TAX COURT OPINION

Case: James Phillip & Carolyn Jaros
Docket Number: 20728-12S
Judge: Goeke
Opinion Type: bench
Filed: 06/11/2013
Pages: 14

. UNITED STATES TAX COURT WASHINGTON, DC 20217 JAMES PHILLIP & CAROLYN JAROS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 20728-12S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Little Rock, Arkansas, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered until Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 11, 2013 D ÂIUN 1 2 2013 Capital Reporting Company 3 1 Bench Opinion by Judge Joseph Robert Goeke 2 April 23, 2013 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 James Phillip & Carolyn Jaros v. Commissioner Docket No. 20728-12S THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This opinion is made pursuant to section 7459(b) of the Internal Revenue Code, and section references hereinafter are to the Internal Revenue Code unless noted. The opinion is also authorized by Rule 152 of the Tax Court Rules of Practice and Procedure. Rule references hereinafter are to the Tax Court Rules of Practice and Procedure. This case was heard pursuant to the provisions of section 7463 in effect when the peti·tion was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court. This case is before the Court based upon the Court's jurisdiction to review deficiencies determined by the respondent when the petitioner has 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 filed a timely petition following the receipt of a notice of deficiency from the respondent. In the present case the respondent issued notice of deficiency on May 16, 2012, to the petitioners, who are residents of Arkansas. In that notice of deficiency respondent determined deficiencies in income for 2008 and 2009 in the amounts of $3,428 and $12,061, respectively. Respondent also determined an addition to tax, under section 6662(a) in the amounts of $410.20 for 2008 and $2,412.20 for 2009. Various issues in the case have been settled by the parties or will be determined based upon computational adjustments which flow from our analysis of the remaining issue in the case. The addition to tax remains as an issue, but the primary issue for our determination regarding the deficiency is whether the petitioner is entitled to deduct Schedule A medical expenses of $55,676 for 2008, of which respondent has conceded $10,760, and whether the petitioners are entitled to deduct 22 medical expenses in the amount of $67,292 for 2009, 23 24 25 of which respondent has conceded $9,302. The medical expenses in dispute relate to amounts claimed on the joint federal income tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 returns of the petitioners for 2008 and 2009 associated with the expenses of their daughter, hereinafter referred to as M.J., and their daughter's participation specifically in horse-related 5 activities involving competitions and training, 6 7 8 9 including the acquisition by the petitioners of a pony and subsequently, in 2009, of a horse that was used by their daughter. Petitioners provided the examining agent 10 with handwritten spreadsheets that reflected the 11 12 13 14 15 expenses associated with these equine-related activities. The expenses were substantial because they involved the maintenance of the horse, travel to competitions, payments for trainers, and a great deal of equipment which was used by M.J. in her riding 16 activities. 17 18 19 The petitioners noted that M.J., who was born in 1995, developed problems in her early educational activities with respect to reading and 20 memory. In 2006 they brought M.J. to be tested by 21 Susan B. Jeter, a licensed professional with a 22 master's degree. 23 24 25 Ms. Jeter provided an extensive report in September 2006 based upon her interviews and testing of M.J. Initially in her report she reflects some 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 background information. She quotes Mrs. Jaros, one of the petitioners, as saying relative to M.J., that "We are worried that she still has so much 4 difficulties with reading and spelling. She still 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 seems to guess when reading many words. She has been through the Learning RX program and made some good gains but still does not seem to be where she needs to be." Also in the background information contained in Ms. Jeter's report she states, relative to M.J., "She is currently very involved in horseback riding and participates on equestrian teams." After much discussion of the various tests and the results M.J. achieved, with a great deal of specificity, Ms. Jeter, in her report in September 2006, makes extensive recommendations relative to improving M.J.'s performance in school. These recommendations all relate to academic endeavors and the improvement of M.J.'s educational opportunities. They do not at all relate to the equestrian activities. Ms. Jeter was subpoenaed by respondent to testify in this case, and she did not testify. She failed to appear. While we think that her report in 2006 is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 an accurate reflection of her objective analysis of 2 M.J.'s situation, we are concerned that the 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 documentation provided by petitioners showing recommendations after 2006 may be somewhat biased in an attempt to influence the Court favorably to the petitioners. However, we note that these subsequent analyses prepared by Ms. Jeter are not specifically recommendations along the lines of the 2006 evaluation but rather simply make comments that the efforts to increase M.J.'s performance have been successful and that M.J. has benefitted from the increased confidence she has obtained from her horseback-riding activities. We note that these subsequent letters from Ms. Jeter in November 2010 and May 2012 do not specifically state that Ms. Jeter has ever recommended the equine therapy as a medical treatment for M.J. She does note that she feels the performance by M.J. in horse-riding competition has helped solidify her improvement in reading and 22 memory. 23 24 25 We have no doubt that the petitioners have in good faith claimed the deductions in dispute and that they honestly believe the horse-riding 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 activities have significantly benefitted M.J. The 2 3 4 5 6 7 8 9 10 11 12 13 petitioners are concerned parents and have done everything reasonably possible to improve the self- esteem and academic performance of their child. We do note that there is no evidence in the record that the horse-riding activities were ever prescribed or even recommended by a medical professional. Turning to a legal analysis of the present situation, we first consider the question of the burden of proof. Generally, pursuant to Rule 142(a), the petitioners bear the burden of proof in the present case. We note that the petitioners have not 14 maintained that the burden of proof shifts to 15 16 17 18 respondent in the present case under section 7491. And because of the extreme documentation required of the petitioners to fully comply with Treas. Reg. section 1.213-1(h) involving the documentation of 19 medical expenses, we believe that petitioners have 20 failed to submit evidence that would require that the 21 22 23 24 25 burden of proof be shift to respondent under section 7491(a) (2). Therefore, the burden of proof in this case remains upon the petitioners. Deductions for expenditures for medical care are confined strictly to expenses incurred 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 primarily for the prevention or alleviation of a physical or mental defect or illness. Haines v. Commissioner, 71 T.C. 644, 647 (1979) and Treas. Reg. section 1.213-1(e) (1) (ii). An expenditure which is beneficial to the general health of an individual, such as the expenses of a vacation, would not qualify as a deductible 8 medical expense. section 1.213-1(e) (3) (ii), Income 9 Tax Regs. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 An important condition that must be satisfied for the claim of a medical expense to succeed is whether the expenditure would have been made even if there had been no illness. Jacobs v. Commissioner, 62 T.C. 813, 819 (1974); Lepsen v. Commissioner, T.C. Memo. 1982-304. The facts of the present case present a very difficult question. We have good parents who wish the best for their child and sought to have their child succeed and increase both in self-esteem but also in academic performance. Clearly they engaged their child in horse riding, an activity that was successful in providing M.J. with confidence and personal growth. What makes this case complicated is that 25 M.J. had more than simple childhood issues of self- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 esteem. She suffered dyslexia and had serious 2 difficulty reading and remembering her school 3 4 lessons. We have no doubt the equine activities aided her growth and helped her overcome her 5 disability. The question is whether these activities 6 meet the requirements of deductibility under section 7 8 9 213, the case law, and the regulations. Treas. Reg. section 1.213-1(h) provides specifically that itemized invoices may be requested 10 by the respondent to substantiate medical expenses. 11 Clearly the petitioners have not provided that 12 13 14 15 16 17 18 19 20 21 22 23 24 25 documentation. Petitioners did provide documentation to show that they made the expenditures in dispute relative to the horse-riding activities. They did not provide specific itemized documentation showing that the claimed nature of the payments actually was for the purposes reflected in the schedule provided by the petitioner. We've noted in the past that when expenditures involved activities that were both potentially of a recreational nature as well as providing health and medical benefits, that specific information and allocation of the expenses was required. Baker v. Commissioner, 122 T.C. 143 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (2004). Section 213(a) permits a deduction for a taxpayer's medical and dental expenses that were paid and not compensated by insurance, to the extent the expenses exceed 7.5 percent of the taxpayer's adjusted gross income. Section 213(d) (1) provides that medical care means amounts paid "for the diagnosis, cure, investigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body." In difficult cases we have often considered whether the activity in question was prescribed for treatment by a physician. O'Donnabhaum v. Commissioner, 134 T.C. 34 (2010) and Halby v. Commissioner, T.C. Memo 2009-204. We also note that petitioners have provided us some authority relative to the deductibility of expenses for special-needs children. This authority was a legal paper prepared which petitioners retrieved on line. In that authority, which is offered in the record of trial as Exhibit 9-P, the author notes that equine activities are deductible if they are prescribed by a physician. There's no discussion of the deductibility of horse-riding expenses which are 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 not specifically prescribed by a medical professional in the authority presented by the petitione We must analyze carefully the facts to determine whether in this difficult situation the horse-riding activities rise to the level of being deductible medical expenses. We note that when the petitioners' child M.J. was specifically tested, the 8 medical professional relied upon by the petitioners, 9 Ms. Jeter, did not recommend the equine activities in 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2006. She noted that M.J. was already engaged in those activities. While we commend the petitioners for providing that opportunity for M.J., this does raise questions about whether the expenses should be treated as deductible medical expenses. This problem goes beyond the mere documentation issue raised by respondent which was cited previously. It goes to whether the expenses in question move beyond simple beneficial recreational activities into more specifically required medical therapy. We find that the petitioners simply have not met their burden of proof showing that the horse- riding activities in question have moved into that category of deductible medical expenses under section 213. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We note that the expenses claimed were for the entire activities of M.J. and anything related to those activities and that they never were specifically recommended by any medical professional. Therefore we find that the petitioners are not entitled to the medical expenses in dispute, and we now turn to the addition to tax. In turning to the addition to tax, section 6662 imposes a penalty equal to 20 percent of any portion of an understatement which is attributable to negligence or disregard of the rules or regulations or substantial underpayment of tax. Negligence includes the failure of a taxpayer to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. A substantial understatement exists if the amount of the understatement exceeds 10 percent of the tax required to be shown on the return or $5000. section 6662(d) (1). If the taxpayer can demonstrate that they had a reasonable cause and that they acted in good faith with respect to the underpayment, the addition to tax will not be applicable. section 6664 (c)(1). In determining the applicability of the addition to tax, the facts and circumstances of the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 specific case are determinative of the outcome. Treas. Reg. section 1.6664-4 (b). In the present case, while the petitioners' recordkeeping was somewhat deficient, it was detailed, and it was 5 maintained in good faith. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We also note that the petitioners have conceded certain automobile expenses claimed. Based upon the testimony at trial, we believe that the petitioners acted in good faith in providing both the conceded automobile expenses and the medical expenses in dispute to their return preparer, and that they did provide detailed information to the return preparer, as requested by the return preparer. They relied upon the advice of the return preparer regarding the deductibility of the horse- riding related expenses, and we believe their reliance upon the return preparer was done in good faith. Their return preparer was a qualified tax professional, and their reliance upon the return preparer does provide reasonable cause. In addition, we find that the petitioners sincerely believed that the horse-riding activities benefitted their daughter, and they felt that these activities rose to the level of deductible medical expenses. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 As we've stated previously, this is a very close and difficult tax ·question, and we do not believe the additions to'tax should be imposed upon the petitioners because of their good faith in claiming the deduction and their reliance upon their return preparer. Therefore we find that the additions to tax for the years 2008 and 2009 are not applicable to the petitioners. Because of the concessions in this case and the computational nature of many of the adjustments, a Rule 155 computation will be necessary. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:24 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com