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carrying on a trade or business. Sec. 162(a). Ordinary and
necessary business expenses include the reimbursement of employee
benefit plan expenses for expenses the employee pays or incurs.
Sec. 162(a)(1); sec. 1.162-10, Income Tax Regs. Employee benefit
plan expense reimbursements are deductible if they are paid to a
bona fide employee, they are an ordinary and necessary expense,
the amount deducted is substantiated,4 the amount deducted was
reasonable in amount, and the payment was in fact purely for
services. Sec. 162; secs. 1.162-7(a), 1.162-10(a), Income Tax
Regs.
Respondent argues that petitioners are not entitled to a
business expense deduction for the employee benefit plan expense
reimbursement because they failed to prove that the total
compensation paid to Mrs. Francis in 2001 was reasonable in
amount. We agree.
The deductibility of employee benefit plan expenses
generally requires proof, in the first instance, of an employer-
employee relationship. Respondent concedes that Mr. Francis had
the right to control5 Mrs. Francis in her performance of services
4Respondent concedes that the amount deducted was
substantiated.
5Although no single factor is controlling, the “right to
control” the activities of the individual whose status is in
issue is the “fundamental test” of whether an employer-employee
relationship exists. Profl. & Executive Leasing, Inc. v.
Commissioner, 89 T.C. 225, 232 (1987), affd. 862 F.2d 751, 753
(continued...)
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