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returns they filed for 1990 and 1991, petitioners included a
“Wages Schedule”, which reported that petitioner had paid wages
of $2,000 to Mrs. Haeder for those years. The 1990 wages
schedule reported no information relating to FICA or Medicare tax
withholding. The 1991 wages schedule reported that petitioner
had deducted FICA taxes of $124 and Medicare taxes of $29. For
1993, petitioner issued a Form W-2 to Mrs. Haeder showing $2,000
in wages, $124 in FICA, and $29 in Medicare taxes.
In the notice of deficiency, respondent determined that
petitioners were not entitled to deduct the amounts claimed on
the Schedules C for wages paid to Mrs. Haeder for the years in
issue. Respondent also reduced petitioners’ income by the
amounts Mrs. Haeder had reported as income from wages. In
addition, respondent determined that petitioners were not
entitled to claim the IRA deductions for the years in issue.
Medical Plan Expense Deductions
Effective January 1, 1988, on the advice of his accountant,
John H. Fuller (Mr. Fuller), petitioner adopted an agreement
entitled “Employee Medical-Dental Expense Reimbursement Plan
[for] Richard Haeder, Attorney at Law” (plan). The agreement
stated that it covered “all employees of RICHARD HAEDER, ATTORNEY
AT LAW” and the spouse and dependents of any covered employee.
Pursuant to the agreement:
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