Tax Memo

Example Case:

Ozzie and Sherrie Johnson lived in Bishop, California. The Johnson’s 15 year old son, Jack, suffered from

illegal drug addiction and experienced both physical problems associated with the addiction and also

behavioral problems. In 2012, without the consultation of a psychiatrist or psychologist, the Johnson’s sent

Jack to a therapeutic boarding school, the Lonely Bridge School, in Idaho. Lonely Bridge was well known

as a school where celebrities and the wealthy could send their “troubled” teens for 365 days a year for

therapy and a high school education and had a strong reputation nationally. The Johnson’s paid tuition of

$48,000 in 2012, incurred $12,000 in travel costs (airfare, rental cars, and lodging) to attend required parent

therapy sessions at the school. They also deposited and spent $3,000 in a “personal account” used to cover

expenses associated with therapy and was required to maintain matriculation at Lonely Bridge. Jack spent

most of 2012 and 2013 at Lonely Bridge before running away in late 2013. Although no longer suffering

physical addiction, his behavioral issues remain today. In 2014, it was discovered that some of the staff at

Lonely Bridge, although therapists, were not credentialed as had been previously thought and that the

school was not accredited as parents had been led to believe. In addition, a number of high profile

“incidents” at the school that alleged unusual therapy methods and abuse forced Lonely Bridge to close in

2014. Prepare a tax research memo for your files regarding whether the Johnson’s can deduct the tuition,

travel costs and personal account expenses for tax purposes as a medical deduction (in excess of the floor)?

To: Files From: Student Date: Today’s date Subject Deduction for Tuition and Travel for Special Boarding School Facts: Ozzie and Sherrie Johnson enrolled their son Jack in Lonely Bridge, a special school for troubled teens

where therapy is provided. In 2012, the Johnson’s paid tuition of $48,000. In addition, in order to attend mandatory parent therapy sessions at the school, the Johnson’s incurred travel costs associated with airfare, rental cars and lodging of $12,000 in 2013. Lastly, the Johnson’s were required to keep a personal account at the school to cover expenses associated with therapy. During Jack’s tenure at Lonely Bridge, the Johnson’s were under the impression that the program at Lonely Bridge was an accredited program for education and drug-addiction related therapy.

Issue: Can the Johnson’s deduct the cost of tuition, travel and the personal account as medical expenses? Analysis: The deduction for medical expenses is covered by§213 which permits a deduction for expenses paid for

medical care for the taxpayer, spouse or dependents. Under §213(d)(1), medical care is defined as amounts paid for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body [and] for transportation primarily for and essential to medical care.” Under §213(d)(2), “amounts paid for lodging while away from home primarily for and essential to medical care” if “the medical care referred to…is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital) shall be deductible as medical costs,” but limited to $50 per person per night.

Reg. §1.213-1(e)(1)(ii) states that “an expenditure which is merely beneficial to the general health of an

individual, such as an expenditure for a vacation, is not an expenditure for medical care.” Furthermore, in Reg. §1,213-1(e)(1)(v), the issue of a deduction for the costs of having an individual in an institution because of his condition are considered by the Treasury. The regulation states that the expenses for care in an institution which is regularly engaged in providing medical care or services are deductible; however, the regulations also state that “where an individual is in an institution, and his conditions is such that the availability of medical care in such institution is not a principal reason for his presence there, only the part of the cost of care in the institution as is attributable to medical care.”

Regs. §1.213-1(e)(1)(v)(a)) further states:

While ordinary education is not medical care, the cost of medical care includes the cost of attending a special school for a mentally or physically handicapped individual, if his condition is such that the resources of the institution for alleviating such mental or physical handicap are a principal reason for his presence there.

and

In such a case, the cost of attending such a special school will include the cost of meals and lodging, if supplied, and the cost of ordinary education furnished which is incidental to the special services furnished by the school. Thus, the cost of medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living, such as a school for the teaching of braille or lip reading. Similarly, the cost of care and supervision, or of treatment and training, of a

mentally retarded or physically handicapped individual at an institution is within the meaning of the term “medical care.”

Two related revenue rulings have been issued on the topic of institutional care for drugs and alcohol. Rev.

Rul. 72-226 states that “amounts actually paid by the taxpayer to maintain his dependent in a therapeutic center for drug addicts including the cost of the dependent’s meals and lodging at the center which were furnished as a necessary incident to his treatment, are expenses for medical care.” Rev. Rul. 73-325 holds that “amounts paid by the taxpayer to the therapeutic center for alcoholism, including the cost of the taxpayer’s meals and lodging at the center which are furnished as a necessary incident to his treatment, are expenses for medical care.”

Rev. Rul. 63-91 states that,

amounts paid for medical services rendered by practitioners, such as chiropractors, psychotherapists, and others rendering similar type services, constitute expenses for “medical care”…even though the practitioners who perform the services are not required by law to be, or are not (even though required by law) licensed, certified, or otherwise qualified to perform such services.

The ruling also cites Wendell (12 TC 161, 1949) in stating that “the determination of what is medical care

depends on the nature of the services rendered, not on the experience, qualifications, or title of the person rendering them.” Rev. Rul. 63-91 also states

The Code and the regulations do not require a taxpayer to ascertain whether a practitioner is qualified, is authorized under state law, or is licensed to practice, before obtaining his services or claiming a medical expense deduction. Where it can be shown that an individual paid an amount for a purpose defined in the Code as “medical care,” such amount qualifies as a medical expense.

In a 1992 Tax Court case, Urbauer (63 TCM 2492, 1992), the court held that the taxpayers could,

deduct amounts spent in connection with the treatment of their son for behavioral and drug problems at a college-preparatory school that addressed the educational and emotional needs of its students. Since the son attended the school principally to benefit from its medical program and the costs of his education were incidental to the special services provided by the school, his enrollment costs were deductible as medical expenses.

In addition, the court held that since his personal account was tantamount to his continued attendance at the institution, those expenses were also deductible. However, the court also held in Urbauer that the cost of lodging was not deductible since the travel was for care that was not provided by a physician in a licensed hospital as required under §213(d)(2).

Conclusion: In the Johnson’s case, the tuition for John at Lonely Bridge meets the standard to be treated as “medical

care” under §213. The definition of medical care under Reg. 1.213-1 as including John’s therapy at Lonely Bridge is also supported by Rev. Rul. 72-226 and Rev. Rul. 73-325. Lastly, the facts in Urbauer closely resemble the facts in the instant case, making it difficult to distinguish between the two. Under Rev. Rul. 63-91, it does not appear relevant that Lonely Bridge was not acting in good faith with respect to qualifications or credentials. The Johnson’s travel costs are deductible under §213, however, any part of the travel costs related to lodging are not deductible by the Johnson’s as Reg. 1.213-1 and Urbauer make it clear that such costs are not associated with services provided by a physician in a licensed hospital. Lastly, the court in Urbauer held that the personal account expenses are deductible due to the close association those costs have with the rendering of medical services at the school.