Cash method deduction for credit card obligation

Taxpayer bought hearing aids in Sept, 2019, at a cost of $4,200. She had the choice to pay cash in full, credit card in full, or credit card at $350 monthly for 12 months, NO interest. Seemed like a no-brainer to her, so she went the deferred payment route, and in 2019 made 4 payments, total $1,400. I don't want to omit any facts, so I'll add that she contractually agreed to make all the payments via automatic monthly charges to her credit card. In her mind (but not mine), she has "paid" for the aids and she wants to add the entire cost of $4,200, not just the 2019 paid amounts of #1,400. That won't fly, right? Or will it? https://bradfordtaxinstitute.com/Endnot ... _78-39.pdf

Since the arrangement constitutes an "agreement to pay" and the taxpayer has not "become indebted to a third party (the bank) in such a way that the cardholder could not prevent..." her doctor "...from receiving payment", then I would deduct $1,400 in tax year 2019 and the rest in the tax years during which the remaining amounts are charged to the card.

Your question brought to mind a lawnmower.

How automatic are those payments to the credit card company?
If the product was defective, could she stop additional payments?
I suppose if the only obligation she had on December 31 was a promise to the vendor of the hearing aids, the deduction in 2019 was $1,400

You must remember this:
http://www.taxalmanac.org/index.php/Discussion_Timing_depreciation_cash_basis_tp.html

It seems the answer wouldn't change if she was making the monthly payments by check or credit card right? At least per Revenue Ruling 78-39.

Agree with Alex.

You must remember this:. A kiss is just a kiss.

Oh, sorry, you meant that old TA post. Actually, I did not remember it until I read it. Brought back memories, Death and Taxes, Spell, Harry, all gone. And Ckenefick apparently no longer posting. They all used to add some good stuff.

So, given the state of things today and the excellent discussion in that post, and that the 78 RR has not (I think) been challenged, where are we?

How about this? Hearing aids are generally assumed to last about 4 years, after which they either need too much servicing to be worth it, or, more commonly, they become obsolete technologically. But they are, I believe, a capital expenditure which, but for the special rule on deducting capital expenditures for medical equipment, might not be deductible in the year of purchase. That aside, they are capital items, so doesn't that give her a good shot at the deduction for the entire amount in 2019? Or why not?

I could really use help on this one. She had very high medical so will itemize in 2019, almost certainly no in 2020. So the entire $4200 would really help in 2019. Thanks.

Is the seller of the hearing aids charging her credit card $350/month for 12 months? If so, that's the same as her paying the seller $350/month. What in the bradford link you included indicates otherwise?

Respectfully, if a taxpayer signs a lease on 7/1/2019 agreeing to pay $1,000 per month for 12 months, how much would you deduct in lease payments for tax year 2019?

How about this? Hearing aids are generally assumed to last about 4 years

If I “hear” you correctly, in an accounting sense, you might be saying that the Hearing Aid *isn’t* an outright expense. You know, it’s more like a fixed asset, in an accounting sense. Do Cash and Accrual methods apply with something like that?

Yes, something along those lines, especially with the old TA thread (linked in #3) fresh in my mind. It had some interesting theories.

Taxpayer bought hearing aids in Sept, 2019, at a cost of $4,200. She had the choice to pay cash in full, credit card in full, or credit card at $350 monthly for 12 months, NO interest. Seemed like a no-brainer to her, so she went the deferred payment route, and in 2019 made 4 payments, total $1,400. I don't want to omit any facts, so I'll add that she contractually agreed to make all the payments via automatic monthly charges to her credit card. In her mind (but not mine), she has "paid" for the aids and she wants to add the entire cost of $4,200, not just the 2019 paid amounts of #1,400. That won't fly, right? Or will it? https://bradfordtaxinstitute.com/Endnot ... _78-39.pdf

If the agreement with the seller, like many of these agreements, can be sold and is officially "commercial paper", she can deduct. i.e, has she created a legal debt above and beyond a contract? I say yes. Similar to a credit card. The providers (Dr's etc..) normally use 3rd party finance companies and then YES, she can deduct it.

I am flip flopping a little here. Wouldn't the key be to examine the contractual agreement? If she is legally obligated to pay these amounts, doesn't that debt create basis?

An analogy:

Taxpayer buys a vehicle for $10,000 with no down payment and contractually agrees to make payments of $200 per month.

At the end of year 1, taxpayer has paid $1,000, but decides he doesn't need the vehicle and sells it to his buddy for $9,500.

Is taxpayer's basis $1,000 or $10,000?

She should deduct the entire amount in 2019. If I understand the facts correctly, wouldn't this apply:
Rev. Rul. 78-39

Advice has been requested whether the use of a credit card to pay an expense for medical care is "payment" sufficient to support a deduction of the amount of the charge as an expense for medical care "paid during the taxable year," for the year the credit card charge was made, under section 213 of the Internal Revenue Code of 1954.

An individual (cardholder), who files tax returns on a calendar year basis, uses credit cards issued by a bank to purchase goods and services. The contract between the cardholder and the bank includes a provision that the cardholder agrees to pay the bank the total amount on the charge statement used to document each purchase. The bank provides blank charge statements (drafts) to participating vendors from whom the cardholder may make purchases by use of the bank credit card.

On November 15, 1976, the cardholder used the bank credit card to pay a hospital $500 for medical services rendered to the cardholder. The bank billed the cardholder for this charge in December 1976, but the cardholder made no payment until January 1977. The cardholder paid the full amount of the indebtedness to the bank during the course of calendar year 1977.

The specific question presented is whether the $500 payment to the hospital by the use of a bank credit card is includible in the medical expense deductions claimed on the cardholder's 1976 tax return.

Section 213(a) of the Code allows as a deduction expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse, or dependent, subject to certain limitations.

Section 1.213-1(a)(1) of the Income Tax Regulations provides, in pertinent part, that a deduction is allowable only to individuals and only with respect to medical expenses actually paid during the taxable year, regardless of when the incident or event that occasioned the expense occurred and regardless of the method of accounting employed by the taxpayer in making income tax returns. Thus, if the medical expenses are incurred but not paid during the taxable year, no deduction for such expenses shall be allowed for such year.

In the instant case, when the cardholder used the bank credit card to pay the hospital for the medical expenses, the cardholder became indebted to a third party (the bank) in such a way that the cardholder could not prevent the hospital from receiving payment. The credit card draft received by the hospital from the cardholder could be deposited in the bank and credited to the hospital's account as if it were a check.

Since the cardholder's use of the bank credit card created the cardholder's own debt to a third party, the use of the bank credit card to pay a hospital for medical services is equivalent to use of borrowed funds to pay a medical expense. The general rule is that when a deductible payment is made with borrowed money, the deduction is not postponed until the year in which the borrowed money is repaid. Such expenses must be deducted in the year they are paid and not when the loans are repaid. William J. Granan, 55 T.C. 753 (1971).

Accordingly, the $500 payment made by bank credit card to the hospital is includible in the medical expense deductions claimed on the cardholder's 1976 tax return.

[End of Document]

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After reading through the Owens case again - it seems to me to come down to whether the cash basis taxpayer has paid for the hearing aid.

In spite of being referred to as a medical expense, a deduction for medical costs apply to a capital expenditure (1.213(e)(1)(iii))

From Owens:
"A hypothetical example can easily illustrate the issue before the court. Assume that hypothetical cash basis taxpayer A incurs certain deductible costs in Year One but that he does not pay for the costs until Year Two. Can taxpayer A take a deduction in Year One? No, under § 461.

Assume instead that taxpayer A issues his promissory note in Year One in payment for the costs, but that he does not pay the note until Year Two. Can taxpayer A now deduct his expenses in Year One? No, under Helvering v. Price, 309 U.S. 409, 413, 60 S.Ct. 673, 84 L.Ed. 836 (1940); Eckert v. Burnet, 283 U.S. 140, 141-42, 51 S.Ct. 373, 75 L.Ed. 911 (1931); Patmon, Young & Kirk v. Commissioner, 536 F.2d 142, 143-44 (6th Cir.1976). Under those cases, the mere issuance of a promissory note by a cash basis taxpayer does not alter the result.

Now assume hypothetical cash basis taxpayer B gives his note in exchange for property. Does taxpayer B obtain basis in his property for issuing his note? Yes, under Crane and Conroe Office Bldg. "

. Section 1012 provides that the "basis of property shall be the cost of such property." As noted by the Supreme Court, "cost," as that term is used in § 1012, includes debt because of the expected obligation to repay. Tufts, 461 U.S. at 307-08, 103 S.Ct. 1826. If I understand Crane correctly, the "note" , referred to above in Owen, was along the lines of a lien on the property and not just some personal promise to pay.

So my questions remain:

How automatic are those payments to the credit card company?
If the product was defective, could she stop additional payments?

In other words, has the lady incurred an expenditure?

A sigh is just a sigh
The fundamental things apply
As time goes by

It's more like she has a promissory note with the vendor and the vendor charges the credit card monthly. Push that through the rev rul and she is limited to the 2019 credit card payments. (Similar to the analysis in Owen.)

The Service, at least Chief Counsel, is taking the difference between cash and accrual seriously for fixed assets. Part of the switch from accrual to cash for small businesses can involve basis differences, especially where section 179 is involved. They're even thinking of issuing guidance on this aspect of the accrual to cash change. If you dig around in the post-TRA '86 notices and proposed regs for the low-income housing credit, (I think), you'll even find an explicit description of their position on cash v. accrual basis differences. As I recall, Chief Counsel was leaning towards treating the difference in method changes similar to the contingent basis rules in the bonus depreciation regs and allowing the 179 effect as part of the 481(a).

I have confirmed with the taxpayer that her contract requires her to pay to a company with a different name than the hearing aid company. No way to tell if that company is owned by or affiliated with the hearing aid company, but does that even matter?

I just learned that the company with the different name is a bank ("Comenity") and she gets a monthly stateent from that bank which tells her to pay the $350 for that month by X date or else get charged the typical exorbitant credit card interest rate, and it shows her full balance due. Doesn't that indicate she borrowed the money from that bank (even if she doesn't realize it) and the proceeds went to the hearing aid company? Seems like she "paid" in a tax sense.

I just learned that the company with the different name is a bank ("Comenity") and she gets a monthly stateent from that bank which tells her to pay the $350 for that month by X date or else get charged the typical exorbitant credit card interest rate, and it shows her full balance due. Doesn't that indicate she borrowed the money from that bank (even if she doesn't realize it) and the proceeds went to the hearing aid company? Seems like she "paid" in a tax sense.

Given the additional information provided, I would deduct the entire amount in tax year 2019 as the taxpayer incurred a debt to make the payment as opposed to simply engaging in a payment plan.

I suppose if Comenity had already paid the hearing aid company, the client has paid the hearing aid company.

Or, perhaps she signed a contract that gave the hearing aid company the "right" to charge her card monthly she has paid the $4,200.

If she signed a contract that said she would charge her credit card monthly, I don't know as she had made an expenditure, and still has control over the unpaid portion of the purchase price..

In other words, has the lady incurred an expenditure?

Good question. The Reg you cite does use that word (several times). Here’s part of that Reg:

(iii) Capital expenditures are generally not deductible for Federal income tax purposes. See section 263 and the regulations thereunder. However, an expenditure which otherwise qualifies as a medical expense under section 213 shall not be disqualified merely because it is a capital expenditure. For purposes of section 213 and this paragraph, a capital expenditure made by the taxpayer may qualify as a medical expense, if it has as its primary purpose the medical care (as defined in subdivisions (i) and (ii) of this subparagraph) of the taxpayer, his spouse, or his dependent.

You can go to Sec 263 if you wish, but that just says a bunch of different types of “expenditures” are not deductible.

But Sec 1012 doesn’t use that word “expenditure.” Is that relevant?