Taxing Times - Sink or Swim: The Tax Court Battles over Pools & Spas

Today we're going to dive into a few different cases on claiming spas and swimming pools. Listen through the whole episode though before you start building a swimming pool in your backyard – because there are times where it has worked and times it unfortunately has not. 

Transcript

"Hello and welcome to Taxing Times, the podcast that explores the fascinating, controversial and often wacky history of taxation. I'm your host Nupur Kumar - aka Super Nupur, a major tax & history nerd and the managing partner of FACT Professional, a CPA firm.”

 Today we're going to dive into a few different cases on claiming spas and swimming pools. Listen through the whole episode though before you start building a swimming pool in your backyard – because there are times where it has worked and times it unfortunately has not. 

Our first case is a taxpayer who deducted his swimming pool for his emphysema in 1971. Unfortunately the name of taxpayer isn’t public knowledge but his battle with the IRS is publicly known!

Emphysema is a chronic lung condition that causes shortness of breath, wheezing, and coughing. It can be caused by smoking, air pollution, or genetic factors. There is no cure for emphysema, but treatments can help manage the symptoms and improve the quality of life. One of the treatments that doctors may recommend is swimming, which can strengthen the respiratory muscles and increase lung capacity.

But swimming is not always easy or accessible for people with emphysema, especially if they live in areas where public pools are scarce, crowded, or expensive. That's why one taxpayer from sweltering Phoenix, Arizona decided to install a swimming pool in his backyard and claim it as a medical expense on his tax return – instead of trying to make it to the local public pool. He built the pool in 1971, claimed it as a medical expense deduction on his 1972 tax return, and was in a battle with the IRS in 1974. 

The IRS was not convinced that the pool was solely for medical purposes. They argued that the pool also provided personal enjoyment and recreational benefits for the taxpayer and his family, and therefore it was a capital expense that could not be deducted. A capital expense does however increase the value of your property if the taxpayer was selling his home in the future. 

The IRS pointed out that the pool was not specially equipped to treat emphysema, and that it was suitable for general use. The IRS also noted that the taxpayer did not have a prescription or a doctor's recommendation for the pool, and that he did not keep a log of his swimming sessions. 

Keeping a log is one of the BIG things the IRS requires because it ensures that you have real records of the activity and you aren’t making it up after getting caught. 

Well the taxpayer, on the other hand, insisted that the pool was necessary for his health, and that he used it exclusively for therapeutic swimming. He claimed that he swam for an hour every day, and that his condition improved significantly as a result. He also said that he did not allow anyone else to use the pool, and that he did not enjoy swimming as a hobby. He submitted letters from his doctor and his physical therapist, who both confirmed that swimming was beneficial for his emphysema.

The case went to the Tax Court, where the judge had to decide whether the pool was a deductible medical expense or not. The judge acknowledged that swimming was a legitimate treatment for emphysema, and that the taxpayer had a genuine medical need for the pool. However, the judge also found that the pool was not exclusively used for medical purposes, and that it had some personal and recreational value. The judge cited the size, shape, and depth of the pool, as well as the presence of a diving board, a slide, and a patio, as evidence that the pool was not designed solely for therapeutic swimming. The judge also questioned the credibility of the taxpayer's testimony, and noted that he did not provide any documentation to support his claim that he swam every day and that he did not let anyone else use the pool. I find this hilarious, that he was more likely to win the claim if he restricted his family from using the pool!

The judge concluded that the pool was a capital expense that could not be fully deducted as a medical expense. However, the judge also allowed the taxpayer to deduct a portion of the installation and maintenance costs of the pool, based on the percentage of the pool's use that was attributable to medical purposes. The judge estimated that 25% of the pool's use was for medical purposes, and therefore allowed the taxpayer to deduct 25% of the costs. The judge also allowed the taxpayer to deduct the full cost of a heater that he installed for the pool, since the heater was necessary to maintain the water temperature at a level that was suitable for his emphysema.

The taxpayer was not happy with the outcome, and appealed the decision to the Ninth Circuit Court of Appeals. The appeals court, however, upheld the Tax Court's ruling, and agreed that the pool was not entirely deductible as a medical expense. The appeals court also affirmed the 25% allocation of the pool's use that was for medical purposes, and the deduction of the heater's cost. So in the end at least he got something! 

Well, what can we learn from this case? First of all, we can learn that swimming can be a great way to treat emphysema, and that the IRS recognizes that! But we can also learn that if you want to deduct a swimming pool as a medical expense, you have to meet some strict requirements. You have to prove that the pool is necessary for your condition, that it is used only for medical purposes, and that it is not suitable for general use. You also have to keep records of your swimming sessions, and have a doctor's prescription or recommendation for the pool. Of course you also have to show that you were incredibly selfish and didn’t let anyone use your pool. And even if you meet all these requirements, you may still only be able to deduct a fraction of the costs, depending on how the IRS or the court allocates the pool's use.

As of today swimming pools that are used for recreation use can’t be deducted on your tax return. However pools used for medical purposes are 100% deductible as a medical expense on your itemized deductions. But this is still limited to 7.5% in excess of your Adjusted Gross Income. 

There have been some tax cases where a spa was claimed as a medical expense deduction, but the IRS has strict rules and conditions for allowing such deductions. Generally, the spa must be prescribed by a doctor for a specific medical condition, and it must not be used for personal or recreational purposes. The cost of the spa must also exceed the increase in the value of the property, and the taxpayer must provide documentation and evidence to support their claim.

One example of a successful case was in 1987 when Cherry from San Diego, California built a spa to handle his severe arthritis and muscle spasms. Cherry was able to deduct the cost of a spa that was installed in his home. His doctor had recommended hydrotherapy as a treatment, and the spa was specially designed to provide therapeutic benefits. The IRS accepted the deduction, since the spa was necessary for the taxpayer’s medical care, and it did not increase the value of his home.

A separate example of a failed case was in 1994 when Fisher from Boulder Colorado tried to deduct the cost of a spa that was installed in his backyard to aid against his chronic back pain and insomnia. His doctor had suggested that soaking in a spa might help his condition, but he did not write a prescription or a letter of recommendation. The IRS denied the deduction, since the spa was not primarily for medical purposes, and it was also used by the taxpayer’s family and friends for recreation. Yet again – be selfish with your swimming pool and spa! The IRS also argued that the spa increased the value of his property, and the taxpayer did not provide any proof of his medical expenses.

As you can see, claiming a spa as a tax deduction is not easy, and it depends on the facts and circumstances of each case. If you are considering buying a spa for medical reasons, you should consult with your doctor and your tax advisor before making any decisions. You should also keep records of your medical condition, your doctor’s prescription or recommendation, your spa’s installation and maintenance costs, and your spa’s usage and benefits. 

You should also be prepared to face scrutiny and challenges from the IRS, and possibly the Tax Court, if you claim a spa as a medical expense deduction on your taxes. This is the second episode we have done on medical expenses. The first was our episode on breast implants being deducted by Chesty Love as an itemized deductions. What we are learning is in all cases the taxpayer has to show it was a justifiable expense. You can’t just build and claim a swimming pool on a whim!

That's all for this episode of Taxing Times. You can also follow us on instagram @factprofessional and send us a message for other podcast ideas. For tax or accounting questions, you can email our office info@factprofessional.com. And don't forget to subscribe to this podcast on your favorite platform and leave a review. Thank you for listening and stay tuned for more Taxing Times!"