UNITED STATES TAX COURT
PETER
F. & MAUREEN
L. SPELTZ,
Petitioners,
Docket
v.
COMMISSIONER
OF INTERNAL
No.
5851-04S
REVENUE,
Respondent.
OPENING BRIEF FOR RESPONDENT
DONALD L. KORB
Chief Counsel
Internal Revenue
OF COUNSEL:
THOMAS R. THOMAS
Division Counsel
(Small Business/Self-Employed)
MARTIN B. KAYE
Area Counsel
(Small Business/Self-Employed:Area
JOHN C. SCHMITTDIEL
Associate Area Counsel
(Small Business/Self-Employed)
MELISSA J. HEDTKE
Senior Attorney
(Small Business/Self-Employed)
5)
Service
CONTENTS
PRELIMINARY
QUESTION
POINTS
1
PRESENTED
RESPONDENT'S
ULTIMATE
STATEMENT
2
REQUEST
FINDINGS
RELIED
FOR FINDINGS OF FACT
OF FACT
9
UPON
10
ARGUMENT
12
I.
Reimbursements
of medical expenses and insurance
premiums in the amount of $3,279 and $4,539 claimed as an
expense on Petitioners' daycare Schedule C for the years
2000 and 2001, respectively, are NOT deductible by the
daycare as ordinary and necessary business expenses under
I.R.C. § 162(a)
A.
Mr. Speltz was not an employee
during the years at issue
II.
did not establish an I.R.C. §
the years at issue
B.
Mr. Speltz did not qualify for reimbursements under
the daycare's medical reimbursement plan, because he was
not an employee of the daycare
C.
Mr. Speltz did not qualify for benefits under the
daycare's medical reimbursement plan, because he did not
work a minimum of 12.5 hours each week
CONCLUS ION
13
of the daycare
Reimbursements
of medical expenses and insurance
premiums in the amount of $3,279 and $4,539 claimed
as an expense on Petitioners' daycare Schedule C in
the years 2000 and 2001, respectively, are NOT
excludable from Mr. Speltz's gross income under
I.R.C. §§ 105 and 106
A.
Petitioners' daycare
105(e) health plan during
3
14
21
22
25
26
29
-
l
-
CITATIONS
Cases
Air Terminal
Cir.
1973)
Cab,
Inc.
v.
Day
Commissioner,
Deputy
Ewens
Commissioner,
v.
Haeder
du
v.
T.C.
975
Pont,
Miller,
&
308
Inc.
Hradesky
curiam,
v. Commissioner,
540 F.2d
851
INDOPCO,
Inc.
v.
New Colonial
(1934)
Ice
Niedringhaus
v.
Packard
v.
Professional
T.C.
225
(5th
Co.
320
Company,
12
Cir
1992)
27
13
117
T.C.
263
(2001)
....
U.S.
503
467
U.S.
351
Darden,
Inc.
v.
15
14
(1943)
65 T.C.
87 (1975),
Cir.
1976)
v.
13
aff'd.
per
12
79
(1992)
12
(1989)
503
14
U.S.
Helvering,
318
(1992)
292
U.S.
14
435
12
Commissioner,
99 T.C.
Commissioner,
63 T.C.
& Executive
(1987)
Leasing,
Ltd.
v.
Smith
v.
Commissioner,
T.C.
Weber
v.
Commissioner,
103
Commissioner,
202
621
(1992)
27
(1975)
Inc.
v.
14
Commissioner,
89
15
Prods.
v.
(8th
575
(1940)
92 T.C.
Rugby
'itVigutow
F.2d
Memo 2001-7
Commissioner,
Ins.
(8th
534
488
V.,
Commissioner,
Mut.
F.2d
T.C.
Commissioner
Nationwide
478
Commissioner,
Commissioner,
v.
States,
Memo 2005-97
U.S.
v.
Heininger,
Mathews
United
14
Barton
v.
v.
Commissioner,
100
T.C.
Memo 1970-243
T.C.
T.C.
378
(1994)
Memo.
-
ii
1983-620
-
531
(1993)
22
10,
13
15,
16
23
CITATIONS
Code
Sections
I.R.C.
§ 105
2,
9,
21
I. R. C.
§ 105 (a)
I.R.C.
§ 105(b)
I.R.C.
§ 105 (e)
I.R.C.
§ 105(g)
10
I.R.C.
§ 106(a)
22
I.R.C.
§ 106
I.R.C.
§ 162
I.R.C.
§ 162 (a)
I.R.C.
§ 213(d)
22
I . R. C.
§ 262 (a)
13
I.R.C.
§ 7491
12
I.R.C.
§ 7491(a)
(2) (A)
12
I.R.C.
§ 7491 (a)
(2)
12
21
10,
11,
22,
10,
22,
24,25,
27
23,
24,
25,
27
26,
2,
2,
9,
9,
21
13,
21
10,
13
(8)
Regulations
Employment
Tax
Regulations
§ 31.3401(c)-1(b)
Minn.
R.
9502.0335,
subp.
1
Minn.
R.
9502.0385,
subp.
2,
Treas.
Reg.
§ 1.105-5(a)
Treas.
Reg.
§ 1.162-10
15
17
subp.
5
17
23
(a)
10,
-
iii
-
13
CITATIONS
Miscellaneous
Tax
Court
Rule
142 (a)
Tax
Court
Rule
155
12
1
- iv -
UNITED STATES TAX COURT
PETER
F.
& MAUREEN
L.
SPELTZ,
)
)
Petitioners,
.
)
)
v.
)
Docket No.
5851-048
)
COMMISSIONER
OF INTERNAL
)
REVENUE,
)
Respondent.
)
OPENING BRIEF FOR RESPONDENT
PRELIMINARY STATEMENT
This case is for redetermination
tax of $921.00 and $1,082.00,
2001,
respectively.
2005,
in St. Paul, Minnesota,
The Court
ordered
the parties
13, 2005.
testimony
given at trial,
26-P,
r
years 2000 and
Judge Diane L.
Kroupa,
to file simultaneous
12, 2005, and reply briefs
September
through
for the taxable
in income
The trial in this case was held on June 13,
on or before August
supplemental
of deficiencies
The evidence
stipulation
consists
and a stipulation
opening briefs
on or before
of the pleadings,
of facts and
of facts with attached
16-J, 17-P, 18-J through
presiding.
exhibits
23-J, 24-P, and 25-J.
27-P, 28-P, 29-P, and 30-P were admitted
concessions
by either
of the parties
necessitate
a Rule 155 computation.
during
I-J
Exhibits
trial.
No
have been made which would
Docket No. 5851-04S
QUESTION
1.
Whether
reimbursements
insurance
$4,539
premiums
claimed
daycare
necessary
Whether
$4,539
premiums
respectively,
gross
are deductible
expenses
and
of $3,279 and
on Petitioners'
as ordinary
under
of medical
in the amount
as an expense
Schedule
expenses
C in the years 2000 and 2001,
business
claimed
daycare
in the amount
reimbursements
insurance
of medical
as an expense
Schedule
respectively,
2.
PRESENTED
and
I.R.C. § 162(a).
expenses
and
of $3,279 and
on Petitioners'
C in the years 2000 and 2001,
are excludable
from Mr. Speltz's
income under I.R.C. §§ 105 and 106.
- 2 -
UNITED STATES TAX COURT
PETER
F. & MAUREEN
L. SPELTZ,
)
)
)
)
)
Petitioners,
v.
.
Docket No.
5851-04S
)
COMMISSIONER
OF INTERNAL
REVENUE,
)
)
)
Respondent.
OPENING BRIEF FOR RESPONDENT
PRELIMINARY STATEMENT
This case is for redetermination
tax of $921.00 and $1,082.00,
2001,
respectively.
2005,
in St. Paul, Minnesota,
The Court
ordered
the parties
13, 2005.
testimony
given at trial,
26-P,
years 2000 and
Judge Diane L. Kroupa,
to file simultaneous
12, 2005, and reply briefs
September
through
for the taxable
in income
The trial in this case was held on June 13,
on or before August
supplemental
of deficiencies
The evidence
stipulation
consists
and a stipulation
opening briefs
on or before
of the pleadings,
of facts and
of facts with attached
16-J, 17-P, 18-J through
presiding.
exhibits
23-J, 24-P, and 25-J.
27-P, 28-P, 29-P, and 30-P were admitted
concessions
by either
of the parties
necessitate
a Rule 155 computation.
during
I-J
Exhibits
trial.
No
have been made which would
Docket
No. 5851-04S
RESPONDENT'S
1.
FOR FINDINGS
At the time the petition
in Rollingstone,
2.
Minnesota.
Respondent
deficiency
3.
Returns
REQUEST
Petitioners
(Form 1040)
at issue").
4.
Stip.
was filed, Petitioners
to Petitioners
a notice of
23, 2004. Stip. ~ 2.
filed joint U.S. Individual
Income Tax
for the tax years 2000 and 2001
During the years at issue, three of Petitioners'
lived with them in their home. Tr. p. 64.
children
that lived with Petitioners
Stip.
7.
Petitioners
business
reported
daycare
a day
income and expenses on
C (Profit or Loss from Business)
as Child Care
(hereinafter
listing the
daycare
Schedule
~ 4; Ex. 2-J, 3-J.
During the years at issue, Petitioners
or two farms from which
16; Ex. 2-J, 3-J.
p.
operated
out of their home. Stip. ~ 4.
1040 Schedule
principal
C).
The three
in their home during the
During the years at issue, Petitioners
business
6.
Form
four
at issue were born in 1987, 1991, and 1996. Tr. p. 64-65.
5.
care
(~the years
~ 3.
children
years
resided
Stip. ~ 1.
timely mailed
on February
OF FACT
they received
rental
also owned one
income.
The farm, or farms, adjoined
Tr. p. 115-
their home. Tr.
115-116.
8.
During the year 2000, Petitioner,
- 3 -
Peter
F. Speltz
Docket No. 5851-04S
(hereinafter
business.
Mr. Speltz),
a snow plowing
and removal
Ex. 2-J.
9.
During the year 2000 and 2001, Mr. Speltz also worked
full-time
as a W-2 wage earner
(hereinafter
Fastenal).
from 6:00 a.m. until
10.
during
11.
expense
had medical
Maureen
for benefits
insurance
plans.
Services
His hours at Fastenal
were
and dental
insurance
through
Speltz
(hereinafter
under Mr. Speltz's
Mrs. Speltz), was
medical
and dental
Ex. 22-J; Tr. p. 112-114.
Included
deducted
Stip. ~ 5.
Company
the years at issue. Ex. 21-J, 22-J; Tr. p. 111-
Petitioner,
eligible
at Fastenal
2:15 p.m. Tr. p. 97.
Mr. Speltz
Fastenal
112.
operated
in the $3,279 employee
by Petitioners'
the year 2000, is $705.82
benefit
on their daycare
in health insurance
programs
Schedule C for
premiums.
Ex. 2-J,
20-J; Tr. p. 65-66.
12.
expense
Included
deducted
in the $4,539 employee
by Petitioners'
benefit
on their daycare
the year 2001, is at least $968.06
in health
programs
Schedule C for
insurance
premiums.
Ex. 3-J, 8-J; Tr. p. 68.
13.
Speltz
State
From February
had a daycare
of Minnesota.
14.
In order
2, 1999 through
license,
which was issued
I, 2003, Mr.
to him by the
Ex. 10-J, 11-J.
to obtain
a daycare
- 4 -
I
February
license
from the State of
Docket
No. 5851-04S
Minnesota,
and take
Mr. Speltz
courses
Mr. Speltz
courses
was also required
performing
license,
would
Mr. Speltz agreed
duties
provide
of deductibles,
the insurance
child care
his Minnesota
daycare
per year.
for an average
insurance
firewood,
childcare
for
of 12.5 hours a week,
him with medical
benefits
premiums,
Ex. 4-J, 10-J, 11-J.
and general
that in exchange
"including:
and medical
will not place on the deductible,U
"lawn care, preparing
items,
check
6, 2000, more than one year after obtaining
certain
the daycare
$6,500
to take additional
in order to maintain
On March
his daycare
which
a background
rd.
15.
payment
to undergo
in child care, CPR, and First Aid. Tr. p. 119.
each year
license.
was required
Mr. Speltz's
bills
limited to
duties were
fix and repair toys and su dry
when needed.
[He] would also take
care of the children
for short times to allow Maureen
to visit
the doctor,
or, in general
tasks
during
daycare
16.
titled
dentist,
time.u
On March
"Employee
6, 2000, Mr. and Mrs.
Salary
Redirection."
to have all or a potion
redirected
to a Flexible
other health
administer
to complete
Ex. 4-J.
"elect[ed]
and/or
needs
Spending
care costs.u
the Flexible
of
Ex. 6-J.
5 -
Mr. Speltz
$542 per month
to pay for uninsured
Mrs. Speltz agreed
Spending Account.
-
signed a document
[his] salary
Account
rd.
Speltz
rd.
to
Docket
No. 5851-04S
17.
During
administer
the years
a Flexible
did not deposit
of Mr. Speltz
option
of receiving
19.
of any kind on
a written medical
plan,
medical
(Tr. p. 73).
reimbursement
benefits
of up to
for benefits
of 12.5 hours per week,
jointly
their daycare
did not have the
under the
a person must be an employee
of seven months
Petitioners
operated
(Tr. p. 74); Mrs. Speltz
To be eligible
must work a minimum
a minimum
did not
salary from the daycare
adopted
Ex. 7-J.
reimbursement
daycare,
work
a cash
6, 2000 that provided
per year.
medical
Account
(Tr. p. 75); and Mr. Speltz
Petitioners
plan on March
$6,500
Spending
$542 per month into an account
behalf
18.
at issue, Mrs. Speltz
of the
and must
per year. rd.
owned the home out of which they
business
during the years at issue. Tr. p.
119.
20.
The parents
daycare
during
Program
Provider
J,
21.
deposited
p.
Policies
N
for "Maureen
Petitioners'
with "Child
Day Care
N
and Pete Speltz.
Ex. 12-
60-6l.
All of the income
into Mrs. Speltz's
received
checking
by the daycare
account.
was not
Ex. 14-J, 9-J; Tr.
76.
22.
Wage
Petitioners'
and Tax Statement,
daycare
business
--
-
---
did not issue a Form W-2,
to Mr. Speltz for either
-
-----
that attended
2000 and 2001 were provided
Tr. p.
13-Ji
of the children
6 -
of the years at
Docket
No.
issue.
Stip.
23.
2000
of
2001
and
24.
related
Tr.
p.
working
for the
Tr.
Saturdays
mowing
the
(Ex.
in the
amount
3-J.
in which
considered
5-J.
activities
to Mr.
activities
she
Ex.
p.
120-121),
~'
lawn
Ex.
5-J;
Tr.
p.
121-22),
from
their
the
day
80),
working
and
when
5-J,
April
26.
During
of the
he was
when
5-J,
or pastures
post
Speltz's
when
picked
portion
2-J,
that
business.
to Mrs.
he
p.
day
Speltz's
when
spent
Tr.
of the
daycare
(see,
108-09),
mail
premiums
kept
a record
joint
reimbursements
insurance
in each
Mr.
According
5-J;
(Ex.
and
returns
on their
Mrs.
on
to be
Speltz
a daily
tried
to
-------------
basis.
rd.;
26, 77.
25.
(Ex.
tax
in income
Ex.
daycare
record
include
respectively.
engaged
to their
accurately
expenses
Speltz
was
not
income
$4,539,
Mrs.
Speltz
did
federal
of medical
$3,279
Mr.
~ 9.
Petitioners
and
Speltz
5851-04S
records,
using
he was
April
up milk
when
office
box
on a sewer
he was
way
he picked
picking
on
he was
Tr.
from
p. 29,
Fastenal
Petitioners'
Tr.
(Ex.
5-J;
home
up
(Ex. 5~J;
pipe
when
(Ex.
was
to chop wood
wood
2001),
farm
on his
Speltz
a chainsaw
splitting
21,
on their
Mr.
p.
5-J,
up plants
121),
July
and
personal
when he
23,
planting
2001;
them
3, 2000).
the
years
Petitioners'
at issue,
farm,
Mr.
which
- 7 -
Speltz
mowed
is located
a large
behind
their
Docket No. 5851-04S
home. Tr. p. 107-108.
of their
farm continuously
p. 108-109.
daycare
Mr. Speltz began mowing
Sometimes
because
the pasture area
it was growing
into weeds. Tr.
Mr. Speltz mowed the pasture
area during
hours. Tr. p. 109.
27.
Mr. Speltz
when he was mowing
chainsaw
28.
Petitioners'
activities
(Tr. p. 102, 110) or cutting
When Mr. Speltz purchased
he usually
The script money
30.
for daycare
children
wood with a
(Tr. p. 120-121).
the daycare,
made with
was not responsible
groceries for
used script money. Tr. p. 122, 123, 125.
was purchased
household
milk and other
from a school with
account.
funds from
Tr. p. 123-124.
script money. Tr. p. 125.
Mr. Speltz
was not engaged
for a minimum
in daycare
of 12.5 hours each week
related
during
the year
2000. Ex. 5-J; Tr. p. 84.
31.
activities
Mr. Speltz was not engaged
for a minimum
in daycare
of 12.5 hours each week
2001. Ex. 5-J; Tr. p. 85.
-
8 -
related
during
the year
Docket
No. 5851-04S
ULTIMATE FINDINGS OF FACT
1.
Mr. Speltz was not an employee
years at issue.
2.
Mr. Speltz
of the daycare
during the
(Entire Record.)
did not work for the daycare
hours each week during
a minimum
the years at issue.
of 12.5
(Entire
Record. )
3.
The reimbursements
premiums
of medical
in the amount
ordinary
daycare
respectively,
and necessary
and insurance
of $3,279 and $4,539
expense on Petitioners'
2000 and 2001,
expenses
Schedule
claimed as an
C in the years
are NOT deductible
business
expenses
under
as
I.R.C. §
162 (a). (Entire Record.)
4.
The reimbursements
premiums
of medical
in the amount
expense on Petitioners'
expenses
and insurance
of $3,279 and $4,539
daycare
Schedule
claimed as an
C in the years
2000 and 2001,
respectively,
Speltz's
income under I.R.C. §§ 105 and 106.
gross
(Entire Record.)
- 9 -
are NOT excludable
from Mr.
Docket
No. 5851-04S
POINTS RELIED UPON
I.R.C. § 162(a)
incurred
during
allows
deductions
the taxable
for expenses
year for "a sickness,
paid or
accident,
hospi tal ization, medica I expense, _..or simi lar benefit
employees
trade
"if they are ordinary
or business."
Commissioner,
to a deduction
Schedule
T.C. Memo
I.R.C.
as an employee
I.R.C. § 105(b)
amounts
received
of the daycare
permits
when the amounts
reimburse
an employee
does
105 (g) .
reimbursements
I.R.C.
§
plan.
received
Petitioners'
plan did not qualify
an I.R.C.
§
daycare's
income of
plan for employees
finances
the medical
or indirectly, to
for medical
care of
The term "employee"
I.R.C. §
to exclude
the
from gross
income under
daycare's
medical
as an I.R.C.
medical
105(e) health plan,
- 10 -
r
from gross
who is self-employed.
by Mr. Speltz
Even if Petitioners'
is considered
incurred
are not entitled
I05(b), because
reimbursement
the years at issue.
or health
and dependents.
an individual
Petitioners
during
are paid, directly
for expenses
the spouse,
not include
Mr. Speltz did not
even though the employer
coverage,
are not entitled
on their daycare
the exclusion
under an accident
in some situations,
the employee,
reimbursements
of the
Smith v.
Petitioners
162(a), because
§
expenses
Reg. § 1.162-10(a);
1970-243.
for medical
C under
qualify
Treas.
and necessary
plan" for
§
105(e) health
reimbursement
Petitioners
plan
are not
Docket
No. 5851-04S
entitled
to exclude
Mr. Speltz
did not qualify
the daycare's
medical
Furthermore,
plan
is considered
considered
entitled
to deduct
not qualify
medical
an I.R.C.
§
reimbursement
pursuant
of Petitioners
under the terms of
medical
reimbursement
and Petitioners
contract,
in income because
Mr. Speltz did
under the terms of the daycare's
Therefore,
to an I.R.C.
including
§
the reimbursements
105(e) health
the reimbursements
C for the years 2000 and 2001 is, of course,
determined
in income
of $921 and $1,082,
by the Commissioner.
- 11 -
were
The
in income and
Schedule
2001 in the amount
as a deduction
plan.
the reimbursements
are still deficiencies
Schedule C
Petitioners
claiming
There
are
on their daycare
to an employment
plan.
because
105(e) health plan, Mr. Speltz is
the reimbursements
the reimbursements
income,
plan.
of the daycare,
for reimbursements
not received
result
for reimbursements
reimbursement
paid pursuant
include
from gross
even if the daycare's
an employee
as amounts
must
the reimbursements
on their daycare
a wash.
tax for the years 2000 and
respectively,
as
Docket
No.
5851-04S
ARGUMENT
Any deductions
require
the taxpayer
all requirements
Helvering,
proof
to identify
of legislative
the deduction
have been met. New Colonial
292 U.S.
435
(1934).
The taxpayer
Commissioner,
burden
determination.
bears
Commissioner,
Inc. v.
the burden of
of the
INDOPCO,
Petitioners
claimed deductions.
and that
Ice Company,
T.C. Rule 142(a);
503 U.S. 79, 84 (1992).
of substantiating
grace that
available
in the Tax Court as to the incorrectness
Commissioner's
851
are a matter
Inc. v.
also bear the
Hradesky
v.
65 T.C. 87, 90 (1975), aff'd. per curiam,
540 F.2d
(5th Cir. 1976).
The burden
circumstances,
establishes
required
that
credible
and fully cooperated
requests.
the deduction
evidence
introduces
he or she substantiated
credible
evidence and
with the Commissioner's
own testimony
taken, the taxpayer
and the burden
in certain
items, maintained
I.R.C. § 7491 (a) (2) (A),
as here, taxpayer's
support
under
if the taxpayer
records,
reasonable
where,
of proof may shift to the Commissioner
(B).
However,
and records
has failed
do not
to provide
does not shift to Respondent
I.R.C. § 7491. Barton v. Commissioner,
T.C. Memo
2005-97.
- 12 -
----
---
--
--
Docket
I.
the
No. 5851-04S
Reimbursements
amount
of medical
of $3,279
Petitioners'
necessary
Schedule
are NOT
business
and insurance
premiums
claimed
as an expense
on
and $4,539
daycare
respectively,
expenses
C for the years
deductible
expenses
by the daycare
under
I.R.C.
I.R.C. § 162(a) allows deductions
expenses
paid or incurred
any trade
or business.
hospitalization,
employees
they
business."
Memo
usual
Treas.
1970-243.
within
471
deductible.
Personal,
in carrying on
benefit
under
accident,
planu for
I.R.C. § 162 "if
of the trade or
Smith v. Commissioner,
if it is customary
business,
or frequent
or industry
occurrence
if it is appropriate
of the business.
(1943).
expenses
trade,
year
Deputy v. du Pont, 308 u.S.
is necessary
development
expenses
is ordinary
"of common
involved."
An expense
467,
An expense
and
and necessary
for "a sickness,
Reg. § 1.162-10(a);
a particular
to a transaction
business
and necessary
as ordinary
for ordinary
the taxable
business
and 2001,
§ 162(a).
expense, ...
or similar
are deductible
are ordinary
during
Expenditures
medical
2000
in
Commissioner
or
or relates
in the type of
488, 495 (1940).
and helpful
v. Heininger,
living, or family
T.C.
expenses
for the
320 U.S.
are not
I.R.C. § 262(a).
In this case, Petitioners
must prove that the reimbursements
- 13 -
Docket
No. 5851-04S
of medical
expenses
on their daycare
and necessary
In order
A.
Schedule
expenses
to satisfy
Mr. Speltz
years
C for the years
paid pursuant
that burden,
was a bona
Mr. Speltz
claimed
as an expense
at issue were ordinary
to a medical
Petitioners
expense plan.
must establish that
fide employee
of the daycare
during the
was not an employee
of the daycare
during the
at issue.
Whether
particular
an employer-employee
situation
Inc. v. United
employee
agency
(1975).
relationship
test. See, ~,
318, 323-324
360-61
(1989).
scrutiny
is required
employee
relationship
account
family
exists,
Nationwide
a family
of such a relationship
relationship.
v.
Cab,
1973); Haeder
v. Commissioner,
whether
63
an employerapply a common law
Ins. Co. v. Darden, 503
Commissioner,
relationship
to determine
existed,
Mut.
in a
Air Terminal
courts generally
(1992); Mathews
Where
Packard
To determine
exists
(8th Cir.
478 F.2d 575, 578
T.C. Memo 2001-7;
621, 629-630
relationship
is a factual question.
States,
v. Commissioner,
U.S.
premiums
in issue.
years
T.C.
and insurance
whether
92 T.C. 351,
is involved,
a bona
fide employer-
and whether
payments
or instead
on account
Haeder v. Commissioner,
close
were made on
of the
T.C. Memo 2001-7.
- 14 -
r------------------------------------------------------------------------------
Docket No. 5851-04S
Courts
employment
consider
various
relationship
include:
factors to determine
exists between parties.
(1) The degree of control
over the details
of the work;
facilities
used
in the work;
indi vidual
for profit
is part
of the principal's regular
they are creating.
263, 270
the individual;
T.C.
(1994).
Rather,
the Court
No
employee
indicates
Section
(6) the permanency
the parties
Leasing,
believe
117 T.C.
Inc. v.
(1987); Weber v. Commissioner,
one factor dictates
& Executive
factors
of the daycare
indicate
during
Leasing,
Mr. Speltz's
at 232.
was not an
First, the
with respect
of the Employment
to the daycare
of the daycare.
Tax Regulations
states
that:
(b) Generally
the relationship
- 15 -
of
or have the right to
that Mr. Speltz was not an employee
31.3401(c)-1(b)
89 T.C.
the years at issue.
activities
103
the outcome.
that Mr. Speltz
fact that Mrs. Speltz did not control,
control,
the work
must look at all the facts and circumstances
each case. Professional
The following
of the
Inc. v. Commissioner,
& Executive
89 T.C. 225, 232
378, 387
business;
Ewens & Miller,
Commissioner,
in the
(5) whether
(7) the relationship
(2001); Professional
factors
(4) whether or not the principal
right to discharge
and
Relevant
invests
(3) the opportunity
or loss;
an
by the principal
(2) which party
has the
of the relationship;
exercised
whether
of employer
and employee
Docket
No. 5851-04S
exists when
the person
has the right
performs
means
to control
the services,
accomplished
employer
and direct
are performed
the individual
not only as to the result
who
to be
by the work but also as to the details and
by which
an employee
for whom services
that result is accomplished.
is subject
That is,
to the will and control
of the
not only as to what shall be done but how it
shall be done.
The control
nature
factor
is the "crucial
test
relationship.
Weber,
of a working
When Mr. Speltz
Speltz
admits
Tr. p. 46.
Mr. and Mrs. Speltz,
could
Id.
was responsible
103 T.e. at 387.
for daycare
When the children
the decision
was, according
The most direction
earlier
she thought
regarding
to Mrs. Speltz,
how to split the
"[s]ometimes
daycare
In addition,
by Mrs. Speltz.
children,
to the farm while
When Mr. Speltz
the children
one group was outside
Mr. Speltz
were often
- 16 -
was to tell
had occurred
was not
assisted
with the
split into two groups,
while the other was inside,
the other stayed behind,
just by, we
to change ...n
Mrs. Speltz gave Mr. Speltz
should be done based on what
in the day. Id.
supervised
children, Mrs.
were split between
both see what was going on and what needed
him what
the
that she did not tell him how to care for them with
any specificity.
children
to determine
U
one group went
or the two groups were
Docket No. 5851-04S
in different
rooms of the house. Tr. p. 47.
did not indicate
Speltz,
Also,
that Mr. Speltz was ever evaluated
or that Mrs. Speltz
determined
In fact, Mr. Speltz does not appear
predetermined
schedule
often
at the daycare.
after working
at Fastenal,
as five times a week.
Mr. Speltz
farmers,
engaged
homeowners,
home engage.
pastures
Id.
Before
home to
ran errands as
he arrived home,
in which many
and fathers with young children
He repaired
living at
bikes, mowed the lawn, mowed the
or chopped
and went into town to collect
Whether
returning
After
of the activities
schedule at
to have had a
Mr. Speltz
See, Ex. 5-J.
on his farms, collected
his gardens,
mail.
in many
by Mrs.
Mr. Speltz's
the daycare.
the daycare
Petitioners
or not he assisted
firewood,
Petitioners'
with the daycare
worked in
personal
appears to
have been his own decision.
Second,
discharge
Mr. Speltz
employee.
obtain
the fact that Mrs. Speltz did not have the right to
his license,
application
1.
as much
helpers.
that he was not Mrs. Speltz's
Mr. Speltz had his own daycare
from the Minnesota
subp.
indicates
license.
Mr. Speltz had to apply
Department
The MDHS also required
training
to obtain
for a daycare
of Human Services
form issued by the department.
Minn.
him to complete
subp. 2, subp.
- 17 -
5.
license
(MDHS) using the
R. 9502.0335,
at least twice
a license as is required
Minn. R. 9502.0385,
In order to
for daycare
Mr. Speltz then
Docket
No. 5851-04S
maintained
his license
by taking the child care courses
by the State of Minnesota.
refuse
Mrs. Speltz could not revoke, or
to renew, Mr. Speltz's
daycare
done by the State
of Minnesota.
Speltz
refused
could have
work and,
if he chose,
Furthermore,
policy,
and operated
by both
Speltz
had the right
Third,
to discharge
account
their daycare
as a business
that Petitioners
As such, neither
indicates
because
Mr. nor Mrs.
business.
owned the home in which
of the daycare's
that Mr. Speltz was not an employee
activities
performed
for
Fourth, the
the daycare
that Mr. Speltz was not an employee of the
he had an investment
was not part
for
purchased
he had the opportunity
in the daycare
Fifth, the fact that much of the work performed
Speltz
were co-
that Mr. Speltz was not an
to the daycare
jointly
owned
the other.
indicates
because
respect
Petitioners
was operated
daycare,
business.
of the daycare,
or loss with
fact that
through
to clients
home from
children.
that were paid for with script money
from the household
profit
assist with daycare
the fact that Mr. Speltz was not reimbursed
expenses
employee
that Mrs.
to allow Mr. Speltz to return
of them, indicates
of the daycare
that could only be
Nor is it likely
their daycare
owners
daycare
license;
the fact that Petitioners,
presented
required
regular
of the daycare.
by Mr. Speltz, allegedly
- 18 -
business
facility.
by Mr.
indicates
Many of the
for the daycare,
I
Docket
No. 5851-04S
are personal
employee.
records
and family
For example,
show Mr. Speltz
of April
2, 2000,
7~ hours.
activities,
working
Speltz working
9, 2001,
yard work, wood,
8 hours.
rd.
repair,
and painting
activities
and fathers
activities
mail compose
on a deck compose
as work
such as pasture mowing,
gutter cleaning,
of children
records
the week of March
recorded by Mrs. Speltz
typically
the week
engaged
and sewer pipe
in by homeowners,
living at home; not the duties
employee.
Speltz attempts
into business
was engaged
him.
during
railings
for the daycare,
are also activities
Mrs.
with
for the daycare during
repair, bike repair,
of a daycare
Speltz
Other
by Mr. Speltz
farmers,
for the daycare
Of the 14 hours that Mrs. Speltz's
show Mr.
sidewalk
of a daycare
of the 11.5 hours that Mrs. Speltz's
lawn care and picking up personal
Ex. 5-J.
performed
not the duties
to convert these personal
activities
by asserting
in these activities,
This is unbelievable
and family
that when Mr.
he often had children
for a number
of reasons.
First,
-~----------------------------------------------------Mr. Speltz
pastures,
daycare
at trial that when he mowed
and when he used a chainsaw,
children.
responsible
"errands,"
to 3:30
admitted
Second,
for children
which happened
the lawn and
he was not responsible for
for Mr. Speltz to have been
during
the times he was running
as often as four times
a week from 2:30
p.m., see, e.g., Ex. 5-J, weeks of 2-11-00,
- 19 -
10-11-00, and
Docket
No. 5851-04S
10-9-00,
vehicle
he would
with him.
specifically
traveling
means
week during many
errands.
Therefore,
recorded
by Mrs. Speltz,
these
on the way home
activities
up coming home
to believe
"precise,"
she noted
Ex.-5-J;
Speltz's
that when
were not
own records,
and were kept by
it on her calendars
Tr. p. 23, 26, 77.
that Mr. Speltz
he performed
up personal
from work.
of a daycare
are nondeductible
had daycare
all of the activities
such as mowing
- 20
r
something
Third, Mrs.
children,
picking
the duties
to Mr. Speltz,
show that when Mr. Speltz was
or "boys."
with him while
constitute
asked to
that some of the errands
See Ex. 5-J.
children
errands
practice of
of 2000, and as often as 4 times a
other months,
it is unbelievable
a chainsaw,
a regular
as often as on 10 of the 18 days that the
for daycare
as "schoolagers"
policy
(and probably
It is impossible
daily notations,"
responsible
in a motor
If an event calls for
according
she states are "accurate,"
"making
using
in a car.
that he "picked
Tr. p. 122.
ran errands
daycare
"[w]e do not make
was open in September
personal
written
Furthermore,
probably
Mr. Speltz
to have children
you will be notified
Ex. 12-J.
from work.u
which
that,
with the children
"errands"
daycare
Petitioners'
states
transportation,
help)."
have been required
the lawn and pastures,
mail,
and running
These activities
employee.
personal
personal
do not
Expenses
related to
and family expenses.
Docket
No. 5851-04S
For the reasons
employee
of the daycare during
Mr. Speltz
jointly
had unreimbursed
supervised
license,
set forth above, Mr. Speltz
or evaluated
expenses,
could not be discharged
daycare
account,
policies,
provided
under
II.
the
into Mrs. Speltz's
was not
was represented
ln the daycare's
business
separate
bank
not an
As a result, the reimbursements
Speltz by the daycare
expenses
are not ordinary
and
of the daycare and are not deductible
I.R.C. § 162.
Reimbursements
amount
of
Petitioners'
I.R.C.
of medical
$3,279
and
daycare
respectively,
under
by Mrs. Speltz,
that Mr. Speltz was a co-owner,
of the daycare.
necessary
set his own schedule,
as well as the fact that not all of the
indicates
to Mr.
facility with Mrs. Speltz,
of the daycare business
income was deposited
employee,
The fact that
by Mrs. Speltz, had his own daycare
as an owner and operator
provider
the years at issue.
owned the daycare
daycare
was not an
Schedule
are NOT
§§ 105
and insurance
premiums
claimed
as an expense
on
C in the years
excludable
and
Under the general
by an employee
$4,539
expenses
from Mr.
2000
Speltz's
and
in
2001,
gross
income
106.
rule of I.R.C. § lOS(a),
through accident
and health
- 21 -
amounts
insurance
received
for personal
Docket No. 5851-04S
injury
or sickness,
to the extent attributable
employer
contributions,
income.
Amounts
employees
health
received
are treated
insurance.
rule allows
are includable
)I.R.C.
an employee
received
to reimburse
employee
for the medical
the employee
105(b).
§
received
105(e).
to exclude
the employee
care
and the employee's
premiums)
Prods. Ltd. v. Commissioner,
order
for Petitioners
Petitioners
105(e)
under
A.
expenses
to the general
income,
for expenses
amounts
incurred
to exclude
and insurance
that an employee's
coverage
100 T.C.
from gross
premiums
must show that their daycare
by the
in I.R.C. § 213(d)) of
I.R.C. §
gross income
(e.g. accident and
under an accident
Rugby
of medical
accident or
An exception
from gross
gross
plan for
spouse and dependents.
I.R.C. § 106(a) provides
insurance
or health
through
(as defined
does not include employer-provided
health
in the employee's
under an accident
as amounts
to non taxed
or health
531, 535
income
made
plan.
(1993).
In
reimbursements
to Mr. Speltz,
established
health plan and that Mr. Speltz qualified
an I.R.C. §
for benefits
the plan.
Petitioners'
health
plan during
daycare
an I.R.C. § 105(e)
the years at issue.
In order to qualify
requires
did not establish
as a health plan,
first, that the benefits
I.R.C.
be received
- 22 -
§
105(e)
under a "plan," and
Docket
No. 5851-04S
second,
that the plan be "for employees.
or more
employees,
u
different
5(a).
and different
employees
or classes
rights
plans may be established
of employees.
There is no requirement
Nor is there a requirement
A plan may cover one
Treas. Reg. § 1.105-
that the plan be in writing. Id.
that there be enforceable
employee
under the plan, so long as notice or knowledge
was reasonably
Wigutow
available
v. Commissioner,
In this case,
to the participant.
T.C. Memo.
Petitioners'
reimbursement
plan
on March
reimbursement
plan
identified
what expenses
would
1983-620.
daycare
adopted
a written medical
6, 2000. See Ex. 7-J.
who was eligible
be reimbursed
The medical
to participate
under the plan.
Id.
is not signed by Mr. Speltz and Petitioners
evidence
at trial
have
the daycare's
medical
failed to establish
Petitioners
reimbursement
qualifies
as a health
reimbursements
received
excludable
reimbursement
that notice
presented no
plan was reasonably
have failed to establish
plan under I.R.C. § 105(e).
expenses
by Mr. Speltz during
and insurance
Since
or knowledge of
plan, as set forth in Exhibit
of medical
available
that the
7-J,
Consequently,
premiums
the years at issue are not
from income under I.R.C. § 105(e)
Because
reimbursements
of medical
- 23 -
expenses
and
However,
that Mr. Speltz was aware of the plan.
medical
to Mr. Speltz,
of the plan
Id.; see also,
the plan
Petitioners
for
and insurance
I
Docket No. 5851-04S
premiums
were not received
105(e) health
Mr. Speltz's
employee
because
by Mr. Speltz pursuant
plan, the reimbursements
income
regardless
of the daycare
the reimbursements
pursuant
to an I.R.C.
are not excludable
or not Petitioners'
their daycare
If Mr. Speltz
from
or not he was an
the years at issue.
were not received
Furthermore,
by Mr. Speltz
105(e) health plan, the reimbursements
§
from Mr. Speltz's
are entitled
Schedule
are not excludable
of whether
during
to an I.R.C. §
income regardless
to deduct
of whether
the reimbursements
on
C.
was an employee
who worked
an average
of 12.5
-------------hours
each week
the daycare
for the daycare
could deduct
during the years at issue, then
the reimbursements
as amounts
pursuant
to an employment
contract.
contract
does not qualify
as a health plan, because
satisfy
the requirements
is not a "plann
contract
reimbu~sements
However,
of I.R.C. § l05(e).
an employment
it does not
An employment
and is not "for employees.n
Therefore,
of medical
expenses
and insurance
pursuant
to an employment
contract
are not excludable
Speltz's
income under
deducting
expense
returns
the reimbursements
paid pursuant
including
I.R.C. § l05(b).
to an employment
the reimbursements
premiums
The result
on their daycare
Schedule
contract
- 24 -
of course,
made
from Mr.
of Petitioners
C as an
and Mr. Speltz
in income on Petitioners'
for the years at issue would,
paid
joint
be a wash.
Docket
No. 5851-04S
Petitioners
the year
would
still have a deficiency
2000 and 2001, respectively,
of $921 and $1,082 for
as determined
by the
Commissioner.
B.
Mr.
Speltz did not qualify
daycare's
medical
employee
reimbursement
for reimbursements
plan, because
if the daycare's
medical
reimbursement
forth
in Exhibit
7-J, is considered
plan,
Mr. Speltz
is not entitled
received
from the daycare
to be eligible
employee
medical
during
reimbursement
of the daycare
discussed
earlier,
annually.
Therefore,
pursuant
under the plan,
See, Ex. 7-J.
under the daycare's
the reimbursements
medical
made
§
under
income pursuant
105(b),
the plan.
that in order
a person
must be an
of 12.5 hours each
For the reasons
of the daycare
did not
and insurance
reimbursement
plan.
to Mr. Speltz were not made
to I.R.C.
- 25 -
I
I.R.C.
expenses
to an I.R.C. § 105(e) health plan
from Mr. Speltz's
the reimbursements
As a result, Mr. Speltz
of medical
as set
105(e) health
Mr. Speltz was not an employee
for reimbursement
premiums
§
plan,
plan provides
and work a minimum
the years at issue.
qualify
to exclude
for reimbursements
for benefits
and 7 months
an I.R.C.
from income under
he did not qualify
The daycare's
week
he was not an
of the daycare.
Even
because
under the
and are not excludible
§
105(b).
r-
Docket
c.
No.
Mr.
medical
5851-04S
Speltz did not gualify
reimbursement
12.5 hours
Even
forth
plan
plan, because
if the daycare's
is considered
reimbursement
an employee
engaging
in personal
chopping,
personal
which
working
Although
Mrs.
working
to Mrs.
sewers and gutters,
such as lawn mowing,
and picking
up
of 12.5 hours
for the daycare.
Speltz admitted
asserted
during
for the daycare
that her records
show that Mr.
of 12.5 hours each week,
trial that Mr. Speltz's
each week should be increased
to record
-
may have
neglected
or stair
rail, Tr. p. 28, vacuuming
children
of 12.5 hours
include time spent by Mr. Speltz
did not work a minimum
conveniently
under the plan
According
mail, Mr. Speltz did not spend a minimum
each week
giving
a minimum
and family activities,
repairing
of the daycare, Mr.
for reimbursements
during the years 2000 and 2001.
own records,
plan, as set
an I.R.C. § 105(e) health
he did not work for the daycare
Speltz's
Speltz
medical
did not did not qualify
each week
wood
he did not work a minimum of
7-J, is considered
and Mr. Speltz
because
under the daycare's
each week.
in Exhibit
Speltz
for benefits
activities
she
hours
because she
such as repairing
the basement,
a bike
Tr. p. 29,
rides to their farm to pick up wood, Tr. p. 29-
30, and lawn work,
Tr. p. 79.
Mrs. Speltz's
- 26 -
claim
is
Docket
No. 5851-04S
contradicted
by her own records,
these
activities,
~'
Ex. 5-J, 3-7-00,
00, 10-19-00,
even when they took place on Saturdays.
basis,
Court
are "precise"
should not,
uncorroborated,
99 T.C.
202, 212
the activities
and is not required
each week working
Therefore,
to an I.R.C.
Speltz's
See, Day v. Commissioner,
v. Commissioner,
nature
did not spend a minimum
§
of many of
while
the daycare
for benefits
for the
of 12.5 hours
he did not qualify
medical
for
reimbursement
plan.
made to Mr. Speltz were not made
105(e) health plan and are not excludible
income pursuant
an I.R.C.
The
each week, not increased.
for the daycare,
Since Petitioners
qualified
to, accept Mrs.
Given the personal
the reimbursements
established
on a daily
Tr. p . 23, 26, 77.
testimony.
under the daycare's
from Mr. Speltz's
of Mr.
the time spent by Mr. Speltz working
Mr. Speltz
reimbursements
recorded
(8th Cir 1992); Niedringhaus
should be reduced
Because
pursuant
and "accurate."
(1992).
4-14-00, 5-30-
trial that her records
in which Mr. Speltz was engaged
was in operation,
daycare
4-13-00,
See,
claim is also contradicted
which were usually
self-serving
534, 538
3-16-00,
Mrs. Speltz's
throughout
activities,
975 F.2d
3-10-00,
3-22-01.
by her statements
Speltz's
which show that she did record
to I.R.C. § 105(b).
have failed to show that their daycare
§
105(e) health plan and that Mr. Speltz
under such a plan, Mr. Speltz
- 27 -
is not
Docket
No. 5851-04S
entitled
to exclude
from gross income reimbursements
expenses
and insurance
premiums
the years
at issue.
in income
on Petitioners'
entitled
to deduct
as amounts
from the daycare
Mr. Speltz must include
including
the reimbursements
on their daycare
to an employment
contract.
the reimbursements
The result
in income
and
the reimbursements
Schedule
C for the years 2000 and 2001, are deficiencies
of $921 and $1,082,
as a deduction
respectively,
Commissioner.
- 28 -
are
Schedule C
claiming
amount
during
joint return even if Petitioners
the reimbursements
paid pursuant
of Petitioners
received
of medical
on their daycare
as determined
in the
by the
r
Docket
No. 5851-04S
CONCLUSION
It follows
Internal
Revenue
that the determination
of the Commissioner
should be sustained.
DONALD L. KORB
Chief Counsel
Internal Revenue
Da t e :__
of
/JJJ6
__ 1_2_2Dffi
__
Service
By:
MELI A J.
Senior Att
ney
(Small Business/Self-Employed)
Tax Court Bar No. HM0572
Galtier Plaza
380 Jackson Street, Suite 650
St. Paul, MN 55101
Telephone: (651) 726-7370
OF COUNSEL:
THOMAS R. THOMAS
Division Counsel
(Small Business/Self-Employed)
MARTIN B. KAYE
Area Counsel
(Small Business/Self-Employed:Area
JOHN C. SCHMITTDIEL
Associate Area Counsel
(Small Business/Self-Employed)
5)
- 29 -