documents, and any material changes in the affairs or status of the residents of Richland may have the effect of changing all or part of this opinion.


Richland Place is a continuing care retirement community located at Nashville, Tennessee. It is a nonprofit corporation duly formed and organized under the laws of the State of Tennessee. Richland received a determination letter from the IRS dated September 28, 1989 and reaffirmed on April 6, 1993 stating that it is exempt from federal income taxation pursuant to Section 501(c)(3) and it is not a private foundation pursuant to Section 509 (a)(2).

Richland provides persons ("residents") who contract with it an apartment for independent living in a cooperative, or community, setting. By its terms the contract is not a lease and does not purport to transfer or grant any interest in real property. The resident pays a one-time, partially refundable Entry Fee and a Monthly Service Fee. In exchange, the resident is given certain lifetime rights, including the right to occupy an apartment and to have access to Richland’s Health Center. The Health Center has two areas in which it provides progressive, continuing healthcare: Assisted Living, and a Long-Term Skilled-Care Nursing Home. Richland also provides residents with 24-hour emergency health services in consultation with Richland’s medical director.

Included within the monthly Service Fee are transportation services to the resident’s private physician, 24-hour emergency health care services, 24-hour on-site emergency alert monitoring, and room and board in the Assisted Living or Nursing Home facilities. The Nursing Home facilities provide 24-hour nursing care by licensed nurses, as needed. Specifically, not included are the fees and expenses of a resident’s private physician, general hospital, laboratory, drugs, etc., and any medical services that cannot be provided at Richland Place.


Section 213 permits a deduction for expenses that are actually paid during the taxable year for the medical care of the taxpayer, his or her spouse, and dependents which are not compensated by insurance or otherwise. The deduction is limited to that portion of the expenses that exceeds 7.5% of the taxpayer’s adjusted gross income. In addition, pursuant to Section 68, medical expenses together with other "miscellaneous itemized" deductions are allowable only to the extent that they exceed 2% of the taxpayer’s adjusted taxable income.

The term "medical care" is defined in Section 213(d) to include amounts paid for diagnosis, cure, mitigation, treatment or prevention of disease, and amounts paid for the purpose of affecting any structure or function of the body. Costs incurred for transportation that is primarily for and essential to medical care are deductible as medical expenses. Medical care includes amounts paid for lodging, but not meals, while one is away from home primarily for and essential to obtaining medical care provided by a physician in a licensed hospital or medical care facility that is related to or is the equivalent of a hospital.

Amounts paid during the taxable year for medicine or drugs prescribed by a physician are deductible under section 213, as are amounts paid for long-term care services. Section 213(d)(1)(C). Insurance premiums actually paid for medical care, including premiums paid under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged, and premiums for a qualified long-term care insurance contract are also deductible. Section 213(d)(1)(D).

The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") confirmed that expenses for qualified long-term care services are treated as medical expenses. HIPPA defined qualified long-term care services to include necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services which are required by a chronically ill person and are provided pursuant to a plan of care prescribed by a licensed health care practitioner. Section 7702B(c)(1). Maintenance of personal care services means any care the primary purpose of which is to provide needed assistance with any of the activities of daily living that a chronically ill person is unable to perform for himself or herself. Section 7702B(c)(3).

While the cost of in-patient hospital care (including the cost of meals and lodging therein) is a deductible expense for medical care, the extent to which expenses for care in an institution other than a hospital constitutes medical care "is primarily a question of fact which depends upon the condition of the individual and the nature of the services he receives (rather than the nature of the institution)." Reg. 1.213-1(e)(1)(v). For example, if a person is in an institution because his condition is such that the availability of medical care is a principal reason for being there, and if meals and lodging are furnished as a necessary incident to such care, then the entire cost of the medical care and meals and lodging is a deductible expense. If, however, an individual is in an institution not principally for medical care, then only that part of the cost of the care in the institution that is attributable to medical care or nursing attention is deductible; the expense of meals and lodging is not deductible.

In a series of revenue rulings and private letter rulings, the IRS has determined that a portion of an initial lump-sum payment, such as the Richland Entry Fee, which is properly allocable to medical care, is deductible as an expense for medical care in the year paid. Rev. Rul. 75-302, 1975-2 C.B. 86; Rev. Rul. 76-481, 1976-2 C.B. 82; Private Letter ruling ("PLR") 7608300510A (August 30, 1976)2. Any refund of such a fee that is received by the taxpayer in a later year must be included in the gross income for such later year to the extent attributable to (and not in excess of) deductions previously allowed. Rev. Rul. 75-302; Rev. Rul. 76-481. Note that a lump-sum payment for an apartment and to partially underwrite the cost of constructing an infirmary did not qualify as a medical expense, since the payment was not for medical care. Rev. Rul. 68-525, 1968-2 C.B. 112.

The IRS has also concluded that periodic maintenance fees, similar to the Richland Service Fee, are deductible under Section 213. The rulings generally conclude that where taxpayers pay a monthly life-care fee to a retirement home and prove that a specific portion of the fee covers the costs of providing medical care for them, that portion of the fee is deductible by the taxpayers as an expense for medical care in the year paid. Rev. Rul. 67-185, 1967-1 C.B. 70. Rev. Rul. 76-481.

While all the revenue rulings and private letter rulings cited were issued to tax-exempt entities qualified under Section 501(c)(3), the deductibility of amounts allocable to providing residents with lifetime medical care did not depend on the tax status of the entity providing the medical care. Richland is not a tax-exempt entity, but a portion of the fees paid by its residents can be allocated to the costs of providing medical care for them, and the authority cited above should apply equally.

When asked in 1971 to comment on Reg. 1.213-1(e)(4)(1)(a), which has to do with deductible medical insurance payments, the IRS considered whether a contract between a retirement home and a resident under which the resident paid a lump-sum life-care fee in exchange for future medical care, if needed, would qualify as an insurance contract for medical care under Section 213. The IRS concluded that, because the retirement home was assuming the risks of providing future medical care, the contract was an insurance contract. The IRS took the opportunity, in fact, to modify Rev. Rul. 67-185 to state that the contract was an insurance contract. The IRS took the opportunity, in fact, to modify Rev. Rul. 67-185 to state that the contract with the retirement home in that case is an insurance contract for purposes of Section 213 to the extent that it actually covers medical care, as defined in Section 213 and the applicable regulations. G.C.M. 34561 (July 26, 1971).

A retirement home’s prior financial experience may be used to determine the portion of a fee that is properly allocable to medical care. Rev. Rul. 67-185; PLR 8213102 (December 30, 1981). In cases where a retirement home has recently commenced operation and does not have a sufficient financial history, the IRS has approved using the financial history of a comparable facility. Rev. Rul. 67-185; PLR 8641037 (July 11, 1986). A proper allocation of medical expenses to total fees may be determined by dividing all directly related medical expenses by total expenses. If the residents pay different fee amounts depending on the different residential accommodations, the allocation ratio may be applied in a way that "will place the residents on approximately equal footing." That is, the computation may be weighted to take into account the cost variance of the residential accommodations. PLR 8630005 (April 4, 1986). For purposes of computing the ratio of medical expenses to total expenses, medical expenses include, for example, salaries of the nurses, nurses’ aides and orderlies, incidental medication and supplies, and the proportionate amount attributable to medical care of housekeeping, maintenance, utilities, administrative and marketing costs, interest on indebtedness, real estate taxes, and depreciation of the nursing facility. PLR 8651028 (September 19, 1986).

In almost every ruling on the question under consideration, the IRS notes that expenses for care in an institution other than a hospital may not in fact be deemed expenses for medical care. Whether they are expenses for medical care is a question of fact to be determined on an individual basis for each taxpayer. PLR 8223065 (March 11, 1982); PLR 8630005 (April 4, 1986); PLR 8930023 (April 27, 1989). The case of Estate of Helen W. Smith v. Commissioner of Internal Revenue, 79 T.C. 313 (1982), is an example of how the issue of medical expenses deductibility is decided on a case-by-case basis. The court held that the application and entrance fees paid for admission and lifetime residence of two retirement home residents were not deductible medical expenses, because the retirement community did not provide nursing or other medical care. Rather, the care required by the couple and in fact provided was merely custodial. The only deduction allowed was for that portion of the fees that provided a set number of free days of standard medical care, when needed, at an adjacent convalescent center which did provide nursing and other medical services.

In Rev. Rul. 93-72, I.R.B. 1993-34 (October 14, 1993), the IRS clarified that current deductions for payments for future medical care (including medical insurance) extending substantially beyond the close of the tax year are not allowed, unless the future care is purchased in connection with obtaining lifetime care of the type at issue in earlier rulings. Since the Entry Fee and Service Fee payments are made in conjunction with obtaining lifetime care, this clarification should have no impact on the deductibility of the medical care portion of the Richland fees.

However, HIPPA limited the amount of premiums for long-term care that could be deducted as medical expense. Depending on the age of the taxpayer, the amount deductible ranges from $200 per year for a 40-year old taxpayer to $2,500 per year for a taxpayer over 70 years of age. Section 213 (c)(10). To the extent that a portion of the Richland Entry Fee and monthly Service Fee is allocable to qualified long-term care rather than to medical care, deductibility of that portion of the fee may be limited.

Based on the foregoing, it is our opinion that the portion of the Entry Fee and the portion of the Service Fee paid to Richland by its residents pursuant to their contracts and properly allocated by Richland to the medical care of the resident is deductible by the resident as an expense for medical care in the year paid, subject to the limitation prescribed in Section 213 and other limitations discussed in this letter.

Our opinion is based upon the existing provisions of the Internal Revenue Code and regulations thereunder and upon current IRS published rulings and existing court decisions, any of which could be changed at any time. Changes may, moreover, be retroactive and could significantly modify the statements and opinions expressed herein. Similarly, any change in the facts and assumptions stated above, upon which this opinion is based, could modify or alter the conclusion.

We render an opinion only as to the matters we expressly set forth, and no opinions should be inferred as to any other matters. The federal tax considerations discussed above are necessarily general, and their application may vary depending upon individual circumstances. Persons considering taking the deduction discussed are urged to consult their tax advisor for specific advice as to the effect of their own particular facts and circumstances on the matters discussed herein.

This opinion represents our best judgment as to the probably outcome of the tax issues discussed, but it is, of course, not binding on the Service and we can give no assurance that the IRS will not challenge our conclusions and prevail before administrative bodies or in the courts in a way that may cause adverse tax consequences contrary to our opinion.

If you should have any questions, or if we can be of further assistance to you, please do not hesitate to contact us.

Sincerely yours,

Sherrard & Roe, PLC



All section references are to the Internal Revenue Code of 1986, as amended, unless otherwise specified.



Private letter rulings have no precedential value to persons other than the taxpayer requesting the ruling. Section 6110(j)(3). Tax practitioners look to private letter rulings as indicative of IRS policy on a particular issue.