Ricky Schmidt and Suzetta J. Schmidt - Page 13

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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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