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Speltz’s activities were essential to the daycare business
operations. Accordingly, we find that payments made under the
daycare’s medical benefits plan in the form of reimbursements are
excludable from petitioners’ gross income under section 105(b).
III. Deductibility of Medical Premiums and Reimbursements
We next determine whether Mrs. Speltz may deduct the medical
cost of insurance premiums and medical reimbursements paid on Mr.
Speltz’s behalf from daycare business income. Petitioners may
deduct medical costs attributable to Mr. Speltz if they
substantiated the amount deducted and established that the
amounts were ordinary and necessary and reasonable in amount.10
Whether Payments to Mr. Speltz Were Ordinary and Necessary
Business Expenses
Respondent argues that petitioners’ employee benefit program
expense should be disallowed because petitioners deducted, in
part, personal expenses, which are not ordinary and necessary
business expenses and are therefore not deductible. Petitioners
aver that the amounts deducted were ordinary and necessary
business expenses and that the personal characteristics of the
activities Mr. Speltz performed should not supplant the
predominant business purpose of those activities.
Taxpayers may deduct all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on a trade
10We previously determined that an employer-employee
relationship existed.
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