Delbert L. and Margaret J. Baker - Page 1

                                   122 T.C. No. 8                                     

                               UNITED STATES TAX COURT                                

                  DELBERT L. AND MARGARET J. BAKER, Petitioners v.                    
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 448-02.              Filed February 19, 2004.               

                    Ps and AFVW executed a residence agreement                        
               entitling Ps to lifetime residence at VW.  VW provides                 
               four different levels of accommodations.  During the                   
               years in issue, Ps resided in an independent living                    
               accommodation which provides the lowest level of care                  
               and resembles a regular residence that can be found in                 
               any nonretirement living community.  Ps paid monthly                   
               service fees of $2,170 and $2,254 for 1997 and 1998,                   
               respectively.  Several amenities were available to Ps,                 
               including medical services and the use of pool, spa,                   
               and exercise facilities.                                               
                    D, the vice president of finance for AFVW, the                    
               operator of VW, calculated the portions of the monthly                 
               service fees paid by independent living residents that                 
               were allocable to medical care.  C, an ad hoc                          
               committee, of which P-H was a member, reviewed D’s                     
               calculations.  On the basis of certified financial                     
               information provided by AFVW, C calculated a higher                    
               amount allocable to medical care.  Both D and C used                   
               the percentage method to calculate the portions                        

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