McDermid v. Commissioner

Harold G. McDermid and Guinevere McDermid, Petitioners v. Commissioner of Internal Revenue, Respondent McDermid v. Commissioner Docket No. 4219-69SC United States Tax Court 54 T.C. 1727; 1970 U.S. Tax Ct. LEXIS 65; September 14, 1970, Filed *65 Decision will be entered under Rule 50. Petitioners, husband and wife, paid all the medical expenses attributable to an aunt's residence in a nursing home with funds consisting of the aunt's pension income, which exceeded $ 600, as well as their own money. Held, since the amount of the aunt's pension income exceeded $ 600, petitioners are not entitled to an exemption deduction for her; held, further, petitioners are entitled to deduct as medical expenses for the aunt only the amounts paid with their own funds; they are not entitled to deduct the amounts paid with the aunt's pension income. Harold G. McDermid and Guinevere McDermid, pro se. John E. White, for the respondent. Featherston, Judge. FEATHERSTON *1728 Respondent determined deficiencies in petitioners' Federal income tax for 1966 and 1967 in the amounts of $ 251.81 and $ 216.26, respectively. The following issues are presented for decision: (1) Whether petitioners are entitled under section 151 1 to an exemption deduction for 1966 and 1967 for Clara Schorn, Guinevere McDermid's aunt, and (2) Whether petitioners are entitled under section 213 to deduct for the same tax years all the medical expenses attributable to the aunt's residence in a nursing home. *67 FINDINGS OF FACT Harold G. McDermid (hereinafter referred to as Harold) and Guinevere McDermid (hereinafter Guinevere), husband and wife, were residents of Buffalo, N.Y., at the time their petition was filed. They filed joint Federal income tax returns for 1966 and 1967 with the district director of internal revenue, Buffalo, N.Y. Guinevere's aunt, Clara M. Schorn (hereinafter Clara), was a teacher in Buffalo, N.Y., for 51 years. In about 1954, she retired from teaching and started receiving a pension from the New York State Teachers' Retirement System. In 1965, she suffered a stroke and was hospitalized for about 3 weeks. Upon discharge from the hospital, she was placed in the Sheridan Manor Nursing Home (hereinafter nursing home) in Tonawanda, N.Y., where she remained during the tax years in issue. She incurred expenses for her care in the nursing home in the following amounts: Year Amount [1966] $ 4,830.00 [1967] 5,579.52 Clara's stroke rendered her unable to manage her own affairs, and, to assist her, petitioners undertook the payment of all the expenses for her care and treatment. Eventually, in April 1967, they secured a power of attorney formally authorizing them*68 to handle her financial affairs. Clara's pension income was received by petitioners at their home in the form of checks made payable to Clara; she received a basic annual pension of $ 2,181, and supplemental pensions in the amounts of $ 282.07 for 1966 and $ 327.12 for 1967. Guinevere, who handled the bookkeeping on Clara's expenses, deposited the pension checks in petitioners' personal checking account. As bills for Clara's care were received, petitioners drew checks on the account to pay them; petitioners used all *1729 the pension income as well as a substantial amount of their own funds for this purpose. In their 1966 and 1967 income tax returns, petitioners reported the pension received by Clara as part of their taxable income; claimed an exemption deduction for her; and deducted the total amount paid for the medical expenses incurred by Clara in the nursing home. Respondent reduced petitioners' adjusted gross income by the amount of the pension received by Clara; disallowed the dependency exemption deduction for Clara; and reduced the medical expense deduction by the amount of the pension income used to defray these expenses. OPINION Petitioners' claim to an exemption*69 deduction for Clara rests upon section 151(e) 2 which allows an exemption deduction of $ 600 for each dependent "whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $ 600." Since Clara's pension income, which is includible in her own gross income, exceeded $ 600 -- amounting to approximately $ 2,463 in 1966 and approximately $ 2,508 in 1967 -- petitioners are not entitled to an exemption deduction for her in either year. With regard to the medical expenses, section 213 is controlling, and it allows the deduction only if *70 the expenses are "not compensated for by insurance or otherwise." Petitioners paid Clara's medical expenses out of an account consisting of their funds as well as Clara's pension income. By Harold's own admission "the [pension] check was used along with our money and transmitted for payment [of Clara's medical expenses]." To this extent Clara's nursing home care was not borne by petitioners. The use of Clara's independent pension income to help defray her medical expenses amounts to "compensation" for some of the expenses within the meaning of section 213. This Court has reached the same conclusion in other similar factual situations. In Loring P. Litchfield, 40 T.C. 967, 969 (1963), affd. 330 F. 2d 509 (C.A. 1, 1964), the taxpayer's brothers reimbursed him for some of the expenses for the medical care of their mother, and this Court stated that "the words 'or otherwise' [as found in section 213(a)] quite clearly appear to have been included in the statute to *1730 serve as a catchall which would require the offsetting of any form of reimbursement received against the total medical expense payments." Also, in Robert W. Hodge, 44 T.C. 186 (1965),*71 this Court encountered facts very similar to the present ones. There the taxpayer paid all the medical expenses incurred in maintaining his mother in a sanitarium. In his capacity as guardian of his mother, however, he received her social security and old age assistance payments. He placed them in his personal bank account and used them along with his own funds to pay the bills. This Court found that the taxpayer served as a conduit for the receipt and use of his mother's funds, and could deduct her medical expenses only to the extent he used his own funds to defray them. These decisions are controlling here. To determine the amount of petitioners' medical expense deductions, it is necessary to subtract Clara's pension income from the total medical expenses. For 1966, the total expenses for Clara's medical care were $ 4,830, and her pension income for that year was $ 2,463.07; thus, petitioners may deduct $ 2,366.93. For 1967, the total medical expenses for Clara were $ 5,579.52, and Clara's pension income was $ 2,508.12; petitioners may deduct $ 3,071.40. Petitioners next argue that they are entitled to refunds for each of the years in issue on a theory that, since Clara, *72 more than 65 years of age, was entitled to a deduction of $ 1,200 as her personal exemption had she filed her own return (see sec. 151(c)), then they may exclude a similar amount in calculating the amount of her pension that was used to pay her medical expenses. However, the personal exemption and medical expense deduction provisions are not so correlated. The actual amount of Clara's pension income which was applied to defray her medical expenses, rather than her pension income adjusted for the personal exemption allowable to her in determining her taxable income, must be used in computing the amount petitioners actually paid toward Clara's medical expenses. And, as noted, the total amount of Clara's pension income was used for this purpose. Petitioners are entitled to deduct the amounts computed above. Decision will be entered under Rule 50. Footnotes 1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise noted.↩ 2. SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. (e) Additional Exemption for Dependents. -- (1) In general. -- An exemption of $ 600 for each dependent (as defined in section 152) -- (A) whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $ 600, * * * The term "dependent" is defined in sec. 152(a)(7) to include "A brother or sister of the father or mother of the taxpayer."↩