T.C. Summary Opinion 2008-18
UNITED STATES TAX COURT
LEO AND SHAWN M. STEPHENS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9171-06S. Filed February 25, 2008.
Reggie L. Wegner, for petitioners.
Milan H. Kim and David Conrad, for respondent.
FOLEY, Judge: This case was heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue.
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and this opinion shall not be treated as precedent for any other
case. The issue for decision is whether, pursuant to section
162(a), petitioners are entitled to deduct expenses related to
employee benefit programs.
Background
Petitioner Leo Stephens and his wife Shawn Stephens operated
a custom harvesting business, Stephens Family, LLC, that
consisted of cutting, hauling, and selling grain (the harvesting
business). Through a joint venture with Mrs. Stephens’s mother,
Clair Schrock, Mr. Stephens also operated a farm on which they
grew various crops and raised 30 to 40 head of cattle.
In January 1995, Mr. Stephens enrolled in a health plan
through Blue Cross/Blue Shield of Kansas. Mr. Stephens was the
named policyholder and his family (i.e., his spouse and his four
children) was covered under the plan. Mr. Stephens paid the plan
premiums out of a joint bank account he owned with Mrs. Stephens.
In December 1998, Mr. Stephens, through AgriPlan/BizPlan, adopted
an employer-provided accident and health plan for employees. The
plan provided for full reimbursement for health insurance costs
to eligible employees and their families. In addition, eligible
employees qualified for reimbursement of up to $15,000 for out-
of-pocket medical expenses. To be reimbursed, eligible employees
were required to submit a transmittal form to AgriPlan/BizPlan
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indicating the amount the employee paid for health insurance and
out-of-pocket medical expenses during the year. AgriPlan/BizPlan
would then process the transmittal form and issue a statement to
the employer stating the amount the employer should reimburse the
eligible employee.
On January 1, 1999, Mrs. Stephens entered into an employment
agreement with Mr. Stephens. Mrs. Stephens agreed to do
bookkeeping for the businesses, run errands, prepare meals for
the staff, answer phones, and do general field work and customary
duties. The employment agreement specified that Mrs. Stephens
would be paid $2,000 annually and be an eligible enrollee under
the AgriPlan/BizPlan.
In 2001, Mrs. Stephens worked 1,172 hours for the harvesting
business and the farm and was issued a Form W-2, Wage and Tax
Statement (Form W-2). Thereafter, she submitted an employee
benefit expense transmittal form to AgriPlan/BizPlan claiming
that, in 2001, she had paid $8,650 for medical expenses. Of this
total, $4,978 was attributable to the health insurance premiums
relating to the Blue Cross/Blue Shield plan, and $3,672 was
attributable to out-of-pocket medical expenses. These expenses
were paid out of petitioners’ joint bank account, and petitioners
were not reimbursed. On the Schedule F, Profit or Loss from
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Farming, accompanying their 2001 return, petitioners deducted
$8,661 for employee benefits programs.
In 2002, Mrs. Stephens worked 1,258 hours for the harvesting
business and the farm and was issued a Form W-2. Thereafter,
Mrs. Stephens submitted an employee benefit expense transmittal
form to AgriPlan/BizPlan claiming that, in 2002, she had paid
$11,242 for medical expenses. Of this total, $5,985 was
attributable to the health insurance premiums relating to the
Blue Cross/Blue Shield plan, and $5,257 was attributable to out-
of-pocket medical expenses. These expenses were paid out of
petitioners’ joint bank account, and petitioners were not
reimbursed. On the Schedule F accompanying their 2002 return,
petitioners claimed an $11,531 deduction relating to employee
benefits programs.
On February 17, 2006, respondent issued petitioners a notice
of deficiency and determined deficiencies relating to 2001 and
2002. Respondent determined that petitioners were not entitled
to deduct 100 percent of their medical expenses on Schedule F as
ordinary and necessary business expenses. Respondent did,
however, allow petitioners a deduction, pursuant to section
162(l), for 60 percent of the $4,978 health insurance premium
payments relating to 2001 and 70 percent of the $5,985 health
insurance premium payments relating to 2002.
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On May 15, 2006, petitioners, while residing in Colby,
Kansas, filed their petition with the Court.
Discussion
Section 162(a) allows a deduction for all ordinary and
necessary expenses paid or incurred in carrying on a trade or
business. Ordinary and necessary business expenses include the
reimbursement of employee benefit plan expenses paid or incurred
by employees. Sec. 162(a)(1); sec. 1.162-10, Income Tax Regs.
Petitioners contend that their health insurance and out-of-pocket
medical care expenses are fully deductible. Pursuant to section
162(l), petitioners, however, are allowed to deduct only 60
percent of the amount paid for health insurance in 2001 and 70
percent of the amount paid for health insurance in 2002. Sec.
162(l)(1)(A) and (B). Accordingly, we sustain respondent’s
determinations that petitioners’ health insurance expenses are
subject to section 162(l). In addition, pursuant to section
162(a), petitioners’ out-of-pocket medical care expenses are not
ordinary and necessary business expenses and, therefore, are not
deductible.
Contentions we have not addressed are irrelevant, moot, or
meritless.
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To reflect the foregoing,
Decision will be entered
for respondent.