STATE AND LOCAL TAXATION

NYS MODIFICATIONS: LONG-TERM CARE INSURANCE AND CONTINUING CARE RETIREMENT COMMUNITY FEES

By Mark H. Levin, CPA,
H.J. Behrman & Company, LLP

Since 1996, New York State has allowed a subtraction modification from Federal adjusted gross income for long-term care insurance premiums. Since 1998, New York State has also allowed a subtraction modification for certain fees paid to a continuing care retirement community. Both of these subtraction modifications are available whether or not the taxpayer itemizes deductions.

Long-term Care Insurance

In order to take advantage of the subtraction modification for long-term care insurance premiums, the policy must qualify under IRC section 7702B and New York State Insurance Law section 1117. The policy must--

* cover the taxpayer or spouse;

* provide coverage for qualified long-term care services only;

* not pay or reimburse expenses incurred to the extent that they are reimbursable under title XVIII of the Social Security Act (other than by Medicare as a secondary payor);

* be guaranteed renewable;

* not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan or borrowed; and

* provide that all refunds of premiums and all policyholder dividends or similar amounts are to be applied as a reduction of future premiums or to increase future benefits (other than as a premium refund due to the death of the insured or a complete surrender or cancellation of the policy).

The term "qualified long-term care services" refers to the necessary diagnostic, preventative, therapeutic, treatment, mitigation and rehabilitative, and maintenance or personal care services that are required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

A "chronically ill individual" is any individual who has been certified by a licensed health care practitioner as being unable to perform (without substantial assistance from another individual) at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity; as having a level of disability similar to those described above; or as requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.

The term "activities of daily living" includes--

* eating,

* toileting,

* transferring,

* bathing,

* dressing, and

* continence.

If the above requirements are met, the policy will be deemed to be a long-term care insurance policy qualifying to be taken as a subtraction modification from Federal adjusted gross income.

Prior to 1997, a Federal itemized deduction was not allowed for long-term care insurance. However, for tax years beginning in 1997 and thereafter, premiums paid for a long-term care insurance policy became deductible as an itemized medical deduction for Federal income tax purposes. As a result of the New York subtraction modification from Federal adjusted gross income, the Federal deduction is not allowed in determining the New York itemized deduction for tax years beginning after 1996.

Certain Fees Paid to a Continuing Care Retirement Community

For tax years beginning in 1998 and thereafter, a subtraction modification is allowed for a portion of the fees paid by a taxpayer who is a resident of an approved continuing care retirement community located within New York State that has been issued a certificate of authority to operate as such by the New York State Commissioner of Health. The subtraction modification is for the portion of the fees that are attributable to the cost of providing long-term care benefits pursuant to a continuing care contract. This subtraction modification is available in addition to the subtraction modification for long-term care insurance premiums.

Limitations

The aggregate deduction for both the long-term care insurance and the continuing care may not exceed the limitations set forth in IRC section 213(d)(10). The deduction limitations are shown in the Exhibit.

Amended Returns

Amended New York State income tax returns should be considered for taxpayers that paid premiums on qualified long-term care policies covering themselves for 1996 or 1997. *

THE COMMERCIAL RENT
TAX NIGHTMARE

By Neil Tipograph, CPA,
Imowitz Koenig & Co., LLP

The New York City commercial rent or occupancy tax (CRT) has been watered down over the past few years through rate reductions and increased exemptions. But for businesses that still pay the CRT, it remains one of the most detested taxes on the books. As the following illustration shows, the CRT contains certain inequitable provisions, of which most practitioners may not be aware.

John M. Smart, CPA, has a client, NYC Widgets, Inc., that rents showroom space in midtown Manhattan. Pursuant to its lease, NYC Widgets must reimburse the landlord, as additional rent, its share of the building's annual real estate tax obligation. In the beginning of 1996, the landlord contests the exorbitant real estate taxes assessed on his property through a real estate tax certiorari proceeding. The court rules in favor of the landlord, and orders the city to reduce the current year's real estate tax assessment (real estate tax year 1996/97) and to refund a portion of the real estate taxes assessed on the building during the past three years (real estate tax years 1993/94, 1994/95, and 1995/96). At the end of 1996, the landlord receives the prior year refunds and, as required in the lease, remits to all tenants, including NYC Widgets, their share of the refunds.

In March 1997, Mr. Smart prepares the corporate tax return and the quarterly CRT return for his client. Both returns reflect the reduction in rent expense resulting from receipt of the tax refunds from the landlord.

In November 1998, a New York City auditor examines the CRT returns for the year ending May 31, 1997, and assesses additional tax by adding back to base rent the landlord's refund of taxes. Mr. Smart is appalled by the adjustment. Mr. Smart and the auditor both agree that, for income tax purposes (including New York City corporate income purposes), the refund is an offset to rent expense in the year of receipt. Mr. Smart does not understand why the treatment is different for purposes of the CRT and demands that the New York City auditor provide authority for the adjustment. The auditor immediately produces New York City Finance Administration Bulletin, vol. 3, no. 1, March 1972, and reads the following paragraph from page 2:

Real estate taxes paid by a tenant on behalf of his landlord are includable in base rent with no offset permitted for prior year's realty tax payments that are currently refunded. The refunds may, however, be claimed as credits on amended returns for the periods to which they relate, if within the statute of limitations.

Now, it is the end of 1998, and Mr. Smart realizes that under the statute of limitations, some of the earlier CRT returns are closed. However, he prepares refund claims for the quarterly CRT returns ending on November 30, 1995, February 29, 1996, and May 31, 1996, under the belief that a three-year statute is to be applied.

A few months later, Mr. Smart gets an angry call from the president of NYC Widgets. The president has received a letter from New York City stating that all refund claims are rejected since claims for CRT refunds must be filed within 18 months of the filing of the quarterly CRT returns.

At this point, Mr. Smart is furious. He knows that because real estate tax certiorari proceedings take time to settle, it is virtually impossible to receive a real estate tax refund within 18 months of the filing of the CRT return. Accordingly, most CRT taxpayers will never have the opportunity to seek the CRT refunds resulting from real estate tax refunds.

Is there a solution to this madness? The obvious answer is to get rid of the CRT, as is promised by politicians from time to time. In the meanwhile, the solution is to file a protective refund claim along with all quarterly CRT filings. Perhaps if all CRT filers follow this approach, the New York City tax department will change the refund rule and allow taxpayers to claim credit against base rent in the year of receipt of the real estate tax refund. *

State and Local Editor:
Barry H. Horowitz, CPA
Eisner & Lubin LLP

Interstate Editor:
Nicholas Nessi, CPA
BDO Seidman LLP

Contributing Editors:
Henry Goldwasser, CPA
M.R. Weiser & Co LLP

Leonard DiMeglio, CPA
PricewaterhouseCoopers LLP

Steven M. Kaplan, CPA
Kahn, Hoffman, Nonenmacher & Hochman, LLP

John J. Fielding, CPA
PricewaterhouseCoopers LLP

Warren Weinstock, CPA
Paneth, Haber & Zimmerman LLP

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.