T.C. Memo. 2010-41
UNITED STATES TAX COURT
MILO L. AND SHARLYN K. SHELLITO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10223-06. Filed March 3, 2010.
Frank W. Bastian and Reggie L. Wegner, for petitioners.
Peter N. Scharff, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined deficiencies of
$3,995 and $6,947 in petitioners’ 2001 and 2002 Federal income
taxes, respectively, and a $1,389 accuracy-related penalty under
section 6662(a) for 2002.1 The issues for decision are:
1
All Rule references are to the Tax Court Rules of Practice
(continued...)
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(1) Whether petitioners are entitled for 2001 and 2002 to deduct
under section 162(a) amounts they claimed for employee benefit
programs on Schedules F, Profit or Loss From Farming; and (2)
whether petitioners are liable for the section 6662(a) accuracy-
related penalty for 2002.
FINDINGS OF FACT
The parties have stipulated some facts, which we incorporate
herein. When they petitioned the Court, petitioners resided in
Kansas. During the years at issue and for an unspecified period
before then, petitioners were married, with two dependent
children. Hereinafter, references to petitioner are to Milo
Shellito and references to Mrs. Shellito are to Sharlyn Shellito.
Petitioner has engaged in a farming business since about
1978. In 2001 and 2002 his farming operation covered about 2,300
acres. Most of this land he leased from his father or other
parties. Petitioners jointly owned about 47 acres. They also
jointly owned three pickup trucks that were used on the farm.
Petitioner individually owned other farm equipment, including a
tractor and a combine.
Petitioners held a joint checking account. They each wrote
checks from the account to pay expenses. During 2001, 2002, and
1
(...continued)
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years at issue. Numbers have been
rounded to the nearest dollar.
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prior years a number of commercial/agricultural loans were taken
out to finance petitioner’s farming operations. Both petitioners
signed most of the promissory notes for the loans.
Mrs. Shellito has assisted on the farm since at least 1982.
The nature of her services has remained fairly constant over
time. Before, during, and after the years at issue her services
included: Assisting with the planting and harvesting of crops;
operating tractors and equipment; feeding and caring for cattle;
building and repairing fencing; maintaining and performing basic
equipment repairs; running various errands; and performing
accounting and bookkeeping services. Before 2001, at least, Mrs.
Shellito received no compensation for these services.
In 2001, upon the advice of his banker, petitioner engaged a
certified public accountant (C.P.A.) to prepare taxes and perform
payroll services for the farming business. The C.P.A. advised
petitioner that he could qualify for an employee medical
reimbursement plan if Mrs. Shellito were petitioner’s employee.
The C.P.A. created a document which petitioners signed on or
about May 29, 2001. The document states:
EMPLOYMENT AGREEMENT
Agreement made effective as of May 29, 2001 by
Milo Shellito to employee Sharlyn Shellito. Employer
is engaged in the business of farming at the following
address * * *
Employer employs, engages, and hires employee as a
hired hand to operate farm machinery work and handle
cattle, do repairs, run errands, and another farm
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related chores, and employee accepts and agrees to such
hiring, engagement, and employment, subject to the
orders, advice and directions of employer.
The employer has the right to terminate the
employee at anytime. The employee has the right to
quit at anytime.
The C.P.A. helped petitioners fill out a preprinted
application for AgriPlan/BIZPLAN, a medical expense reimbursement
plan, which offered medical expense reimbursements to eligible
employees. Petitioner signed this application on May 29, 2001.
The application lists Mrs. Shellito as the only eligible employee
of petitioner. It indicates that available benefits for Mrs.
Shellito were to consist of unlimited reimbursement of health
insurance premiums for her and her family, reimbursement of up to
$15,000 of out-of-pocket medical expenses for her and her family,
and $50,000 of term life insurance for Mrs. Shellito.2
Also on May 29, 2001, an individual checking account was
opened in Mrs. Shellito’s name. Acting on the C.P.A.’s advice,
on June 7, 2001, and each month thereafter in 2001 and 2002,
petitioner wrote Mrs. Shellito a $100 check from their joint
checking account, which she deposited into her individual
checking account. The memo line on most of the checks and each
accompanying deposit ticket stated that the check represented
wages or salary. Mrs. Shellito used these funds to pay for
2
There is no indication in the record that petitioner ever
provided Mrs. Shellito any term life insurance.
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medical care for herself, petitioner, and their dependent
children.
2001 Items and Tax Treatment
For the part of 2001 after May 29, 2001, Mrs. Shellito paid
$7,899 in expenses for medical care and health insurance premiums
for herself, petitioner, and their dependent children, as
follows:
Expense/Premium Amount
Out-of-pocket medical expenses1 $4,671
Medical mileage 97
Insurance premiums2 3,131
Total 7,899
1
This amount includes $4,479 that Mrs. Shellito
paid from her separate checking account and $192 that
she paid directly from petitioners’ joint checking
account.
2
This $3,131 of insurance premiums comprised these
three items: (1) $689 that Mrs. Shellito paid to
Conesco Health Insurance Co. for an insurance policy
under which she was the primary insured; (2) $1,990
that Mrs. Shellito paid to American Republic Insurance
Co. for an insurance policy under which petitioner was
the primary insured; and (3) $452 that was
automatically debited from petitioners’ joint checking
account for premiums paid to American Fidelity
Insurance Co. for a cancer expense insurance policy
that listed petitioner as the named insured.
Beginning July 18, 2001, and continuing periodically
thereafter throughout 2001, petitioner wrote Mrs. Shellito checks
totaling $5,400, drawn on their joint checking account. She
deposited them in her separate checking account. The
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accompanying deposit tickets indicate that the deposits
represented medical reimbursements from Mr. Shellito.3
On January 11, 2002, petitioners executed a document
entitled “Employee Benefit Expense Transmittal”, which they sent
to AgriPlan/BIZPLAN. In this document petitioner claimed
eligible expenses incurred for eligible plan participants during
2001 of $10,323.4 On February 20, 2002, AgriPlan/BIZPLAN sent a
yearend report to petitioner. The report indicated that on the
basis of a review of the Employee Benefit Expense Transmittal,
the total submitted benefit expenses were $15,593 and that this
amount could be deducted as a business expense on petitioner’s
business tax return.5
3
Petitioners allege that petitioner actually paid Mrs.
Shellito more than the $5,400 of reimbursements described above
because he paid additional amounts directly to insurance
companies on Mrs. Shellito’s behalf. Although we do not find
petitioners’ allegations well founded, because our analysis does
not depend upon the exact amount of reimbursements that
petitioner allegedly paid Mrs. Shellito, we need not address this
issue further.
4
We are unable to correlate this number with other evidence
in the record.
5
The record does not conclusively explain the discrepancy
between the $15,593 listed on this yearend report and the $10,323
of expenses that petitioner claimed on the Employee Benefit
Expense Transmittal or the $7,899 of medical expenses that Mrs.
Shellito incurred after May 29, 2001.
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Petitioner issued to Mrs. Shellito a Form W-2, Wage and Tax
Statement, reporting wages paid of $754 in 2001.6 Petitioners
reported this amount as wages on their 2001 Form 1040, U.S.
Individual Income Tax Return, which their C.P.A. prepared. On
the Schedule F attached to their 2001 Form 1040, petitioners
claimed a $15,593 deduction for “Employee benefit programs” and a
$700 deduction for “Labor hired”. On their 2001 Form 1040
petitioners listed Mrs. Shellito’s occupation as “HOUSE WIFE”.
In the notice of deficiency respondent disallowed $14,904 of
the amount that petitioners had claimed for “Employee benefit
programs”; i.e., all but $689.7 Respondent allowed petitioners a
$2,898 offsetting adjustment for “Self Employed Health
Insurance”.8
2002 Items and Tax Treatment
For 2002 Mrs. Shellito incurred or paid $22,307 of expenses
for medical care and health insurance premiums for herself,
petitioner, and their dependent children, as follows:
6
This amount represents $700 of total monthly cash payments
plus $54 of employment taxes that petitioner reported paying on
Mrs. Shellito’s behalf. On Form 943, Employer’s Annual Tax
Return for Agricultural Employees, petitioner reported liability
for employment taxes of $107 for 2001.
7
The parties agree that this $689 represents the premium
that Mrs. Shellito paid in 2001 on the Conesco Health Insurance
Co. insurance policy that listed her as the primary insured.
8
The record does not indicate how this adjustment was
calculated.
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Expense/Premium Amount
Out-of-pocket medical expenses $15,975
Medical mileage 435
Insurance premiums1 5,897
Total 22,307
1
This $5,897 of insurance premiums comprised these
two items: (1) $1,702 that Mrs. Shellito paid to
Conesco Health Insurance Co. for the insurance policy
under which she was the primary insured; and (2) $4,195
that Mrs. Shellito paid to American Republic Insurance
Co. for an insurance policy that listed petitioner as
the primary insured.
During 2002 petitioner wrote Mrs. Shellito, on their joint
checking account, checks totaling $20,800, which she deposited in
her separate checking account. The accompanying deposit tickets
indicate that the deposits represented medical reimbursements
from petitioner.
On January 30, 2003, petitioners executed a document
entitled “Employee Benefit Expense Transmittal”, which they sent
to AgriPlan/BIZPLAN. In this document petitioner claimed
expenses for eligible plan participants during 2002 of $22,202,
consisting of $5,897 insurance premiums and $16,305 of medical
expenses.9 On February 14, 2003, AgriPlan/BIZPLAN sent a yearend
report to petitioner. The report indicated that on the basis of
a review of the Employee Benefit Expense Transmittal, the total
submitted benefit expenses were $22,202 and that after a $1,305
9
Although $22,202 is close to the $22,307 of medical
expenses incurred or paid by Mrs. Shellito during 2002, the
record does not explain the seeming discrepancy.
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negative adjustment, the total benefit expenses that could be
claimed as a business expense on petitioner’s business tax return
were $20,897.10
Petitioner issued to Mrs. Shellito a Form W-2 reporting
wages paid of $1,292 in 2002.11 Petitioners reported this amount
as wages on their 2002 Form 1040, which their C.P.A. prepared.
On the Schedule F attached to their 2002 Form 1040, petitioners
claimed a $20,897 deduction for “Employee benefit programs” and a
$1,200 deduction for “Labor hired”. On their 2002 Form 1040
petitioners listed Mrs. Shellito’s occupation as “HOUSE WIFE”.
In the notice of deficiency respondent disallowed $20,208 of
the amount that petitioners had claimed for “Employee benefit
programs”; i.e., as for 2001, all but $689.12 Respondent allowed
10
The report contains no explanation of the $1,305 negative
adjustment. It appears, however, that this was the amount by
which petitioner’s $16,305 of reported medical expenses exceeded
the $15,000 limit on reimbursements of out-of-pocket expenses as
indicated on petitioner’s AgriPlan/BIZPLAN application.
11
This amount represents $1,200 of total monthly cash
payments plus $92 of employment taxes that petitioner reported
paying on Mrs. Shellito’s behalf for 2002. On Form 943
petitioner reported liability for employment taxes of $184 for
2002.
12
As noted supra note 7, the parties agree that $689
represents the premium that Mrs. Shellito paid in 2001 on the
Conesco Health Insurance Co. insurance policy under which she was
the primary insured. In 2002 the premium that Mrs. Shellito paid
on this insurance policy was actually $1,702. The record
contains no explanation as to why respondent allowed this
deduction for 2002 in the amount of the 2001 premium.
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petitioners a $3,646 offsetting adjustment for “Self Employed
Health Insurance”.13
OPINION
I. Employee Benefit Plan Expenses
Before 2001 Mrs. Shellito had worked on petitioners’ family
farm without compensation for about 20 years. In 2001, upon the
advice of their C.P.A., petitioners signed a document whereby
Mrs. Shellito purportedly became her husband’s at-will employee.
Although the document makes no reference to compensation,
petitioner purportedly agreed to pay Mrs. Shellito $100 a month
plus medical benefits in the form of reimbursements for medical
expenses and health insurance premiums incurred for herself,
petitioner, and their dependent children. Petitioners contend
that pursuant to section 162(a) they are entitled to deduct these
purported reimbursements as employee benefit plan expenses. For
the reasons explained below, we disagree.
A. Burden of Proof
As a general matter, the Commissioner’s determination is
presumptively correct, and the taxpayer bears the burden of
proving entitlement to claimed deductions. Rule 142(a); INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992). In certain
circumstances, the burden of proof with respect to any factual
13
The record does not indicate how this adjustment was
calculated.
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issue may be shifted to the Commissioner. Sec. 7491(a). The
parties disagree as to whether petitioners have met the statutory
requirements to shift the burden of proof to respondent. Because
we do not decide this case by reference to the placement of the
burden of proof, we need not and do not decide whether
petitioners have met the requirements under section 7491(a) to
shift the burden of proof to respondent.
B. Section 162(a)
Section 162(a)(1) allows a deduction for all ordinary and
necessary expenses paid or incurred in carrying on any trade or
business, including a reasonable allowance for “salaries or other
compensation for personal services actually rendered”, such as
any amount paid to an employee pursuant to an employee benefit
plan for an expense that the employee pays or incurs. Sec.
1.162-10(a), Income Tax Regs.; see Frahm v. Commissioner, T.C.
Memo. 2007-351.14 Respondent concedes that pursuant to this
14
Under sec. 105(b), accident and health insurance payments
made directly or indirectly to an employee to reimburse expenses
for medical care are, with certain limitations, excludable from
the employee’s gross income. For this purpose, amounts received
under an “accident or health plan for employees” are treated as
amounts received through accident or health insurance. Sec.
105(e). Ostensibly pursuant to this provision, petitioners have
excluded from Mrs. Shellito’s gross income the medical expense
reimbursements that petitioner allegedly paid to her. This
claimed exclusion, which is not at issue in this case, is
inconsequential in the light of our holding that Mrs. Shellito
was not petitioner’s employee and received no compensation from
him.
(continued...)
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provision petitioners are entitled to most of the claimed
deductions for “Employee benefit programs” if Mrs. Shellito is
properly considered her husband’s employee.15 Respondent
contends, however, that petitioners are not entitled to these
deductions because Mrs. Shellito was not a bona fide employee of
her husband. We agree with respondent.
C. Analysis
Citing Matthews v. Commissioner, 92 T.C. 351, 361 (1989),
affd. 907 F.2d 1173 (D.C. Cir. 1990), and like cases, petitioners
contend that under the common law agency test, the crucial
consideration is the right of control, or lack of it, which the
employer may exercise over the putative employee. Petitioners
assert that petitioner has employed Mrs. Shellito since 1982
14
(...continued)
Pursuant to sec. 162(l)(1), a self-employed individual may
deduct a percentage (60 percent in 2001, 70 percent in 2002) of
any amount paid or incurred for insurance that constitutes
medical care for the taxpayer or the taxpayer’s spouse or
children. In the notice of deficiency respondent allowed
petitioners adjustments for “Self Employed Health Insurance” for
each year at issue, ostensibly pursuant to sec. 162(l)(1).
Although we are unable to correlate the derivation of the amounts
of these adjustments with the evidence of record, the parties
have not raised and accordingly we do not reach any issue
regarding these adjustments.
15
Respondent contends that even if Mrs. Shellito were deemed
petitioner’s employee, petitioners are not entitled to deduct
certain relatively small amounts that respondent alleges were
paid before May 29, 2001, or amounts that respondent contends
exceed petitioner’s actual reimbursements to Mrs. Shellito. In
the light of our holding that Mrs. Shellito was not a bona fide
employee of petitioner, it is unnecessary to address these
contentions.
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because since then she has performed her services on the family
farm under petitioner’s control and instruction. They contend
that petitioners entered into an employment agreement on May 29,
2001, to “formalize” this preexisting employer-employee
relationship.
We do not agree that the purported employment agreement
formalized a preexisting employer-employee relationship because
we do not believe there was any such preexisting relationship.
The existence of remuneration is an “‘essential condition’” of an
employer-employee relationship. O’Connor v. Davis, 126 F.3d 112,
116 (2d Cir. 1997) (quoting Graves v. Women’s Profl. Rodeo
Association, Inc., 907 F.2d 71, 73 (8th Cir. 1990)); see
McGuinness v. Univ. of N.M. Sch. of Med., 170 F.3d 974, 979 (10th
Cir. 1998). Absent remuneration, there is no “plausible”
employment relationship and consequently no need to undertake a
common law agency analysis. Graves v. Women’s Profl. Rodeo
Association, Inc., supra at 73-74.
According to petitioners’ own testimony, before May 29,
2001, Mrs. Shellito received no remuneration for her services.16
Consequently, because this essential condition of an employment
relationship was missing, Mrs. Shellito was not her husband’s
16
Mrs. Shellito testified that petitioner did not pay her or
provide her any form of compensation before May 29, 2001.
Similarly, petitioner testified that he started paying Mrs.
Shellito and providing her “medical insurance” in 2001.
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employee before 2001, irrespective of the degree of control he
might have exercised over her. Rather, it appears to us that
during these many years Mrs. Shellito rendered her services as
part of the “‘shared enterprise’” of marriage, Cray v. Cray, 867
P.2d 291, 299 (Kan. 1994) (quoting Berish v. Berish, 432 N.E.2d
183, 184 (Ohio 1982)), as petitioners worked together to make a
living and raise their family.
We are not convinced that anything happened in 2001 that
materially changed the nature of petitioners’ economic
relationship. Mrs. Shellito’s tasks on the farm were unchanged.
More significantly, Mrs. Shellito’s purported “compensation” was,
we believe, illusory.
In essence, the purported compensation arrangement was that
petitioner would reimburse Mrs. Shellito for family medical
expenses and insurance premiums that she paid.17 In paying these
expenses from her separate checking account, Mrs. Shellito
ostensibly assumed the obligation to pay family medical expenses
that under Kansas law were as much her husband’s liability as her
own. See St. Francis Regl. Med. Ctr., Inc. v. Bowles, 836 P.2d
17
Although petitioner “paid” Mrs. Shellito (from their joint
checking account) $100 “wages” each month in addition to
reimbursements for medical expenses, he testified that he
reimbursed her for the amount of “medical bills and stuff” that
was “above and beyond the $100 that I’d paid her prior to.” In
essence, then, the $100 per month of “wages” appears to have been
simply a component of the medical expense reimbursements that
petitioner allegedly paid Mrs. Shellito.
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1123, 1125 (Kan. 1992) (pursuant to the common law “doctrine of
necessaries”, as recognized under Kansas law based upon the
concept of “unity of marriage”, each spouse is liable for the
other’s “necessaries”, including “medical services”). We do not
see that Mrs. Shellito obtained any economic benefit from her
husband’s “reimbursing” her, from their joint checking account,
for medical expenses for which he was also liable.18
In the absence of proof to the contrary, petitioners are
presumed to own equally the funds in their joint checking
account. See Walnut Valley State Bank v. Stovall, 574 P.2d 1382
(Kan. 1978). Consequently, we consider the funds paid from their
joint checking account to have been paid equally by each of them.
Cf. Higgins v. Commissioner, 16 T.C. 140 (1951) (husband was
entitled to deduct on his separate return only half of the
interest paid from his and his wife’s joint checking account).
Insofar as Mrs. Shellito was “reimbursed” with her own funds from
the joint checking account, she clearly obtained no economic
benefit. Insofar as she was “reimbursed” with her husband’s
funds from the joint checking account, any resulting economic
18
Relatively small amounts of the medical expenses in
question were automatically debited from petitioners’ joint
checking account. In addition, Mrs. Shellito paid small amounts
of the medical expenses in question from petitioners’ joint
checking account. These circumstances do not affect our
conclusion that Mrs. Shellito obtained no economic benefit from
the purported employment agreement.
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benefit is directly offset and negated by her assuming and paying
her husband’s liability for the family medical expenses.
When all is said and done, it appears to us that Mrs.
Shellito’s and her family’s medical expenses and health insurance
premiums continued, in effect, to be paid from petitioners’ joint
checking account just as they always had been. We conclude that
Mrs. Shellito received no remuneration under the purported
employment arrangement and consequently during the years at
issue, as in the preceding years, there was no bona fide
employment relationship.
Petitioners executed the purported employment agreement for
tax reasons on the advice of their C.P.A., who had prepared the
document for them. Petitioner testified forthrightly that he
started paying Mrs. Shellito in June of 2001 because “it would be
a tax break that I could use.” Citing Seidel v. Commissioner,
T.C. Memo. 1971-238, petitioners contend that the mere fact that
petitioner had a tax-savings motive does not affect the validity
of the purported employee benefit plan that he adopted. This may
be true but is beside the point--even a valid employee benefit
plan is unavailing in the absence of a bona fide employment
relationship. Although a “tax-avoidance motive for structuring a
transaction in a particular way is not inherently fatal,” a
transaction between family members deserves a heightened level of
“skepticism and scrutiny” to determine the transaction’s
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substance. True v. United States, 190 F.3d 1165, 1174 n.6 (10th
Cir. 1999); see Hamdi v. Commissioner, T.C. Memo. 1993-38, affd.
without published opinion 23 F.3d 407 (6th Cir. 1994).
Exercising that heightened skepticism and scrutiny, we conclude
that in substance petitioners’ purported employment agreement was
a mere formalism that, for the reasons previously discussed, did
not give rise to a true employment relationship.19
In support of their argument that Mrs. Shellito was
petitioner’s bona fide employee, petitioners note that in the
notice of deficiency respondent did not disallow the deduction
petitioners claimed on Schedule F for “wages” that petitioner
paid Mrs. Shellito and also allowed for each year at issue $681
of the expenses that petitioners claimed for employee benefit
programs. The notice of deficiency does not explain the
treatment of these items, and respondent has offered no
explanation in this proceeding.20 Whatever inferences might be
19
This conclusion is not altered by the fact that petitioner
reported Mrs. Shellito’s “wages” on Forms W-2 and paid relatively
small amounts of employment taxes in furtherance of the claimed
deductions for employee benefit programs, the economic benefit of
which, if sustained, would far exceed the relatively small amount
of employment taxes incurred.
20
It might be inferred that respondent’s allowing the
deduction for “wages” paid might have been meant to
counterbalance petitioners’ including these amounts in gross
income as wages. Cf. Haeder v. Commissioner, T.C. Memo. 2001-7
n.10 (noting that the Commissioner had determined that the
taxpayers’ income should be reduced by wages the husband
allegedly paid to his wife). The allowance of the $689 deduction
(continued...)
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drawn from respondent’s treatment of these items are
counterbalanced, however, by inferences that might be drawn from
petitioners’ describing, on their Forms 1040 for each year at
issue, Mrs. Shellito’s occupation as “HOUSE WIFE”--a
characterization that we believe was accurate.
In sum, we conclude that because she received no
remuneration and the purported employment agreement was a mere
formalism, Mrs. Shellito was not petitioner’s bona fide employee
for the years at issue.21 Consequently, petitioner is not
20
(...continued)
for employee benefit programs for both 2001 and 2002 is more
puzzling. The parties agree that this $689 deduction represents
the premium that Mrs. Shellito paid in 2001 on her Conesco Health
Insurance Co. policy. In 2002, however, her premium on this
policy was $1,702.
21
Cf. Frahm v. Commissioner, T.C. Memo. 2007-351 (holding
that employee benefit plan expenses were allowable under sec.
162(a); the Commissioner conceded the existence of a valid
employment relationship between the married taxpayers); Eyler v.
Commissioner, T.C. Memo. 2007-350 (disallowing claimed sec.
162(a) deduction for want of proof that the taxpayer husband paid
health insurance premiums in his capacity as his wife’s employer
pursuant to an unwritten health plan rather than in his
individual capacity as the primary insured under the health
policy); Albers v. Commissioner, T.C. Memo. 2007-144 (disallowing
claimed sec. 162(a) deduction because taxpayers failed to prove
that the employer husband paid his employee wife, pursuant to an
employee benefit plan, amounts to reimburse her for medical
expenses that she incurred or paid); Francis v. Commissioner,
T.C. Memo. 2007-33 (without deciding the bona fides of a
purported employment relationship between the married taxpayers,
disallowing disputed amounts of sec. 162(a) deduction for want of
evidence that any compensation the taxpayer husband paid his wife
was reasonable in amount); Haeder v. Commissioner, supra,
(disallowing claimed sec. 162(a) deduction on the basis that the
taxpayer’s wife was not his bona fide employee because she
(continued...)
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entitled under section 162(a) to any deduction for employee
program benefits in excess of the amounts respondent has allowed.
II. Accuracy-Related Penalty
Respondent determined that for 2002 petitioners are liable
for an accuracy-related penalty under section 6662(a). Section
6662(a) and (b)(2) imposes a 20-percent accuracy-related penalty
on any portion of a tax underpayment that is attributable to,
among other things, any substantial understatement of income tax,
defined in section 6662(d)(1)(A) as an understatement that
exceeds the greater of 10 percent of the tax required to be shown
on the return or $5,000. Sec. 6662(d)(1).
The accuracy-related penalty does not apply with respect to
any portion of the underpayment if it is shown that the taxpayer
had reasonable cause and acted in good faith. Sec. 6664(c)(1).
Such a determination is made by taking into account all facts and
circumstances, including the experience and knowledge of the
taxpayer and his or her reliance on a professional tax adviser.
See sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners sought and in good faith, we believe, followed
the tax advice of their C.P.A., who steered them into setting up
the medical reimbursement plan, helped them fill out the
application for it, drafted the purported employment agreement
21
(...continued)
performed no services “other than those reasonably expected of a
family member”).
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for them, and prepared their tax returns for the years at issue.
Taking into account all the facts and circumstances, including
petitioners’ lack of experience and knowledge regarding tax
matters, we conclude that they reasonably relied upon the
C.P.A.’s advice in claiming the disputed deductions. Cf. United
States v. Boyle, 469 U.S. 241, 251 (1985) (“When an accountant or
attorney advises a taxpayer on a matter of tax law, such as
whether a liability exists, it is reasonable for the taxpayer to
rely on that advice.”). We do not sustain imposition of the
accuracy-related penalty.
To reflect the foregoing,
An appropriate decision
will be entered.