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Mr. Sears maintained a full-time job at a computer software
company, where he earned $46,081.60 in the taxable year 2000.
Following one of the tax-reduction strategies advocated by
RTP, Mr. Sears established a “Medical Expense Reimbursement Plan”
(the reimbursement plan) to cover employees of his RTP activity.
He testified that petitioner Carol McCabe (Ms. McCabe) became an
employee of the activity in April 2000 and elected to participate
in the reimbursement plan. The record does not indicate what
duties Ms. McCabe performed, but Mr. Sears testified she worked 2
hours a week for $6 an hour. Mr. Sears filed Forms 941,
Employer’s Quarterly Federal Tax Return, for the second, third,
and fourth quarters of 2000, reporting total wages paid of $468.
At least two of the Forms 941 were filed late.
Petitioners initially reported that Ms. McCabe incurred
$2,777 of reimbursable medical costs. They deducted that amount
as employee benefit programs expense on their Schedule C for the
activity.6 Petitioners later conceded, however, that $1,322 of
those expenses were nondeductible because they were paid before
Ms. McCabe became an employee. Mr. Sears also admitted that he
did not make reimbursement payments to Ms. McCabe. Instead, Ms.
McCabe paid her medical bills, and petitioners claimed a
6 Petitioners attached a second Schedule C to their joint
2000 Federal income tax return for a business described as
“Consulting - Health care insurance” that Ms. McCabe operated.
Respondent made no adjustments to this Schedule C, and it is not
in dispute.
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