TAX COURT OPINION

Case: Ivan G. & Rosemary J. Snorek
Docket Number: 12863-05
Judge: Kroupa
Opinion Type: memo
Filed: 02/08/2007
Pages: 6

T .C . Memo . 2007-3 4 UNITED STATES TAX COUR T IVAN G . AND ROSEMARY J . SNOREK, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Respondent v' , l Docket No . 12863-05 . Filed February 8, 2007 . Frank W . Bastian and Reggie L . Wegner , for petitioners . Blaine Holiday , for respondent . MEMORANDUM OPINIO N KROUPA, Judge : Respondent determined a $607 deficiency in petitioners' Federal income tax for 2001 . After concessions,' the sole issue for decision is whether health insurance premium s 'Both petitioners and respondent have conceded adjustments to the amount of the business expense deductions petitioners claimed on the return for 2001 . SERVED FEB - 3 2007 - 2 - for petitioner Rosemary Snorek (Mrs . Snorek) are fully deductible under section 162(a)2 or only 60 percent deductible under section 162(1) . We hold that they are 60 percent deductible . Background This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found . The stipulation of facts and accompanying exhibits are incorporated by this reference . Petitioners resided in Owatonna, Minnesota, at the time they filed the petition . Mrs . Snorek operated a sole proprietorship upholstery business, Snorek Upholstery, during 2001 . That year, Snorek Upholstery executed an adoption agreement to provide a medical reimbursement plan for eligible employees through an organization called AgriPlan/BizPlan (the plan) . Eligible employees under the plan would be fully reimbursed by Snorek Upholstery for health insurance costs for themselves and their immediate family and reimbursed up to $3,000 for other out-of-pocket medical expenses . To be reimbursed, an eligible employee was required to submit a transmittal form to AgriPlan/BizPlan noting the amount the eligible employee paid or incurred for health insurance and out- of-pocket medical expenses during the year . AgriPlan/BizPla n 2All section references are to the Internal Revenue Code in effect for 2001, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated . Amounts are rounded to the nearest dollar . 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 t o 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 . - 4 - The $10,355 deduction was attributable to the claimed eligible medical expenses submitted to the plan . Respondent sent petitioners a deficiency notice . Respondent determined that petitioners were not allowed to deduct the $3,906 claimed employee benefit plan expenses attributable to the health insurance premiums for Mrs . Snorek . Respondent determined that 60 percent of $3,906 was deductible under section 162(1) . Petitioners timely filed a petition . Discussion We are asked to decide whether petitioners can deduct the health insurance premiums for Mrs . Snorek and, if so, to what extent . This is an unusual substantiation case because the parties agree that the health insurance premiums for Mrs . Snorek were paid ; they disagree as to who paid the premiums . We look to the general rule that deductions are a matter of legislative grace, and the taxpayer must show that he or she is entitled to any deduction claimed . Rule 142(a) ; Deputy v . du Pont , 308 U .S . 488, 493 (1940) . This includes the burden of substantiation . Hradesky v . Commissioner , 65 T .C . 87, 89-90 (1975), affd . per curiam 540 F .2d 821 (5th Cir . 1976) . Petitioners do not assert that the burden shifts to respondent under section 7491(a) . Therefore the burden of proof remains with petitioner . - 5 - In addition, taxpayers may fully deduct all ordinary and necessary expenses paid or incurred during the taxable year carrying on a trade or business . Sec . 162(a) . Ordinary and necessary business expenses include the reimbursement of employe e benefit plan expenses to an employee for expenses the employee pays or incurs . Sec . 162(a)(1) ; sec . 1 .162-10, Income Tax Regs . The deductibility of health insurance costs paid or incurred by self-employed individuals, however, is subject to the special rules of section 162(1) . For 2001, self-employed individuals are allowed to deduct only an amount equal to 60 percent of the amount paid or incurred during the year for health insurance . Sec . 162(1) (1) (A) and (B) . Respondent argues that Mrs . Snorek, a self-employed individual, paid her own health insurance premiums, and therefore the premium payments are only 60 percent deductible under section 162(1) . Petitioners counter that Mr . Snorek, an eligible employee under the plan, paid the health insurance premiums for Mrs . Snorek, and further argue that Snorek Upholstery reimbursed him . They argue, therefore, that the health insurance premiums for Mrs . Snorek are fully deductible as an ordinary and necessary business expense . We disagree . Petitioners failed to provide evidence that Mr . Snorek, the eligible employee, paid the health insurance premiums for Mrs . Snorek or that he was reimbursed by Snorek Upholstery for that - 6 - amount . Petitioners introduced the transmittal form that Mr . Snorek submitted to the plan, on which he claimed he paid the health insurance premiums for Mrs . Snorek . Petitioners introduced no documentary evidence, however, showing that Mr . Snorek actually paid the health insurance premiums for Mrs . Snorek . Petitioners did not, for example, introduce receipts or canceled checks showing that Mr . Snorek paid the health insurance premiums for Mrs . Snorek . Petitioners also did not introduce the premium statement or policy itself, which may have identified the party responsible for making the premium payments for the insured . Petitioners' failure to produce this documentation caused respondent to determine that Mrs . Snorek paid the health insurance premiums for herself . Nothing in the record rebuts this determination nor convinces us that petitioners have carried their burden of proving that Mr . Snorek paid the health insurance premiums for Mrs . Snorek to entitle him to deduct 100 percent of the premium payments . Accordingly, we hold that petitioners may deduct only $2,344 (60 percent) of the $3,906 health insurance premiums for Mrs . Snorek under section 162(1) . To reflect the foregoing and the concessions of the parties , Decision will be entere d under Rule 155 .