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<p><strong>Estate of Lillian Baral, Deceased v. Commissioner, 137 T.C. No. 1 (July 5, 2011).</strong></p>
<p style="text-align: justify;"><strong>Facts.</strong>  Lillian Baral appointed her brother, David Baral, as her attorney-in-fact for her personal and financial affairs.  Lillian’s primary care physician diagnosed her with dementia, and prescribed two medications generally prescribed for patients diagnosed with dementia or suspected Alzheimer’s disease.  Lillian had difficulty complying with her medication regime and was hospitalized in 2004.  She was hospitalized again a few months later.  Following her second hospital admission, Lillian’s physician evaluated her to assess whether she was properly taking her prescribed medications and whether she could safely live alone in order to develop a long-term care plan.  His findings indicated that Lillian was confused and experienced difficulties communicating orally.  His records also indicated that she required assistance with activities of daily living, could not be left alone (as she was at risk of falling), and she required supervision due to her memory deficit and baseline homecare services.  Her physician ultimately determined that Lillian required supervision 24 hours a day for medical and safety reasons as a result of her diminished capacity, and recommended a company to provide these services.  David retained the company to provide the required services to Lillian, but subsequently terminated the company and directly hired one of its care providers to assist Lillian.  The provider assisted Lillian with bathing, dressing, taking medication, transferring to a wheelchair, and transporting to her physicians.  He also hired a second caregiver to provide assistance when Lillian’s primary provider was unavailable.  Neither of the caregivers were licensed health care providers.  David paid the providers with Lillian’s funds, and reimbursed them for expenses paid on behalf of Lillian as well as paid for medical care provided by her physicians and the hospital.  Lillian did not receive reimbursement from insurance or other third party for these expenses.</p>
<p style="text-align: justify;">Lillian did not file a federal income tax return for 2007, nor did David, as her attorney-in-fact, file a return on her behalf.  The IRS prepared a substitute for return and determined that Lillian was entitled to a personal exemption and the standard deduction.  As a result, there was an income tax deficiency of $17,681.  David petitioned the U.S. Tax Court and challenged the deficiency.</p>
<p style="text-align: justify;"><strong>U.S. Tax Court Ruling. </strong> In his petition, David alleged that that Lillian was not required to file a return because she suffered from severe dementia, and the IRS had the burden of proof to establish that she was required to file.  The IRS moved for summary judgment.  David object to the motion for summary judgment, and asserted that Lillian was entitled to deduct amounts paid for medical care from her adjusted gross income.  The Tax Court granted partial summary judgment in favor of the IRS and determined that Lillian’s dementia did not relieve her from the requirement to file and pay income tax.  The Tax Court also determined that Lillian had the burden of proof to establish the deficiency was incorrect.  Accordingly, the remaining issue to be determined was whether Lillian was entitled to deduct the amounts paid to her caregivers and her physicians as medical care expenses.</p>
<p style="text-align: justify;">The Tax Court concluded that Lillian was entitled to deduct the amounts paid to the caregivers and her physicians as medical expenses under Internal Revenue Code Section 213.  Section 213 provides for an itemized deduction for expenses paid for medical care, which is defined as amounts paid for diagnosing, curing, mitigating, treating and preventing disease, amounts paid for transportation primarily for and essential to medical care, qualified long-term care services, or amounts paid insurance covering medical care or qualified long-term care insurance contacts.  Qualified long-term care services are those services necessary for diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitation purposes, as well as maintenance and personal care services required by a chronically ill individual and provided in accordance with a care plan prescribed by a licensed health care provider.  Internal Revenue Code Section 7702B(c)(3) defines “maintenance or personal care services” as services whose primary purpose is to provide needed assistance “with any of the disabilities as a result of which the individual is a chronically ill individual (including the protection from threats to health and safety due to severe cognitive impairment.)” Emphasis added.</p>
<p style="text-align: justify;">The Tax Court determined that Lillian qualified as chronically ill, and therefore satisfied the requirements of Internal Revenue Code Section 7702B(c)(2), as she required substantial supervision to protect her from threats to her health and safety due to severe cognitive impairment and her physician had certified her as requiring such assistance.  Further, the services provided to Lillian by her caregivers were “necessary maintenance and personal care services” provided pursuant to a care plan prescribed by a licensed health care practitioner as a result of Lillian’s diminished capacity.  The Tax Court consequently allowed Lillian a deduction for those amounts paid to the caregivers and her physicians as medical care expenses that exceeded 7.5% of her adjusted gross income, but denied the deduction for the expenses reimbursed to the caregivers for failure to substantiate that such expenses were for medical care expenses.   </p>