Ivan G. and Rosemary J. Snorek - Page 3

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          would then audit the transmittal form and issue a statement to              
          Snorek Upholstery stating the amount it should reimburse the                
          eligible employee.                                                          
               Mrs. Snorek, as owner and operator of Snorek Upholstery, and           
          petitioner Ivan Snorek (Mr. Snorek) executed a written employment           
          agreement near the end of 2000, in which Mr. Snorek agreed to               
          perform repair and recovery services for Snorek Upholstery                  
          beginning in 2001.  The employment agreement specified that Mr.             
          Snorek would annually receive $480 in wages and would be an                 
          eligible employee under the plan.                                           
               Mr. Snorek performed services for Snorek Upholstery in 2001            
          and was paid $480.  Near the end of 2001, Mr. Snorek submitted an           
          employee benefit expense transmittal form (transmittal form) to             
          the plan, claiming that he had paid $10,355 of eligible medical             
          expenses during the year.  Of this amount, $3,906 was                       
          attributable to premiums paid on a Blue Cross/Blue Shield                   
          individual health insurance policy for Mrs. Snorek.  The record             
          does not contain any evidence showing that Mr. Snorek paid the              
          health insurance premiums for Mrs. Snorek, or that he was                   
          reimbursed by Snorek Upholstery.                                            
               Petitioners filed a joint Federal income tax return for                
          2001.  Petitioners reported income and expenses from Snorek                 
          Upholstery on Schedule C, Profit or Loss From Business.                     
          Petitioners deducted $10,355 as an employee benefit plan expense.           






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