TAX COURT OPINION

Case: Joseph W. & Jeanette Cotter
Docket Number: 1834-10S
Judge: Colvin
Opinion Type: bench
Filed: 02/10/2011
Pages: 9

UNITED STATES TAX COURT 20217 Washington, D.C. JOSEPH W. AND JEANETTE COTTER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Re spondent . ) ) ) ) ) ) ) ) ) Docket No. 1834-10S Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is O R D E R ORDERED that the Clerk of the Court shall the transcript of the trial of herewith to petitioners and to respondent a copy of pages of Special Trial Judge Lewis R. Carluzzo at Fresno, California, on January 13, 2011, containing his oral findings of opinion rendered at the conclusion of trial. the above case before transmit the fact and In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. February 10, 2011 RVED FEB 10 20ff 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 3 Bench Opinion by Special Trial Judge Lewis R. Carlu zo Cotter v. Commissioner Docket No. 1834-10S January 13, 2011 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. This proceeding for the redetermination of a deficiency is conducted as a small tax case, pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice & Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice & Procedure. Unless otherwise noted, subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for 2007. Rule references are to the Tax Court Rules of Practice & Procedure. Joseph W. Cotter and Jeanette Cotter appëared pro sese. Melissa C. Quale appeared on behalf of Respondent. In a notice of deficiency dated October 26, 2009, Respondent determined a $4265 deficiency in Petitioners' 2007 federal income tax. The issues for decision are Heritage Reporting Corporation (202) 628-4888 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 4 (1) whether the 2006 state income tax refund Petitioners received during 2007 is includable in their 2007 income, and (2) whether Petitioners are entitled to a medical expense deduction in excess of the amount allowed by Respondent. Some of the facts have been stipulated and are so found. Petitioners are married to each other. They filed a timely joint 2007 federal income tax return. At the time the petition was filed, Petitioners resided in California. References to Petitioner are to Jeanette E. Cotter. Petitioner suffers from a variety of health problems, including chronic problems with her back. At all times relevant here, she has been under the care of Dr. Say. With respect to Petitioner's back problems during 2006, Dr. Say recommended, by written prescription, certain treatments, including a 'home pool to improve the uality of life and well-being'. According to a January 8, 2010, note written by Dr. Say at the request of Petitioner, 'special beds' would help Petitioner 'to achieve her goal'. We presume that at least one of her 'goals' was to minimize her back pain and discomfort. On April 20, 2007, Petitioners purchased a spa from Dolphin Spas in Modesto, California. The cos of the spa, including accessories and sales tax, was $4402.38. On the date the spa was purchased, Petitioners by check made a Heritage Reporting Corporation (202) 628-4888 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 5 $500 down payment. The spa was scheduled to be delivered about a month later. According to the sales contract, the balance of the purchase price was 'to be financed upon credit approval'. By check dated one week later, April 27, 2007, Petitioners made a $1610.63 payment towards the cost of the spa. On December 13, 2007, Petitioners purchased a deluxe queen mattress and deluxe queen foundation from Lane Home Furnishings in Merced, California. The cost of the mattress and foundation, plus sales tax, totaled $3123.67. They made a $400 down payment and paid the balance through monthly payments, although neither Petitioner could remember the amount of those monthly payments. Petitioners received a refund of state income taxes paid during 2006. They claimed a deduction for state income taxes on their 2006 federal income tax return. Petitioners' 2007 joint federal income tax return was prepared by a paid income tax return preparer that they had used over the years. Their adjusted gross income for that year is reported as $65,830, which does not include any amount shown for a refund of state income taxes. The taxable income reported on their return is computed by taking into account deductions shown on a Schedule A, itemized deductions. As relevant here, that Schedule A shows (1) medical expenses of $10,000, $10,161, Heritage Reporting Corporation (202) 628-4888 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 6 and a $5224 medical expense deduction, and (2) a deduction for state and local income taxes. In the notice of deficiency, Respondent (1) disallowed the entire medical expense deduction claimed on the Schedule A, and (2) increased Petitioners' income by $1487, the amount of the state income tax refund rebeived by Petitioners during 2007 as shown in Respondent's records. Other adjustments made in the notice of deficiency have either been resolved by the parties or are computational and need not be addressed. Respondent now concedes that Petitioners incurred $2582 for medical expenses contemplated by section 213. The portion of the medical expenses remaining in dispute, that is, $7579, closely approximates the purchase prices of the spa, the mattress, and the mattress foundation, and we turn our attention first to those items. In general, section 213(a) allows a deduction for the expenses paid during the taxable year not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, and others, but only to the extent that the expenses exceed 7.5 percent of the taxpayer's adjusted gross income. In general, medical care includes the diagnosis, cure, mitigation, treatment, or prevention of disease. Expenses paid for medical care generally include, among other things, amounts paid for the purpose of Heritage Reporting Corporation (202) 628-4888 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 7 effecting any structure or function of the body. Section 1.213-1(e) (1) (I), Income Tax Regs. On the other hand, section 262(a) generally provides that no deduction is allowable for personal living or family expenses. As between an expense contemplated by section 213 and one contemplated by section 262, we are satisfied that the amounts paid for the mattress and the mattress foundation are more properly classified as personal expenses within the meaning of 262(a). We recognize that Dr. Say indicated that 'special beds' would be therapeutic in treating Petitioner's back condition, but the mattress and the mattress foundation described by Petitioners, while apparently of high quality, are hardly so 'special' so as to allow for the cost of those items to be treated as medical expenses within the meaning of section 213(a). Furthermore, it does not appear that the mattress or the mattress foundation was actually purchased upon prescription from Dr. Say. Petitioners are not entitled to include the cost of either the mattress or the mattress foundation in the computation of their allowable medical expense deduction. We view the spa differently. First, the item is described in a prescription issued by Dr. Say in 2006. Second, although not uncommon for personal recreational purposes, a spa provides commonly recognized thera eutic Heritage Reporting Corporation (202) 628-4888 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 8 benefits to persons suffering with chronic back problems. Nevertheless, we need not decide whether the cost of the spa is an expense described in section 213. Petitioners' recollections of the circumstances surkounding the purchase of that item were less than specific. Both testified that after the down payment was made, the balance was paid through a series of monthly payments. As with the case of the mattress and the mattress foundation, however, neither Petitioner could remember the amount of any monthly payments. Furthermore, Petitioners' recollection of the manner in which the spa was paid for is not entirely consistent with the $1610.63 check payable to Dolphin Spas during 2007. If other monthly payments were made by check, we expect that those checks would have likewise been presented. All things considered, we find that the record only supports a finding that during 2007 Petitionets paid $2110.63 as the cost of the spa, as evidenced by the cancelled check to Dolphin Spas, and not $4402.38, as shown on the sales agreement between Dolphin Spas and Petitioners. Even if otherwise allowable as a medical expense, the lesser amount actually paid, plus the amount Respondent concedes as an allowable medical expense, that is, $2582, would not exceed 7.5 percent of Petitioners' 2007 adjusted gross income. I Heritage Reporting Corporation (202) 628-4888 1 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 9 That being so, Petitioners are not entitléd to a medical expense deduction for 2007, and Respondent's disallowance of that deduction is sustained. Based upon information received from third parties, Respondent's records show that Petitioners received a $1482 state income tax refund during 2007. Although the record is not as complete as we would like on the point, as best we can tell from what has been presented, they claimed a deduction for state income taxes on their 2006 federal income tax return, just as they did on their 2007 federal income tax return. The amount of the 2006 deduction is not known, but Petitioners, although not entirely certgin of the details, agree that some amount was deducted in 2006 and some amount was refunded in 2007. More likely than not, the amount of the refund is as Respondent's records indicate. The tax advantage gained by a cash-basis taxpayer with respect to a deduction claimed in one yea is includable in the taxpayer's income in a later year if it is determined that the deduction was overstated. Section 111(a); Hillsboro National Bank v. Commissioner, 460 US 370, 377 (1983); Francisco v. Commissioner, 119 TC 317, 333-334 (2002). Petitioners are obviously cash-basis taxpayers and we are satisfied that this principle applies here. Respondent's adjustment increasing Petitioners' income by Heritage Reporting Corporation (202) 628-4888 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 10 $1487 is sustained. Tó reflect the foregoing and to allow the items shown in the stipulation of settled issues, filed January 10, 2011, to be taken into account, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:15 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888