Tax Memo

I need to write a tax memo. Professor provides an example, please check the attachment.

Requirements:

– three pages, 1.5 spacing

– quote related tax law/code

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.

Background:

Rico owns a building in downtown San Diego. Rico is trying to lease the building. Rico is a calendar-year, cash-method taxpayer and is trying to evaluate the tax consequences of three different lease arrangements. Lease option 1, the building rents for $5,000 per month, payable on the first of the next month, and the tenant must make a $5,000 security deposit that is refunded at the end of the lease. Lease option 2, the building rents for $55,000 per year, payable at the time the lease is signed, but no security deposit is required. Lease option 3, the building rents for $5,000 per month, payable at the beginning of each month, and the tenant must pay a security deposit of $10,000 that is to be applied toward the rent for the last two months of the lease.

a. What amounts are included in Rico’s gross income this year if a tenant signs lease option 1 on December 1 and makes timely payments under that lease?

b. What amounts are included in Rico’s gross income this year if the tenant signs lease option 2 on December 31 and makes timely payments under that lease?

c. What amounts are included in Rico’s gross income this year if the tenant signs lease option 3 on November 30 and makes timely payments under that lease?

Your responsibility:

Prepare a tax research memo for the tax files regarding the federal income tax treatment of the three alternative options. Please note for the first lease option there is judicial authority and please look to the regulations for the third lease option. You will need to support your conclusions using primary sources of tax law. Your textbook is NOT primary authority.

You must use proper citation form in your memo (see Chapter 2 for help with citation form). The form for this communication should be professional and in the form of a tax research memo (example posted on Blackboard and a similar example in your text on p. 2-20). Do yourself a favor and look at the grading rubric before you submit.

This memo should be whatever length you feel is appropriate to resolve the issues. We do NOT use a bibliography or list of references in a tax research memo. You will see that citations are within the text of the document in the example. Once a court case has been cited in full, it can be referred to using simply the name in italics.

Please do not simply regurgitate the background, but present the facts in a logical, factual manner.