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expenses and that payments of these expenses by Hillside Dairy
constitute constructive dividends to the Schmidts. On the other
hand, petitioners assert that all the expenditures are reasonable
and necessary business expenses, deductible by Hillside Dairy and
excluded from the Schmidts’ income.
Petitioners contend that the medical costs are employee
benefits, deductible by the employer and excludable from the
employee’s income under sections 105 and/or 106. Petitioners
further maintain that Hillside Dairy provided food and lodging to
Mr. Schmidt in his capacity as an employee and that such was done
for the convenience of Hillside Dairy. Consequently, petitioners
assert that the food and lodging expenses are employer-provided
“meals and lodging”, the costs for which are excluded from the
Schmidts’ income under section 119 and deductible by Hillside
Dairy. Petitioners further assert that, as owner and lessor of
the farmhouse, Hillside Dairy is entitled to deduct (1) the
expenditure for insurance on the farmhouse as a reasonable and
necessary business expense under section 162, (2) the property
taxes under either section 162 or 164, and (3) the depreciation
of the farmhouse under section 167. Petitioners posit that these
latter expenses are not the Schmidts’ personal expenses because
they are not the owners of the property.
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