Peter F. & Maureen L. Speltz - Page 22

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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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