Frahm v. Comm'r

T.C. Memo. 2007-351
UNITED STATES TAX COURT
RALPH E. FRAHM & ERIKA C. FRAHM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15572-05. Filed November 27, 2007.
Frank W. Bastian and Reggie L. Wegner, for petitioners.
Henry N. Carriger, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined deficiencies of
$1,941, $2,984, and $2,293 in petitioners’ Federal income tax
(tax) for their taxable years 2000, 2001, and 2002, respectively.
We must decide whether petitioners are entitled for each of
their taxable years 2000, 2001, and 2002 to deduct under section
- 2 -
162(a)1 certain amounts in excess of those conceded by respondent
for “Employee benefit programs” that petitioners claimed in
Schedule F, Profit or Loss From Farming (Schedule F), included as
part of petitioners’ tax return for each of those years. We hold
that they are.
FINDINGS OF FACT
All of the facts in this case, which the parties submitted
under Rule 122, have been stipulated by the parties and are so
found except as stated below.
Petitioners resided in Newton, Iowa, at the time they filed
the petition in this case.
At all relevant times, petitioner Ralph E. Frahm (Mr. Frahm)
owned and operated a grain and livestock farm (farming business)
in Newton, Iowa.
During 2000, 2001, and 2002, the years at issue, Mr. Frahm
had one employee in his farming business, viz., his spouse
petitioner Erika Frahm (Ms. Frahm). During those years, Ms.
Frahm performed field jobs, cared for livestock, assisted with
machinery repairs, maintained bookkeeping records, and performed
certain other tasks that were usual and customary to Mr. Frahm’s
farming business. During each of the years 2000, 2001, and 2002,
Mr. Frahm paid Ms. Frahm annual wages of $3,000 for those ser-
1
All section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
- 3 -
vices, from which he withheld Social Security tax and Medicare
tax totaling $229.50.
On August 17, 1998, Mr. Frahm signed a preprinted form that
was an authorization to provide a medical reimbursement plan
under AgriPlan/BizPlan to eligible employees. The preprinted
form on which that authorization appeared stated in pertinent
part:
SECTION 1 - Employer Information
Business owner last name: First:
Frahm Ralph
* * * * * * *
Business name: Type of business: Check one:
Ralph Frahm Farming : AgriPlan 9 Biz
* * * * * * *
SECTION 2 - Eligibility Criteria
To be eligible for benefits, employee(s) must meet each of the
following requirements. * * *
: Part-time employees must work an average of 25 hours per
week. (maximum=25 * * *)
: Seasonal employees must work 7 months per year.
(maximum=7 * * *)
: Employees must be 25 years of age. (maximum=25)
: Employees hired prior to today (Current Employees) must have
been with employer for 0 months. (maximum=36)
: Employees hired after today (New Employees) must be with
employer for 36 months. (maximum=36)
SECTION 3 - Eligible Employees
Employees listed below meet all requirements of Section 2 and are
considered current employees as of the date of this agreement.
* * *
Employee Last Name First Name Social Security Number
1. Frahm Erika * * *
* * * * * * *
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SECTION 4 - Selection of Benefits
The benefits and amounts selected below will be offered to each
employee (and their family) listed in Section 3. * * * The
employer agrees to reimburse:
: Health Insurance Premium reimbursements up to $ ALL (may use
ALL).
: Out of Pocket medical reimbursements up to $5000.
9 Dental Insurance Premiums.
The benefits selected below will be offered to the employee only
(other family members excluded):
9 Employee Term life Insurance ($50,000 Maximum) 9 Employee
Disability
Insurance
SECTION 5 - Authorization and Payment
The undersigned employer [Mr. Frahm] hereby executes this
agreement on the 17 day of Aug, 1998 and the plan start date shall
be January 1st of this year * * * [Reproduced literally.]
During each of the years 2000, 2001, and 2002, pursuant to
the authorization that he signed to provide a medical reimburse-
ment plan under AgriPlan/AgriBiz, Mr. Frahm provided such a plan
(AgriPlan/AgriBiz medical reimbursement plan) for the benefit of
Ms. Frahm and her family (i.e., Ms. Frahm and her spouse Mr.
Frahm). At all relevant times, Ms. Frahm met the eligibility
requirements to receive benefits under that plan.
On a date not disclosed by the record prior to July 1, 2000,
Mr. Frahm completed a preprinted application form (Mr. Frahm’s
Wellmark Plan C application)2 in which he applied to
Wellmark/Blue Cross and Blue Shield of Iowa (Wellmark) for a so-
called Plan C health insurance policy to cover himself and Ms.
2
The title of Mr. Frahm’s Wellmark Plan C application is not
disclosed by the record.
- 5 -
Frahm. In that application, Mr. Frahm identified himself as
“Applicant” and Ms. Frahm as “Spouse”. The portion of Mr.
Frahm’s application entitled “Enrollment Information” stated in
pertinent part:
1. The Health Care Plan you are 2. This request for 3. This application
applying for is: (PLEASE CIRCLE ONE) coverage is for: is for: (check
Plan A Plan B Plan C[3] (check all that all that apply)
Plan D Plan E Plan F apply) 9 New Enrollment
Plan G Plan H : Self 9 Change
: Spouse 9 Adding/Removing
9 Child(ren) Dependents
* * * * * * *
5. How do you want to pay your premiums?
9 Direct Bill. If so, on what basis? 9 Quarterly 9 Semi-annually
9 Automatic Account Withdrawal. If so, on what basis? (Include a voided check.)
9 Monthly-1st of the month 9 Monthly-5th of the month 9 Quarterly 9 Semi-annually
From: 9 Checking or 9 Savings * * *
6. The amount you are submitting is: $ (One check or money order per application, made
payable to Wellmark, Inc.)
a. Will your employer be paying any part of the premium for this policy either directly or
through wage adjustments or other means of reimbursement? : No 9 Yes
If yes, explain:
b. Will your premium payments for this coverage be deductible on your federal income tax
return as a trade or business expense other than the special health insurance deduction
available to self-employed persons? : No 9 Yes
7. Qualifying previous coverage Date of termination of previous coverage:
Has this coverage been in effect for 12 consecutive months or more? 9 Yes 9 No
What type of coverage did you have? 9 Employer Group 9 Individual
9 Short Term Major Medical 9 Group Conversion 9 Other (please identify)
Who was your previous insurer? BC/BS If Blue Cross/Blue Shield (BCBS), give details
below.
Name of Contract Holder Ralph Frahm I.D. Number
Group or Employer Name FB Group Name of Blue Cross/Blue Shield Plan
: I want continuous coverage from my previous BCBS program. 9 I do not want continuous
coverage from my previous BCBS
program.
Wellmark approved Mr. Frahm’s Wellmark Plan C application
and issued a health insurance policy to him (Mr. Frahm’s Wellmark
Plan C policy) that covered himself and his spouse Ms. Frahm.
During 2000, Ms. Frahm paid the following premiums totaling
3
Mr. Frahm circled “Plan C” as the “Health Care Plan” for
which he was applying.
- 6 -
$6,252.604 for Mr. Frahm’s Wellmark Plan C policy on the dates
indicated by a check drawn on, or electronic transfers from, an
individual checking account that she maintained (Ms. Frahm’s
individual checking account):
Date of Payment Amount of Payment
06/22/2000 $1,042.10
08/08/2000 1,042.10
09/05/2000 1,042.10
10/06/2000 1,042.10
11/08/2000 1,042.10
12/05/2000 1,042.10
During 2000, Ms. Frahm paid by an electronic transfer from
Ms. Frahm’s individual checking account premiums of $55.46 for a
health insurance policy issued in Ms. Frahm’s name by American
Association of Retired Persons (Ms. Frahm’s AARP policy). During
that year, Ms. Frahm paid by a check drawn on Ms. Frahm’s indi-
vidual checking account premiums of $548 for a cancer insurance
policy issued in Ms. Frahm’s name by Conseco Health Insurance
Company (Ms. Frahm’s Conseco policy).
During 2000, in addition to the premiums that Ms. Frahm paid
for Mr. Frahm’s Wellmark Plan C policy, Ms. Frahm’s AARP policy,
and Ms. Frahm’s Conseco policy, Ms. Frahm paid a total of $3,325
4
The parties stipulated that during 2000 Ms. Frahm paid to
Wellmark premiums totaling $6,254 for Mr. Frahm’s Wellmark Plan C
policy. That stipulation is clearly contrary to the facts that
we have found are established by the record, and we shall disre-
gard it. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
195 (1989). The record establishes, and we have found, that
during 2000 Ms. Frahm paid directly to Wellmark premiums totaling
$6,252.60 for Mr. Frahm’s Wellmark Plan C policy.
- 7 -
for certain medical expenses not covered by insurance (nonin-
surance medical expenses).5
Ms. Frahm submitted to AgriPlan/BizPlan a request for
reimbursement of medical expenses for 2000 totaling $10,182.
That submission consisted of a preprinted form entitled “Employee
Benefit Expense Transmittal” (Ms. Frahm’s 2000 employee benefit
expense form) that Ms. Frahm had completed. That form, which Ms.
Frahm signed as employee, stated in pertinent part:
EMPLOYEE STATUS
Gross W-2 wage to employee during
2000 (other than benefits): 3000.00
* * * * * * *
BENEFIT TOTALS
1 Medical/Health Insurance Premium
[6]
(from Section 2) 6857.00
* * * * * * *
7 Medical expenses from 2000 plan year
[7]
(from Sections 3 and 4) 2082.00
5
The noninsurance medical expenses paid by Ms. Frahm during
2000 are not at issue in this case.
6
The amount shown is the amount, rounded to the nearest
dollar, of the total (i.e., $6,857.06) of all of the premiums
shown in “Section 2. Insurance Benefits” quoted below. But see
infra note 9.
7
We have not attempted to determine whether the “Medical
expenses from 2000 plan year” of $2,082 shown under “BENEFIT
TOTALS” in Ms. Frahm’s 2000 employee benefit form, which con-
sisted solely of noninsurance medical expenses, is the correct
total of all of the noninsurance medical expenses listed in
“Section 3 Medical Expenses" and “Section 4 Medical Expenses” of
that form. That is because those expenses are not at issue in
this case. See supra note 5.
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8 Medical expenses from 1999 plan year
[8]
(from Section 5) 1243.00
* * * * * * *
READ, SIGN AND DATE
To the best of my [Ms. Frahm’s] knowledge and belief, my
statements in this transmittal are complete and true. I am
claiming only eligible expenses incurred during the applicable
plan year(s) and for eligible plan participants. I certify that
any part or all of these expenses have not been reimbursed
previously under this or any other benefit plan and have not been
previously claimed as a tax deduction.
* * * * * * *
Section 2. Insurance Benefits
* * * * * * *
Major Medical/Health Insurance
Insured Insurance Period of Annual Amount Last Date
Company Coverage Paid Paid
Wellmark Blue total
[9]
Cross & Blue months 06 6253.60 12/01/00
Shield
Conseco total
Health Ins Co months 12 548.00 04/07/00
(Cancer)
AARP Health total
months 01 55.46 01/01/00
8
We have not attempted to determine whether the “Medical
expenses from 1999 plan year” of $1,243 shown under “BENEFIT
TOTALS” in Ms. Frahm’s 2000 employee benefit form, which con-
sisted solely of noninsurance medical expenses, is the correct
total of all of the noninsurance medical expenses listed in
“Section 5 Medical Expenses" of that form. That is because those
expenses are not at issue in this case.
9
We have found that during 2000 Ms. Frahm paid premiums
totaling $6,252.60 for Mr. Frahm’s Wellmark Plan C policy. See
supra note 4. The record does not disclose why Ms. Frahm’s 2000
employee benefit expense form requested reimbursement of
$6,253.60 of premiums for that policy, which is more than the
amount of premiums that we have found she paid for that policy.
- 9 -
During 2000, Mr. Frahm, as Ms. Frahm’s employer, issued to
Ms. Frahm certain checks that were drawn on a joint business
checking account (business checking account) that Mr. Frahm
maintained for the payment of expenses for, and the receipt of
income from, his farming business. Mr. Frahm issued those checks
to pay Ms. Frahm certain wages and to reimburse her for the
premiums for Mr. Frahm’s Wellmark Plan C policy, the premiums for
Ms. Frahm’s AARP policy, the premiums for Ms. Frahm’s Conseco
policy, and the noninsurance medical expenses that Ms. Frahm paid
during that year.10
On a date not disclosed by the record prior to February 1,
2001, Mr. Frahm decided to terminate the Wellmark Plan C policy
and completed a preprinted application form entitled “Application
for Individual Health Benefit Plans Blue Care, Secure Blue, and
Secure Blue Select” (Mr. Frahm’s Wellmark Secure Blue Select
application). In that application, Mr. Frahm applied to Wellmark
10
The parties stipulated that Mr. Frahm issued to Ms. Frahm
certain checks included in the record that were drawn on the
business checking account as payment of her wages for 2000 and as
reimbursement for the insurance premiums and the noninsurance
medical expenses that she paid during that year. We have found
that during 2000 Ms. Frahm paid premiums of $6,252.60, and not
the $6,254 that the parties stipulated she paid, for Mr. Frahm’s
Wellmark Plan C policy. See supra note 4. We are unable to
ascertain from the record whether Mr. Frahm, as Ms. Frahm’s
employer, reimbursed Ms. Frahm for the $6,252.60 of premiums that
we have found she paid for Mr. Frahm’s Wellmark Plan C policy
during 2000 or whether he reimbursed her for the $6,253.60 of
premiums for that policy requested in Ms. Frahm’s 2000 employee
benefit expense form.
- 10 -
for a so-called Secure Blue Select plan to cover himself and Ms.
Frahm. In Mr. Frahm’s Wellmark Secure Blue Select application,
Mr. Frahm identified himself as “Applicant” and Ms. Frahm as
“Spouse”. The portion of Mr. Frahm’s application entitled
“Enrollment Information” stated in pertinent part:
1. You are applying for: (check one) Do you want the optional maternity rider? (This
9 Blue Care 9 Secure Blue : Secure Blue rider is only available at your initial
Select enrollment.)
9 Yes : No
2. This request for coverage is for: (check all 3. This application is for: (check
that apply) all that apply)
: Self : Spouse 9 Child(ren) : New Enrollment 9 Adding/Removing
Dependents
4. How do you want to pay your premiums? 9 Automatic Account Withdrawal. If so, on what
9 Direct Bill. If so, on what basis? basis? (Include a voided check.)
9 Quarterly 9 Semi-annually 9 Monthly-what date? 9 1st of the month or
9 Annually 9 5th of the month
9 Quarterly 9 Semi-annually 9 Annually
From:
9 Checking 9 Savings
5. The amount you are submitting is: $ 742.20 (Make check payable to Wellmark Blue Cross and
Blue Shield of Iowa.)
Will your employer be paying any part of the premium for this coverage either directly or
through wage adjustments or other means of reimbursement? 9 Yes 9 No
Will your premium payments for this coverage be deductible on your federal income tax return
as a trade or business expense other than the special health insurance deduction available
to self-employed persons? 9 Yes 9 No
Wellmark approved Mr. Frahm’s Wellmark Secure Blue Select
application and issued a health insurance policy to him (Mr.
Frahm’s Wellmark Secure Blue Select policy) that covered himself
and his spouse Ms. Frahm.
During 2001, Ms. Frahm paid the following premiums totaling
$9,281.8011 for Mr. Frahm’s Wellmark Secure Blue Select policy on
11
The parties stipulated that during 2001 Ms. Frahm paid to
Wellmark premiums totaling $8,164.20 for Mr. Frahm’s Wellmark
Secure Blue Select policy. That stipulation is clearly contrary
(continued...)
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the dates indicated by electronic transfers from Ms. Frahm’s
individual checking account:
Date of Payment Amount of Payment
01/05/2001 $1,117.60
02/05/2001 1,117.60
03/05/2001 366.80
04/05/2001 742.20
05/07/2001 742.20
06/05/2001 742.20
07/05/2001 742.20
08/06/2001 742.20
09/05/2001 742.20
10/05/2001 742.20
11/05/2001 742.20
12/05/2001 742.20
During 2001, Ms. Frahm paid by a check drawn on her individ-
ual checking account premiums of $548 for Ms. Frahm’s Conseco
policy.
During 2001, Mr. Frahm, as Ms. Frahm’s employer, paid by
checks drawn on the business checking account premiums of $575.96
for a long-term care insurance policy issued in Ms. Frahm’s name
by American Fidelity Assurance Company (Ms. Frahm’s long-term
care policy). During that year, Mr. Frahm, as Ms. Frahm’s
employer, also paid by a check drawn on the business checking
11
(...continued)
to the facts that we have found are established by the record,
and we shall disregard it. See Cal-Maine Foods, Inc. v. Commis-
sioner, 93 T.C. 195. The record establishes, and we have
found, that during 2001 Ms. Frahm paid directly to Wellmark
premiums totaling $9,281.80 for Mr. Frahm’s Wellmark Secure Blue
Select policy.
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account premiums of $583.60 for a long-term care insurance policy
issued in Mr. Frahm’s name by American Fidelity Assurance Company
(Mr. Frahm’s long-term care policy).
During 2001, in addition to the premiums that Ms. Frahm paid
for Mr. Frahm’s Wellmark Secure Blue Select policy and Ms.
Frahm’s Conseco policy, Ms. Frahm paid a total of $5,076 for
certain noninsurance medical expenses.12
Ms. Frahm submitted to AgriPlan/BizPlan a request for
reimbursement of medical expenses for 2001 totaling $15,188.
That submission consisted of a preprinted form entitled “Employee
Benefit Expense Transmittal” (Ms. Frahm’s 2001 employee benefit
expense form) that Ms. Frahm had completed. That form, which Ms.
Frahm signed as employee, stated in pertinent part:
EMPLOYEE STATUS
Gross W-2 wage to employee during
2001 (other than benefits): 3000.00
* * * * * * *
BENEFIT TOTALS
1 Medical/Health Insurance Premium
[13]
(from Section 2) 8712.00
2 Employee’s Long Term Care Insurance
12
The noninsurance medical expenses paid by Ms. Frahm during
2001 are not at issue in this case.
13
The amount shown is the amount, rounded to the nearest
dollar, of the total (i.e., $8,712.20) of all of the premiums
shown under the heading “Major Medical/Health Insurance” in
“Section 2. Insurance Benefits” quoted below. But see infra
note 18.
- 13 -
[14]
Premium (from Section 2) 576.00
3 Spouse’s Long Term Care Insurance
[15]
Premium (from Section 2) 584.00
* * * * * * *
7 Medical expenses from 2001 plan year
[16]
(from Sections 3 and 4) 3409.00
* * * * * * *
8 Medical expenses from 2000 plan year
[17]
(from Section 5) 1837.00
* * * * * * *
READ, SIGN AND DATE
To the best of my [Ms. Frahm’s] knowledge and belief, my
statements in this transmittal are complete and true. I am
claiming only eligible expenses incurred during the applicable
plan year(s) and for eligible plan participants. I certify that
any part or all of these expenses have not been reimbursed
previously under this or any other benefit plan and have not been
14
The amount shown is the amount, rounded to the nearest
dollar, of the premiums (i.e., $575.96) shown under the heading
“Long Term Care Insurance” for the “Employee” in “Section 2.
Insurance Benefits” quoted below.
15
The amount shown is the amount, rounded to the nearest
dollar, of the premiums (i.e., $583.60) shown under the heading
“Long Term Care Insurance” for the “Spouse” in “Section 2.
Insurance Benefits” quoted below.
16
We have not attempted to determine whether the “Medical
expenses from 2001 plan year” of $3,409 shown under “BENEFIT
TOTALS” in Ms. Frahm’s 2001 employee benefit form, which con-
sisted solely of noninsurance medical expenses, is the correct
total of all of the noninsurance medical expenses listed in
“Section 3 Medical Expenses” and “Section 4 Medical Expenses” of
that form. That is because those expenses are not at issue in
this case. See supra note 12.
17
We have not attempted to determine whether the “Medical
expenses from 2000 plan year” of $1,837 shown under “BENEFIT
TOTALS” in Ms. Frahm’s 2001 employee benefit form, which con-
sisted solely of noninsurance medical expenses, is the correct
total of all of the noninsurance medical expenses listed in
“Section 5 Medical Expenses” of that form. That is because those
expenses are not at issue in this case. See supra note 5.
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previously claimed as a tax deduction.
* * * * * * *
Section 2. Insurance Benefits
* * * * * * *
Major Medical/Health Insurance
Insured Insurance Period of Annual Amount Last Date
Company Coverage Paid Paid
Wellmark total
[18]
BC & BS months 12 8164.20 12/05/01
Conseco total
Health Ins months 12 548.00 04/05/01
Co. (Cancer)
* * * * * * *
Long Term Care Insurance
Insured Insurance Period of Annual Amount Last Date
Company Coverage Paid Paid
Employee American total
Fidelity months 12 575.96 02/01/01
Assurance Co.
Spouse American total
Fidelity months 12 583.60 02/01/01
Assurance Co.
During 2001, Mr. Frahm, as Ms. Frahm’s employer, issued to
Ms. Frahm certain checks that were drawn on the business checking
account to pay her certain wages and to reimburse her for the
premiums for Mr. Frahm’s Wellmark Secure Blue Select policy, the
premiums for Ms. Frahm’s Conseco policy, and the noninsurance
18
We have found that during 2001 Ms. Frahm paid premiums
totaling $9,281.80 for Mr. Frahm’s Wellmark Secure Blue Select
policy. See supra note 11. The record does not disclose why Ms.
Frahm’s 2001 employee benefit expense form requested reimburse-
ment of only $8,164.20 of the premiums paid for that policy.
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medical expenses that she paid during that year.19
During 2002, Ms. Frahm paid the following premiums totaling
$9,529.20 for Mr. Frahm’s Wellmark Secure Blue Select policy on
the dates indicated by electronic transfers from Ms. Frahm’s
individual checking account:
Date of Payment Amount of Payment
01/07/2002 $794.10
02/05/2002 794.10
03/05/2002 794.10
04/05/2002 794.10
05/06/2002 794.10
06/05/2002 794.10
07/05/2002 794.10
08/05/2002 794.10
09/05/2002 794.10
10/07/2002 794.10
11/05/2002 794.10
12/05/2002 794.10
During 2002, Ms. Frahm paid by checks drawn on her individ-
ual checking account premiums of $548 for Ms. Frahm’s Conseco
policy, premiums of $575.96 for Ms. Frahm’s long-term care
19
The parties stipulated that Mr. Frahm issued to Ms. Frahm
certain checks included in the record that were drawn on the
business checking account as payment of her wages for 2001 and as
reimbursement for the insurance premiums and the noninsurance
medical expenses that she paid during that year. We have found
that during 2001 Ms. Frahm paid premiums of $9,281.80, and not
the $8,164.20 that the parties stipulated she paid, for Mr.
Frahm’s Wellmark Secure Blue Select policy. See supra note 11.
We are unable to ascertain from the record whether Mr. Frahm, as
Ms. Frahm’s employer, reimbursed Ms. Frahm for the $9,281.80 of
premiums that we have found she paid for Mr. Frahm’s Wellmark
Secure Blue Select policy during 2001 or whether he reimbursed
her for the $8,164.20 of premiums for that policy requested in
Ms. Frahm’s 2001 employee benefit expense form.
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policy, and premiums of $523.60 for Mr. Frahm’s long-term care
policy.
During 2002, in addition to the premiums that Ms. Frahm paid
for Mr. Frahm’s Wellmark Secure Blue Select policy, Ms. Frahm’s
Conseco policy, Ms. Frahm’s long-term care policy, and Mr.
Frahm’s long-term care policy, Ms. Frahm paid a total of $2,784
for certain noninsurance medical expenses.20
Ms. Frahm submitted to AgriPlan/BizPlan a request for
reimbursement of medical expenses for 2002 totaling $13,961.
That submission consisted of a preprinted form entitled “Employee
Benefit Expense Transmittal” (Ms. Frahm’s 2002 employee benefit
expense form) that Ms. Frahm had completed. That form stated in
pertinent part:
EMPLOYEE STATUS
Gross W-2 wage to employee during
2002 (other than benefits): 3000.00
* * * * * * *
BENEFIT TOTALS
Medical/Health Insurance Premium
[21]
(from Section 2) 10077.00
Employee’s Long Term Care Insurance
20
The noninsurance medical expenses paid by Ms. Frahm during
2002 are not at issue in this case.
21
The amount shown is the amount, rounded to the nearest
dollar, of the total (i.e., $10,077.20) of all of the premiums
shown under the heading “Major Medical/Health Insurance” in
“Section 2. Insurance Benefits” quoted below.
- 17 -
[22]
Premium (from Section 2) 576.00
Spouse’s Long Term Care Insurance
[23]
Premium (from Section 2) 524.00
* * * * * * *
Medical expenses from Jan to Dec 2002
[24]
(from Sections 3 & 4) 2606.00
* * * * * * *
Section 2. Insurance Benefits
* * * * * * *
Major Medical/Health Insurance
Insured Insurance Period of Annual Amount Last Date
Company Coverage Paid Paid
Wellmark total
BC & BS months 12 9529.20 12/05/02
Conseco total
Health Ins months 12 548.00 04/08/02
Co. (Cancer)
22
The amount shown is the amount, rounded to the nearest
dollar, of the premiums (i.e., $575.96) shown under the heading
“Long Term Care Insurance” for the “Employee” in “Section 2.
Insurance Benefits” quoted below.
23
The amount shown is the amount, rounded to the nearest
dollar, of the premiums (i.e., $523.60) shown under the heading
“Long Term Care Insurance” for the “Spouse” in “Section 2.
Insurance Benefits” quoted below.
24
The parties stipulated that the amount of “Medical ex-
penses from Jan to Dec 2002" shown under “BENEFIT TOTALS” in Ms.
Frahm’s 2002 employee benefit expense form, which consisted
solely of noninsurance medical expenses, should have been shown
in that form as $2,784. We have not attempted to determine
whether that stipulated amount is the correct total of all of the
noninsurance medical expenses listed in “Section 3 Medical
Expenses” and “Section 4 Medical Expenses” of Ms. Frahm’s 2002
employee benefit expense form. That is because those expenses
are not at issue in this case. See supra note 20.
- 18 -
Long Term Care Insurance
Insured Insurance Period of Annual Amount Last Date
Company Coverage Paid Paid
Employee American total
Fidelity months 12 575.96 02/16/02
Assurance Co.
Spouse American total
Fidelity months 12 523.60 02/16/02
Assurance Co.
During 2002, Mr. Frahm, as Ms. Frahm’s employer, issued to
Ms. Frahm certain checks that were drawn on the business checking
account to pay her certain wages and to reimburse her for the
premiums for Mr. Frahm’s Wellmark Secure Blue Select policy, the
premiums for Ms. Frahm’s Conseco policy, the premiums for Ms.
Frahm’s long-term care policy, the premiums for Mr. Frahm’s long-
term care policy, and the noninsurance medical expenses that she
paid during that year.
Petitioners timely filed Form 1040, U.S. Individual Income
Tax Return (return), for each of their taxable years 2000 (2000
return), 2001 (2001 return), and 2002 (2002 return). Petitioners
included Schedule F as part of the 2000 return (2000 Schedule F),
the 2001 return (2001 Schedule F), and the 2002 return (2002
Schedule F). Each such Schedule F pertained to Mr. Frahm’s
farming business. Petitioners claimed, inter alia, deductions of
$10,182, $14,948, and $13,961 for expenses for “Employee benefit
programs” in the 2000 Schedule F, the 2001 Schedule F, and the
2002 Schedule F, respectively.
On June 7, 2005, respondent issued to petitioners a notice
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of deficiency (notice) with respect to their taxable years 2000,
2001, and 2002. In that notice, respondent, inter alia, deter-
mined to disallow the deductions of $10,182, $14,948, and $13,961
that petitioners claimed in the 2000 Schedule F, the 2001 Sched-
ule F, and the 2002 Schedule F, respectively, for “Employee
benefit programs” because “it has not been established that these
amounts were ordinary and necessary business expenses, or were
expended for the purpose designated.” In the notice, respondent
also determined to allow petitioners deductions of $6,109,
$8,969, and $9,773 for their taxable years 2000, 2001, and 2002,
respectively, for “Self-Employed Health Insurance” because “you
are allowed the deduction for self-employed health insurance
premiums.”
OPINION
We first address section 7491(a). The parties agree that
section 7491(a) is applicable in the instant case. The parties
disagree over whether the burden of proof has shifted to respon-
dent under that section. We need not, and we shall not, address
that disagreement. That is because resolution of the issue
presented here does not depend on who has the burden of proof.
We turn now to whether petitioners are entitled to deduct
under section 162(a) certain amounts in excess of the amounts
conceded by respondent for “Employee benefit programs” that
petitioners claimed in the 2000 Schedule F, the 2001 Schedule F,
- 20 -
and the 2002 Schedule F, respectively.25 A taxpayer, including
25
With respect to the $10,182 deduction that petitioners
claimed for “Employee benefit programs” in the 2000 Schedule F,
respondent concedes that petitioners are entitled to deduct
$3,928 of those expenses. That conceded amount, which has been
rounded to the nearest dollar, consists of premiums of $55.46 for
Ms. Frahm’s AARP policy, premiums of $548 for Ms. Frahm’s Conseco
policy, and all noninsurance medical expenses of $3,325. The
disallowed portion (i.e., $6,254) pertains to the premiums that
the parties stipulated were paid for Mr. Frahm’s Wellmark Plan C
policy. See supra note 4. In the notice, respondent determined
that although petitioners are not entitled to deduct in the 2000
Schedule F the insurance premiums paid during 2000 for Mr.
Frahm’s Wellmark Plan C policy, petitioners are entitled to
deduct under sec. 162(l) 60 percent of those premiums.
With respect to the $14,948 deduction that petitioners
claimed for “Employee benefit programs” in the 2001 Schedule F,
respondent concedes that petitioners are entitled to deduct
$6,200 of those expenses. That conceded amount, which has been
rounded to the nearest dollar, consists of premiums of $548 for
Ms. Frahm’s Conseco policy, premiums of $575.96 for Ms. Frahm’s
long-term care policy, and all noninsurance medical expenses of
$5,076. The disallowed portion (i.e., $8,748) pertains to the
premiums that the parties stipulated were paid for Mr. Frahm’s
Wellmark Secure Blue Select policy and Mr. Frahm’s long-term care
policy. See supra note 11. In the notice, respondent determined
that although petitioners are not entitled to deduct in the 2001
Schedule F the insurance premiums paid during 2001 for Mr.
Frahm’s Wellmark Secure Blue Select policy and Mr. Frahm’s long-
term care policy, petitioners are entitled to deduct under sec.
162(l) 60 percent of those premiums.
With respect to the $13,961 deduction that petitioners
claimed for “Employee benefit programs” in the 2002 Schedule F,
respondent concedes that petitioners are entitled to deduct
$3,908 of those expenses. That conceded amount, which has been
rounded to the nearest dollar, consists of premiums of $548 for
Ms. Frahm’s Conseco policy, premiums of $575.96 for Ms. Frahm’s
long-term care policy, and all noninsurance medical expenses of
$2,784. The disallowed portion (i.e., $10,053) pertains to the
premiums paid for Mr. Frahm’s Wellmark Secure Blue Select policy
and Mr. Frahm’s long-term care policy. In the notice, respondent
determined that although petitioners are not entitled to deduct
in the 2002 Schedule F the insurance premiums paid during 2002
(continued...)
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the owner of an unincorporated business, is entitled to deduct
all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on a trade or business, sec. 162(a),
including any amount paid to an employee pursuant to an employee
benefit plan for an expense that such employee pays or incurs,
sec. 162(a)(1); sec. 1.162-10, Income Tax Regs.26 However, a
taxpayer who owns an unincorporated business is not entitled to
deduct health insurance costs that he pays or incurs for himself,
his spouse, and his dependents except as provided in section
162(l).27
25
(...continued)
for Mr. Frahm’s Wellmark Secure Blue Select policy and Mr.
Frahm’s long-term care policy, petitioners are entitled to deduct
under sec. 162(l) 70 percent of those premiums.
26
See Albers v. Commissioner, T.C. Memo. 2007-144; Francis
v. Commissioner, T.C. Memo. 2007-33.
27
As applicable here, sec. 162(l)(1) provides that a tax-
payer is entitled to deduct 60 percent of any amount that such
taxpayer paid or incurred during 2000 and 2001 and 70 percent of
any amount that such taxpayer paid or incurred during 2002 for
insurance that constituted medical care for such taxpayer, such
taxpayer’s spouse, and such taxpayer’s children. Sec. 162(l)
provides in pertinent part:
SEC. 162. TRADE OR BUSINESS EXPENSES.
* * * * * * *
(l) Special Rules for Health Insurance Costs of
Self-Employed Individuals.--
(1) Allowance of deduction.--
(A) In general.–-In the case of an indi-
(continued...)
- 22 -
It is petitioners’ position that they are entitled for each
of the years at issue to deduct under section 162(a) as ordinary
and necessary business expenses the total amount of insurance
premiums that remain at issue.28 In support of their position,
petitioners argue that Mr. Frahm, as Ms. Frahm’s employer, paid
such total amount to Ms. Frahm, directly (i.e., reimbursed Ms.
Frahm for the insurance premiums that she paid to the insurers in
question) or indirectly (i.e., paid the insurance premiums to the
insurer in question), pursuant to a health plan within the
meaning of section 105(b).
27
(...continued)
vidual who is an employee within the meaning
of section 401(c)(1), there shall be allowed
as a deduction under this section an amount
equal to the applicable percentage of the
amount paid during the taxable year for in-
surance which constitutes medical care for
the taxpayer, his spouse, and dependents.
(B) Applicable percentage.–-For purposes
of subparagraph (A), the applicable percent-
age shall be determined under the following
table:
For taxable years beginning The applicable
in calendar year-- percentage is--
1999 through 2001 . .. . . . .. . . .60
2002 . . . . . . . . .. . . . . . . .70
The legislative history under sec. 162(l) establishes that
that statute was enacted “to reduce the disparity between the tax
treatment of owners of incorporated and unincorporated busi-
nesses.” S. Rept. 104-16, at 11 (1995); see also H. Rept. 104-
32, at 7-8 (1995).
28
See supra note 25.
- 23 -
It is respondent’s position that the insurance premiums that
remain at issue are personal expenses and therefore are not
deductible as ordinary and necessary business expenses under
section 162(a). In support of respondent’s position, respondent
argues:
Employee Benefit Plan expenses claimed on the Schedule
F are deductible as ordinary and necessary expenses
paid pursuant to an employee benefit plan if the medi-
cal and insurance expenses are attributable to the
employee.
* * * * * * *
Respondent does not dispute the existence of an
agreement between Ralph Frahm, as employer, and Erika
Frahm, as employee, that provided that the employer
would provide health insurance benefits to the em-
ployee. Respondent does not dispute that Erika Frahm
was an employee of Ralph Frahm. Respondent does not
dispute that Erika Frahm worked sufficient hours at a
sufficient wage rate to qualify for health insurance
benefits. Respondent does dispute that the actual
health insurance policy purchased by petitioners, in
Ralph Frahm’s name, which provided coverage for Erika
Frahm, was an ordinary and necessary business expense.
* * * Petitioners’ expenses bore no relation to
Ralph Frahm’s farming business. His only employee
received the health benefits giving rise to the dis-
puted expenses by virtue of her marital relationship
with Ralph Frahm, and not by virtue of the employment
relationship.
* * * The family relationship - not the employment
relationship - was the means by which the health insur-
ance coverage reached Erika Frahm. Erika Frahm would
not have received the benefit of health insurance
coverage under the policy purchased if she had not been
Ralph Frahm’s wife. But, she would have received the
benefit as his wife regardless of whether she was Ralph
Frahm’s employee.
* * * * * * *
- 24 -
Ralph Frahm provided benefits to the wrong person
when petitioners bought a health insurance policy with
Ralph, instead of with his employee, Erika, as the
primary insured. Petitioners fail to meet the require-
ments of I.R.C. § 162(a). Petitioners claim the dis-
puted expense as a business expense in the nature of
compensation for services rendered. The health insur-
ance policy was taken out in Ralph Frahm’s name. While
his wife benefited incidentally from this, as his
covered spouse under the policy, it can hardly be said
that she was compensated by petitioners buying insur-
ance for Ralph Frahm and his dependents. * * * [Repro-
duced literally.]
As we understand respondent’s position, respondent is
arguing that if an employer maintains a health plan described in
section 105 that covers one or more employees, such employee(s)’
spouse(s), and such employee(s)’ dependents, only the payments
that the employer makes for the medical expenses of the em-
ployee(s), and not the payments that the employer makes for the
medical expenses of the employee(s)’ spouse(s) and dependents,
constitute payments made pursuant to such a plan. Consequently,
according to respondent, any payment that the employer makes for
the medical expenses of the employee(s)’ spouse(s) and dependents
are not payments made to such employee(s) pursuant to an employee
benefit plan within the meaning of section 1.162-10, Income Tax
Regs. We disagree.
Section 105(b) provides in pertinent part:
- 25 -
SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH
PLANS.
* * * * * * *
(b) Amounts Expended for Medical Care.–-
* * * gross income does not include amounts
referred to in subsection (a)[29] if such
amounts are paid, directly or indirectly, to
the taxpayer to reimburse the taxpayer for
expenses incurred by him for the medical care
(as defined in section 213(d)) of the tax-
payer, his spouse, and his dependents
* * *.[30] [Emphasis added.]
Section 105(b) excludes from gross income amounts referred to in
section 105(a) that an employer pays, directly or indirectly, to
an employee in order to reimburse the employee for expenses for
the medical care, as defined in section 213(d), of not only the
employee, but also the employee’s spouse and dependents.
During the years at issue, pursuant to the AgriPlan/AgriBiz
medical reimbursement plan, Mr. Frahm, as Ms. Frahm’s employer,
29
Sec. 105(a) provides:
(a) Amounts Attributable to Employer
Contributions.--Except as otherwise provided in this
section, amounts received by an employee through acci-
dent or health insurance for personal injuries or
sickness shall be included in gross income to the
extent such amounts (1) are attributable to contribu-
tions by the employer which were not includible in the
gross income of the employee, or (2) are paid by the
employer.
30
For purposes of sec. 105(b), expenses for medical care
include amounts paid as premiums for insurance covering medical
care referred to in sec. 213(d)(1)(A) and (B) and for any quali-
fied long-term care insurance contract as defined in sec.
7702B(b). Sec. 213(d)(1)(D).
- 26 -
paid, directly or indirectly, to Ms. Frahm certain amounts for
premiums for various insurance policies covering herself, her
spouse Mr. Frahm, and/or both of them.31 Respondent concedes the
deductibility under section 162(a) of the amounts of such premi-
ums that Mr. Frahm, as Ms. Frahm’s employer, paid, directly or
indirectly, to Ms. Frahm for the insurance policies issued in her
name and covering only her. Respondent disputes only the deduct-
ibility under section 162(a) of the amounts of such premiums that
Mr. Frahm, as Ms. Frahm’s employer, paid, directly or indirectly,
to Ms. Frahm for the insurance policies issued in his name and
covering only him or covering him and her.32
We consider first the respective amounts that Mr. Frahm, as
Ms. Frahm’s employer, paid during the years at issue directly to
Ms. Frahm in order to reimburse her for the premiums that she
paid during those years for the policies issued in her spouse’s
(i.e., Mr. Frahm’s) name. On the record before us, we find that,
pursuant to the AgriPlan/AgriBiz medical reimbursement plan, Mr.
Frahm, as Ms. Frahm’s employer, paid directly to Ms. Frahm
certain amounts (1) during 2000 in order to reimburse her for the
premiums that she paid during that year for Mr. Frahm’s Wellmark
Plan C policy, (2) during 2001 in order to reimburse her for the
31
Respondent does not dispute that the AgriPlan/AgriBiz
medical reimbursement plan constitutes a health plan described in
sec. 105.
32
See supra note 25.
- 27 -
premiums that she paid during that year for Mr. Frahm’s Wellmark
Secure Blue Select policy, and (3) during 2002 in order to
reimburse her for the premiums that she paid during that year for
Mr. Frahm’s Wellmark Secure Blue Select policy and Mr. Frahm’s
long-term care policy.33 See sec. 105(b). On that record, we
further find that the respective amounts that Mr. Frahm, as Ms.
Frahm’s employer, paid pursuant to the AgriPlan/AgriBiz medical
reimbursement plan directly to Ms. Frahm (1) during 2000 in order
to reimburse her for the premiums that she paid for Mr. Frahm’s
Wellmark Plan C policy, (2) during 2001 in order to reimburse her
for the premiums that she paid for Mr. Frahm’s Wellmark Secure
Blue Select policy, and (3) during 2002 in order to reimburse her
for the premiums that she paid for Mr. Frahm’s Wellmark Secure
Blue Select policy and Mr. Frahm’s long-term care policy consti-
tute ordinary and necessary business expenses of Mr. Frahm’s
farming business within the meaning of section 162(a).34 See
sec. 162(a)(1); sec. 1.162-10, Income Tax Regs.
We next consider the premiums that Mr. Frahm, as Ms. Frahm’s
employer, paid during 2001 to American Fidelity Assurance Company
33
The Court directs the parties to determine as part of the
computations under Rule 155 the respective amounts that Mr.
Frahm, as Ms. Frahm’s employer, paid directly to Ms. Frahm during
2000 and 2001 in order to reimburse her for the premiums that she
paid during those respective years for Mr. Frahm’s Wellmark Plan
C policy and Mr. Frahm’s Wellmark Secure Blue Select policy. See
supra notes 10 and 19.
34
See supra note 33.
- 28 -
for Mr. Frahm’s long-term care policy. Section 1.105-2, Income
Tax Regs., provides:
If the taxpayer incurs an obligation for medical care,
payment to the obligee in discharge of such obligation
shall constitute indirect payment to the taxpayer as
reimbursement for medical care. Similarly, payment to
or on behalf of the taxpayer’s spouse or dependents
shall constitute indirect payment to the taxpayer.
During 2001, pursuant to the AgriPlan/AgriBiz medical
reimbursement plan, Mr. Frahm, as Ms. Frahm’s employer, made a
payment to the insurer on behalf of Ms. Frahm’s spouse (i.e., Mr.
Frahm) for the premiums for Mr. Frahm’s long-term care policy.
On the record before us, we find that Mr. Frahm, as Ms. Frahm’s
employer, paid pursuant to that plan indirectly to Ms. Frahm the
amount of those premiums for the medical care of her spouse. See
sec. 105(b); sec. 1.105-2, Income Tax Regs. On that record, we
further find that the amount that Mr. Frahm, as Ms. Frahm’s
employer, paid pursuant to the AgriPlan/AgriBiz medical reim-
bursement plan indirectly to Ms. Frahm during 2001 for the
premiums for Mr. Frahm’s long-term care policy constitutes an
ordinary and necessary business expense of Mr. Frahm’s farming
business within the meaning of section 162(a). See sec.
162(a)(1); sec. 1.162-10, Income Tax Regs.
Based upon our examination of the entire record before us,
we find that petitioners are entitled to deduct under section
- 29 -
162(a) certain amounts35 in excess of the amounts conceded by
respondent for “Employee benefit programs” that petitioners
claimed in the 2000 Schedule F, the 2001 Schedule F, and the 2002
Schedule F, respectively.36
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.37
To reflect the foregoing and the concessions of respondent,
Decision will be entered under
Rule 155.
35
See supra note 33.
36
Cf. Albers v. Commissioner, T.C. Memo. 2007-144. Unlike
the instant case, in Albers, the fully stipulated record did not
establish that Darwin J. Albers (Mr. Albers), as the employer of
Peggy L. Albers (Ms. Albers), paid, directly or indirectly, to
Ms. Albers pursuant to the AgriPlan/AgriBiz medical reimbursement
plan involved in that case the medical expenses at issue there in
order to reimburse her for expenses incurred or paid for the
medical care of herself, her spouse Mr. Albers, and/or her
dependent children. Nor did the fully stipulated record in that
case establish why the payment by the taxpayers of the claimed
medical expenses qualified those expenses as ordinary and neces-
sary expenses paid or incurred by Mr. Albers in carrying on his
farming business.
37
In light of our findings and holdings herein, we reject
respondent’s argument on brief and determinations in the notice
that the insurance premiums at issue are subject to sec. 162(l).