by petitioners in 1997 and 1998 that are allocable to medical care under the percentage method.28 However, with respect to the claimed deductions for medical use of the pool, spa, and exercise facilities, we find that petitioners have not submitted credible evidence. The financial information discussed above, as further explained below, does not contain specific figures or calculations by Mr. Dalton or AFVW relating to expenditures for the facilities that are sufficient for us to base our decision. Therefore, we conclude that the burden of proof does not shift to respondent on this issue.29 III. Portion of Monthly Services Fees Allocable to Medical The parties' positions regarding the application of the percentage method are based primarily on the ad hoc committee's report and the portion of Mr. Powell's report discussing this method. Respondent argues that Mr. Powell's application of the method and the resulting conclusion should be followed if the percentage method is applied. Petitioners rely primarily on the ad hoc committee's findings with certain adjustments contained in a supplemental calculation. After discussing this issue with the parties at trial and examining their briefs, we interpret petitioners' position to be that both the ad hoc committee's findings and the findings resulting from petitioners' subsequent adjustments are appropriate methods of determining the appropriate allocation percentage. Petitioners ultimately argue that, based on either calculation, the appropriate allocation is approximately 41 percent. A. Petitioners' Calculations Petitioners generally agree with the approach and financial figures used by the ad hoc committee, of which Mr. Baker was a member. They also presented a supplemental report 28 On brief, petitioners argue that respondent's reliance on Mr. Powell's report and use of the actuarial method constitutes a new matter. Petitioners may be correct, especially in light of the fact that any appeal in this case would normally lie to the Court of Appeals for the Ninth Circuit. See, e.g., Estate of Harper v. Commissioner, T.C. Memo. 2002-121 (discussing recent decisions by the Court of Appeals for the Ninth Circuit regarding burden of proof). However, because we have already held that respondent has the burden of proof, we need not reach this issue. 29 Petitioners do not argue that respondent raised a new matter with respect to the disallowance of the claimed deductions for Mr. Baker's use of the pool, spa, and exercise facilities. prepared by Mr. Baker as another means of establishing the appropriate allocation percentage. As previously mentioned, we interpret their position to be that the allocation percentage is approximately 41 percent under either the ad hoc committee's calculations or Mr. Baker's supplemental report. In order to complete its calculations regarding the appropriate allocation percentage, the ad hoc committee relied on certified data from the financial records of AFVW. The committee coordinated and worked with AFVW's management in reaching its calculations. Petitioners have adequately demonstrated to the Court how the ad hoc committee used the information provided by AFVW management to arrive at its conclusions regarding the appropriate allocation percentage. The ad hoc committee calculated an allocation percentage by dividing medical expenses by total operating costs, with specific item adjustments to both figures. In calculating total operating costs, the committee subtracted interest expense, depreciation and amortization, issue cost, and noncontract patient expenses from total costs. In calculating medical expenses, the committee included SNF, ALU, and SCU operating expenses, and subtracted out noncontract patient fees and depreciation and amortization allocable to the three facilities. The committee then made certain upward adjustments to account for the emergency-pull-cord system, food service, environmental service, utilities, and insurance. The adjustments for food service and environmental expenses were based on formulas provided by the food service contractor and the environmental service contractor. The adjustment for utilities was based on a square-footage method, and the adjustment for insurance was based on a ratio- and squarefootage methodology. The committee ultimately concluded that the allocation percentages were 40.3 percent and 41.6 percent for the years 1997 and 1998, respectively. The resident council reported to AFVW residents a summary of the ad hoc committee's findings. The resident council explained how the allocation percentage was to be applied, provided the same census figures used in the Health Facility Information report, and stated what the medical deduction was per resident. Mr. Baker testified that the calculations in the supplemental report he prepared were similar to the ad hoc committee's calculations. He testified that his calculations assumed that the fee charged for a medical service approximated the cost of Village West's providing that service. Mr. Baker did not explain in detail the adjustments contained in his supplemental report, and we are unable to satisfactorily connect his figures to the financial information contained in the record. As a result, we find the supplemental report to not be helpful, and we choose not to rely on it in our analysis. Accordingly, we will examine respondent's position to determine whether he has shown that the allocation percentages and portions of the monthly service fees allocable to medical care are different from those calculated by the ad hoc committee. B. Mr. Powell's Calculations Respondent relies on the percentage method as applied by Mr. Powell. Although Mr. Powell did not believe that the percentage method should be used, he developed a procedure for generating a percentage for use with the percentage method. Mr. Powell stated that the basic formula would examine the relationship between total costs and amounts allocated to medical care, with adjustments for specific items. In his report, Mr. Powell stated that because the sum of entrance fees and monthly service fees over the resident's lifetime is expected to cover the costs of care for residents in a CCRC, it is reasonable to assume that the costs of medical care in the fee structure represent the same proportion or percentage in the total costs. Mr. Powell relied on the financial figures in AFVW's Health Facility Information report. He did not rely on the 1998 financial document. Mr. Powell stated that total costs would include departmental cash expenses plus depreciation and interest expense. Subtractions would be made for issuance costs associated with debt financing, room and board revenues and Medicare and HMO billings for noncontract patients in the SNF, and ancillary services associated with the SNF. He stated that it is reasonable to subtract medical expenses not associated with the residents from both the numerator and denominator of the formula. Additionally, the ancillary fees that are paid on a fee-for-service basis and expected reimbursements from Medicare and HMO insurance should also be subtracted from both the numerator and denominator because these expenses are not expected to be covered by entrance fees or monthly service fees. Similar to the ad hoc committee, Mr. Powell believed that the expenses for medical care would include expenses allocated to the ALU, SCU,30 and SNF, plus a portion of the interest expense allocable to these facilities. The same debt finance costs, SNF room and board revenues, and ancillary services and Medicare and HMO billings subtracted from the total costs would also be subtracted from the medical expense. In addition, ancillary services, Medicare, and HMO billings for residents should be subtracted; however, Mr. Powell stated that he could not obtain an accurate amount due to a difference between the accrual and cash bases for those revenues. The following chart prepared by Mr. Powell reflects his calculations for 1997: Source for amount Total operating expenses for AFVW, including depreciation and interest expense Issuance costs associated with debt financing Operating $16,069,104 Ancillary services, Medicare, and HMO billings for residents; not included Total for numerator (0) 13,116,664 For 1997, the percentage is 21.8 percent ($3,116,664 $14,319,500).2 ÷ 1 We note that the total of the medical expenses is $3,116,637, not $3,116,664 as listed in Mr. Powell's report. 2 We note that application of the corrected medical expense figure still produces a percentage of 21.8 percent. 30 The SCU was completed in June 1997 and began operation at that time. Mr. Powell did not allocate any medical expenses to the SCU for 1997. The following chart prepared by Mr. Powell reflects his calculations for 1998. Source for amount Total operating expenses for AFVW, including deprecia tion and interest expense.... Issuance costs associated with debt financing ........ Total for denominator Operating $17,759,058 (1,315,694) (378,905) 15,957,325 Medical Ancillary services, Medicare, and HMO billings for resi- (0) 4,505,533 For 1998, the percentage is 28.2 percent ($4,505,533 ÷ $15,957,325). To complete his procedure, Mr. Powell chose to apply the percentages to the total monthly service fees that petitioners paid to Village West. As previously mentioned, petitioners' monthly service fees were $2,170 and $2,254 for 1997 and 1998, respectively. Thus, Mr. Powell calculated that petitioners were entitled to deductions (before application of the 7.5percent floor) of $5,67731 and $7,628.32 C. Analysis of the Parties' Positions Our approach in this case is to examine the ad hoc committee's calculations regarding the appropriate allocation percentage in light of respondent's allegations of error, which are primarily based on Mr. Powell's calculations, his testimony, and the testimony of Mr. Dalton.33 In order to accom 31 Calculated as 21.8 percent of 12 × $2,170. 32 Calculated as 28.2 percent of 12 x $2,254. 33 We note that to the extent respondent has not challenged certain assumptions by the ad hoc committee, we treat these as concessions by respondent and express no opinion as to the validity or accuracy of the assumptions. |