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income tax returns for 2000 and 2001, listing their principal
business as “child care.” Petitioners deducted $3,279 as an
employee benefit program expense in 2000, including $705.82 for
health insurance premiums. Petitioners deducted $4,539 as an
employee benefit program expense in 2001, including $968.06 for
health insurance premiums.
Respondent disallowed petitioners’ claimed employee benefit
program expense deductions because respondent found petitioners
failed to establish that the amounts were ordinary and necessary
business expenses or that Mr. Speltz was a bona fide employee of
the daycare. Respondent mailed petitioners a deficiency notice
on February 23, 2004, and petitioners timely filed a petition.
Discussion
We are presented with two issues, the excludability of
medical premiums and reimbursements from petitioners’ gross
income and the deductibility of those same amounts from the
daycare business income. Regarding the excludability issue, we
must determine whether petitioners entered into a valid
arrangement for the payment of health benefits under section
105(b) and whether Mr. Speltz was a bona fide employee of the
daycare. Regarding the deductibility issue, we must determine
whether the deduction amount was an ordinary and necessary
business expense of the daycare.
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