For the tax lawyer in a firm best known for representing parents
of special needs students, there have been many opportunities to respond to the
question whether the costs of providing special education services for a
dependent child are deductible as medical expenses. There have been a
surprising number of opportunities to debate the question with recalcitrant tax
The problem may stem from a paucity of guidance
on the subject, or more likely, on the lack of clarity introduced by the applicable
Treasury Regulations. The basic rule, of course, appears in Section 213 of the
Internal Revenue Code of 1986, which provides for a deduction for unreimbursed
expenses paid (over a floor of 7.5 percent of adjusted gross income) for the
“medical care” of the taxpayer or his/her spouse or dependent.1
Medical care is defined, in pertinent part, as “amounts paid (A) for the
diagnosis, cure, mitigation, treatment, or prevention of disease, or for the
purpose of affecting any structure or function of the body, [and] (B) for
transportation primarily for and essential to [such] medical care … ”2
This does little to answer the ultimate
question, so the next step is to look at the regulations, and specifically at
Treasury Regulation § 1.213-1(e)(1)(v)(a), which purports to define “medical
care” in the context of care in a non-hospital institution, as follows:
Where an individual is in an institution because
his condition is such that the availability of medical care (as defined in
subdivisions (i) and (ii) of this subparagraph) in such institution is a
principal reason for his presence there, and meals and lodging are furnished as
a necessary incident to such care, the entire cost of medical care and meals
and lodging at the institution, which are furnished while the individual
requires continual medical care, shall constitute an expense for medical care.
For example, medical care includes the entire cost of institutional care for a
person who is mentally ill and unsafe when left alone. 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.
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.” (emphasis added)
On the one hand, the highlighted sentences
appear to provide support for the proposition that the cost of tuition, fees,
room and board and transportation for attendance at a “special education”
school qualify as expenses for medical care. On the other hand, the caveat that
“ordinary education is not medical care” and the examples that are provided to
illustrate the type of institution that qualifies as a “special school,” i.e.,
“a school for the teaching of braille or lip reading,” have given some
taxpayers and their tax return preparers pause. The regulation goes on to make
reference to Code Section 262 and the regulations thereunder “for disallowance
of deduction for personal, living, and family expenses not falling within the
definition of medical care.”3 At this point, a position of doubt and
insecurity may well seem justified.
However, as early as 1978, the Internal Revenue
Service cast considerable gloss on the matter in the form of Revenue Ruling
78-340.4 This ruling considered the case of a child with “severe
learning disabilities,” including “congenital impairment in the areas of visual
memory and visual matching,” whose disabilities had been determined by
“competent medical authorities” to be caused by “a neurological disorder.” The IRS
determined that amounts paid for tuition at a “special school” having a
“program designed to educate children with severe learning disabilities so that
they can return to a regular school within a few years” qualified as expenses
for medical care under Code Section 213. These facts constitute a fairly
typical scenario involving attendance at a “special education” school.
The IRS has been consistent in its application
of the rules developed in Revenue Ruling 78-340. In a series of private letter
rulings spanning the years 1978 to 2007, the IRS has determined that expenses
of special education constitute deductible expenses in instances in which the
fact pattern is similar to that in the revenue ruling, i.e., there is a diagnosis
of a neurologically based learning disability or other handicap, leading to a
recommendation of and attendance at an institution specially equipped to help
the student overcome the handicap. In the few instances in which the IRS has
ruled against the taxpayer, the basis for the adverse ruling was factual.5
In each case, the school program was found to be insufficiently “special” or
insufficiently geared to enable the student to cope with a “medical” issue.6
Of course, private letter rulings are not precedential, but they do provide an
indication of the policies and predilections of the IRS.
The Tax Court, on the other hand, has somewhat
muddied the waters with a series of decisions in favor of the government in the
1970s and 1980s.7 Review of these decisions reveals that the adverse
rulings resulted from reasoning similar to that in the adverse private letter
rulings cited above, i.e., a determination that the educational program, even
if recommended by a physician or psychotherapist, was not “special” enough, as
exemplified in the following selections:
We have recognized that because of the difficulty
of distinguishing personal educational expenses of an emotionally disturbed
child from payments for medical care a careful analysis should be made of the
evidence not only to determine if the school the child attended is a “special
school” but also to determine to what extent the services rendered to the child
are educational and to what extent the services are medical care.8
This Court has rarely
allowed a medical expense deduction for the full cost of a private school
education. Although the individual attention, small class size, and strict
discipline characteristic of good private schools often are beneficial to
students suffering from mental or physical defects or illnesses, the cost of a
basic education is still primarily a personal expense, and it does not become a
medical expense merely because it is prescribed by a physician. If a private
school provides no special services beyond the ordinary educations program
offered as a part of its regular curriculum, then the cost of attending the
school is not deductible, notwithstanding that attendance may help alleviate a
student’s mental or physical defect or disease.9
We have construed the
regulation to mean that a school is a special school only if the ordinary
education it provides is incidental to medical care.10
The facts are preeminent in the analysis, and in
an early decision, on more favorable facts, the Tax Court did in fact rule in
favor of the taxpayer, in a case involving a learning disability stemming not
from neurological causes, but rather from an emotional disturbance.11
The clear conclusion is that if the fact pattern is appropriate, taxpayers and
their advisors should not be reluctant to claim a medical deduction for expenses
of providing special education to a dependant, including tuition, fees, room
and board, transportation and related medical and counseling services.
A more challenging and perhaps more interesting
question is whether legal fees expended by parents in their quest to obtain special
education services from a city or town can be included in the foregoing
compilation of deductible medical expenses. For many years, there was no
specific answer from the courts or the IRS, but an analogy could be made to the
Gerstacker12 decision, accepted by the IRS in
Revenue Ruling 71-281.13 In that case, the Sixth Circuit Court of
Appeals ruled that legal fees incurred in a guardianship proceeding were
deductible as a medical expense as they were required in order to obtain necessary
medical care for the ward, specifically commitment to a hospital for treatment
of mental illness. By analogy, parents might argue that their legal battle with
the municipality is a necessary avenue to obtain special education services,
which in turn constitute medical care.
This argument was finally rejected by the Tax
Court in 1998 in Lenn v. Commissioner,14 in which the
underlying legal dispute was over reimbursement for special education expenses
paid by the parent. The court distinguished the Gerstacker
reasoning because the case against the town was not brought to “legitimate or
authorize medical treatment,” but was instead brought to determine who would
pay for such services. This is a logical and cogent response to the attempt to
extend the Gerstacker rationale, but it leaves open the
question whether the same argument can be made in the case of destitute parents
whose child cannot and will not receive needed services unless
the city or town pays for them. This question will have to be left to another
§ 213(a) (1986).
§ 213(d)(1) (1986).
Reg. § 1.213-1(e)(1)(vi).
Rul. 78-340, 1978-2 C.B. 124.
e.g., Priv. Ltr. Rul. 7827020; Priv. Ltr. Rul. 7843032; Priv. Ltr.
Rul. 8033096; Priv. Ltr. Rul. 8401024; Priv. Ltr. Rul. 8445032; Priv. Ltr. Rul.
8447014; Priv. Ltr. Rul. 200521003; Priv. Ltr. Rul. 200704001; Priv. Ltr. Rul.
e.g., Priv. Ltr. Rul. 8303037; Priv. Ltr. Rul. 8616069.
e.g., Reiff v. Comm’r, T.C. Mem.
1974-20; Dreifus v. Comm’r, T.C. Mem. 1977-83;
v. Comm’r, T.C. Mem. 1979-499; VanKirk
v. Comm’r, T.C. Mem. 1980-572; Fay
v. Comm’r, 76 T.C. 408 (1981); Walton v. Comm’r, T.C. Mem.
1982-648; Shidler v. Comm’r, T.C. Mem. 1971-126;
v. Comm’r, T.C. Mem. 1978-189.
v. Comm’r, 54 T.C. 1684 (1970).
v. Comm’r, 414 F.2d 448 (6th Cir. 1969).
Rul. 71-281, 1971-2 C.B. 165.