Delbert L. and Margaret J. Baker - Page 34

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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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