Raymon Gerard v. Commissioner
37 T.C. 826 (Tax Ct. 1962)

  • Gerard's daughter had cystic fibrosis, which meant it was dangerous for her to be exposed to dry, dusty air. On the recommendation of her doctor, Gerard installed an air-conditioning system costing $1300 to make his daughter feel better.
  • When he filed his taxes, Gerard deducted the $1300. The IRS denied the deduction. Gerard appealed.
    • Gerard argued that the $1300 was deductible under 26 U.S.C. 213, which allows for deductions for expenses related to medical care.
    • The IRS argued that this wasn't a medical expense, it was an improvement to Gerard's house, and that's a non-deductible capital expenditure.
      • The air conditioner would be functional far longer than one year, and it made Gerard's house worth more, so it is a classic example of a capital expenditure.
  • The Tax Court split the difference.
    • The Tax Court found that the air conditioner was an expenditure for medical care, and so was covered within the scope of 213.
    • However, the Court also found that 26 U.S.C. 263(a)(1) does not allow deductions for any amount paid for permanent improvements or betterments made to increase the value of any property.
    • In this case, the Court found that the air conditioner increased the value of Gerard's property by $800. Therefore, Gerard was only allowed to deduct $1300-$800 = $500.
  • Btw, in the rare case that an expense causes the property value to decrease, the property owner is not allowed to deduct that loss as a medical expense.
    • So if for some medical reason Gerard had to paint his house an ugly color, and that lowered the value by $1000. The most he could still have deducted was $1300, even though he technically lost $1300+$1000=$2300.