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assumptions about costs of services with the longevity projection
to determine the lifetime total costs of care and the lifetime
total medical care costs. By applying the lifetime medical care
costs, the fourth step uses the contract provision about monthly
service fees paid to determine the prepaid medical care costs.
The amount of medical care that is funded before transfer to
assisted living or nursing care is the difference between
lifetime medical care costs and the sum of monthly service fees
paid. This difference is referred to as the prepaid medical care
costs and should be considered deductible under section 213(a).
The calculation of the portion of the prepaid medical care costs
that can be claimed for the entrance fee and the portion that can
be claimed for the total monthly service fees for the year is at
the discretion of the taxpayer with the limitation that the
actuarial present value sum of all deductions does not exceed the
prepaid medical care costs.
C. Appropriate Allocation Method
The threshold dispute is over which method to use to
determine the portion of the monthly service fees that is
allocable to medical care. As explained in detail below, the
percentage method preferred by petitioners has been accepted by
respondent and generally relied upon since at least 1967.
Properly applied, the percentage method provides a reasonable and
straightforward approach for determining the portion of monthly
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