t c memo united_states tax_court maurice tompkins petitioner v commissioner of internal revenue respondent docket no filed date maurice tompkins pro_se blaine charles holiday for respondent memorandum findings_of_fact and opinion kerrigan judge this proceeding was commenced under sec_6015 for review of respondent’s determination that petitioner is not entitled to relief from joint_and_several_liability for with respect to a federal_income_tax return he filed with his former spouse the issues presented for consideration are whether petitioner is entitled to relief under sec_6015 c or f all section references are to the internal_revenue_code in effect at all relevant times findings_of_fact some of the facts have been stipulated and are incorporated in our findings by this reference petitioner resided in minnesota when the petition was filed petitioner and francy tompkins were married on date and were divorced on date for tax_year petitioner filed a form 1040a u s individual_income_tax_return prepared by h_r block reflecting a filing_status as head_of_household and claiming his daughter as a dependent petitioner filed as head_of_household at the advice of h_r block during petitioner ms tompkins and their minor daughter lived together petitioner worked for atr needlecraft inc and earned wages totaling dollar_figure during ms tompkins earned wages totaling dollar_figure including dollar_figure from resource inc and dollar_figure from becklund personal care ms tompkins also earned dollar_figure of interest_income from tcf national bank during this period petitioner and ms tompkins’ marriage was strained and they rarely communicated with each other petitioner handled financial matters and used h_r block to prepare his tax_return as he had done in the past ms tompkins accompanied petitioner to a meeting at h_r block to discuss their tax_return preparation their very young daughter attended the meeting at h_r block petitioner and ms tompkins timely filed an income_tax return for and claimed a filing_status of married_filing_jointly petitioner and ms tompkins reported an adjusted_gross_income of dollar_figure and claimed exemptions for themselves and their daughter for petitioner filed a form 1040a prepared by h_r block his filing_status was married_filing_separately and he claimed his minor daughter as a dependent respondent examined petitioner’s tax_return and determined an income_tax deficiency of dollar_figure the underlying deficiency is not at issue the determined deficiency arose from the following failure to include ms tompkins’ income from becklund personal care failure to include ms tompkins’ income from resource inc and failure to include ms tompkins’ interest_income from tcf national bank on date petitioner submitted a form_8857 request for innocent spouse relief to the internal_revenue_service irs petitioner indicated on the form that he had filed a joint_return and that he did not know his spouse had income the irs sent petitioner a final_determination letter dated date denying him innocent spouse relief under sec_6015 c and f according to the letter the basis for denial was that petitioner knew or had reason to know of the income or deductions that caused the additional tax opinion generally married taxpayers may elect to file a joint federal_income_tax return sec_6013 after making this election each spouse is jointly and severally liable for the entire tax due for that taxable_year sec_6013 a requesting spouse may seek relief from joint_and_several_liability under sec_6015 or if eligible may allocate liability under sec_6015 sec_6015 if a requesting spouse is not eligible for relief under sec_6015 or c a requesting spouse may be eligible for equitable relief under sec_6015 olson v commissioner tcmemo_2009_294 slip op pincite sec_6015 authorizes the secretary to grant relief if the taxpayer satisfies the requirements of subparagraphs a through e sec_6015 procedures for relief from liability applicable to all joint filers if-- in general --under procedures prescribed by the secretary a a joint_return has been made for a taxable_year b on such return there is an understatement_of_tax attributable to erroneous items of one individual filing the joint_return c the other individual filing the joint_return establishes that in signing the return he or she did not know and had no reason to know that there was such understatement d taking into account all the facts and circumstances it is inequitable to hold the other individual liable for the deficiency in tax for such taxable_year attributable to such understatement and e the other individual elects in such form as the secretary may prescribe the benefits of this subsection not later than the date which i sec_2 years after the date the secretary has begun collection activities with respect to the individual making the election then the other individual shall be relieved of liability for tax including interest penalties and other_amounts for such taxable_year to the extent such liability is attributable to such understatement the requirements of sec_6015 are stated in the conjunctive so a spouse must satisfy all five requirements to be relieved of joint_and_several_liability haltom v commissioner tcmemo_2005_209 slip op pincite accordingly a failure to meet any one of them prevents a requesting spouse from qualifying for the relief offered therein 119_tc_306 aff’d 101_fedappx_34 6th cir haltom v commissioner slip op pincite respondent does not dispute that petitioner and ms tompkins filed a joint federal_income_tax return however respondent argues that petitioner has not met all the requirements of sec_6015 respondent acknowledges that petitioner made the request for relief from joint_and_several_liability timely pursuant to sec_6015 respondent contends that petitioner has not demonstrated that in signing the return he did not know and had no reason to know that there was such understatement sec_6015 a requesting spouse has knowledge or reason to know of an understatement if he or she actually knew of the understatement or if a reasonable person in similar circumstances at the time he or she signed the return could be expected to know that the return contained an understatement sec_1_6015-2 income_tax regs a requesting spouse has knowledge or reason to know of an understatement if a reasonably prudent taxpayer under the circumstances of the requesting spouse at the time of signing the return could be expected to know that the tax_liability stated was erroneous or that further investigation was warranted 18_f3d_1521 11th cir rev’g tcmemo_1991_463 the rules pertaining to a requesting spouse’s actual knowledge are set forth in sec_1_6015-3 income_tax regs sec_1_6015-2 income_tax regs in the case of omitted income knowledge of the item includes knowledge of receipt of the income sec_1_6015-3 income_tax regs petitioner testified that ms tompkins accompanied him to h_r block ms tompkins testified that she told h_r block that she worked for approximately six weeks each for resource inc and becklund personal care ms tompkins testified that the tax preparers at h_r block informed her that her income did not need to be reported petitioner’s daughter accompanied them and petitioner was caring for her while ms tompkins spoke with the tax preparers at h_r block we find that petitioner had no knowledge of the amount or source_of_income ms tompkins received and no knowledge of when she actually received this income therefore petitioner did not have actual knowledge of ms tompkins’ earned_income or investment_income in determining whether a requesting spouse has reason to know if the understatement in the return is attributable to an omission_of_income we consider the circumstances facing the requesting spouse at the time that spouse signed the return and whether a reasonable person would have known of the omission see alt v commissioner fed appx pincite see also crouse v commissioner tcmemo_2011_97 slip op pincite all of the facts and circumstances are considered in determining whether a requesting spouse had reason to know of an understatement sec_1_6015-2 income_tax regs the facts and circumstances to be considered include but are not limited to the nature of the erroneous item and the amount of the erroneous item relative to other items the couple’s financial situation the requesting spouse’s educational background and business experience the extent of the requesting spouse’s participation in the activity that resulted in the erroneous item whether the requesting spouse failed to inquire at or before the time the return was signed about items on the return or omitted from the return that a reasonable person would question and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns id the erroneous item involved in this case is unreported income of petitioner’s former spouse it consists of investment_income of dollar_figure and wages for a short_period petitioner did not participate in and was not involved in the activity that resulted in the erroneous income the erroneous items are not a deduction or an effort to shelter income the items involved are small compared to the total income petitioner and ms tompkins reported on their joint tax_return for the amount of the deficiency is approximately of petitioner’s gross income for petitioner does not have significant business experience or an educational background in business or finance petitioner argued that he believed ms tompkins was not working and that he had included all reportable income as part of the tax_return it is not clear from the record whether ms tompkins had been employed in the past petitioner and ms tompkins testified that they had lived apart during the erroneous item is not part of a pattern one of the factors to be considered is whether the spouse failed to inquire at the time of signing the return about items on the return that a reasonable person would question ms tompkins testified that she worked only four to six hours a day and that she didn’t let him petitioner know anything about me making any kind of money petitioner testified that he placed his daughter in daycare because he thought it would be best for his daughter’s well-being and not because ms tompkins was not at home ms tompkins testified that i was doing something behind his back which i think is my responsibility not mr tompkins’ from the testimony it is reasonable to conclude that petitioner would not have questioned ms tompkins even if he had inquired petitioner would have likely received a dishonest answer taking into consideration all of the facts and circumstances and the testimony of petitioner and ms tompkins we find that petitioner did not have reason to know of the understatement in making a determination under sec_6015 we need to determine whether at the time petitioner signed the joint_return he had a duty to inquire or investigate further see 872_f2d_1499 11th cir aff’g tcmemo_1988_63 780_f2d_561 6th cir aff’g in part rev’g in part tcmemo_1984_310 114_tc_276 a requesting spouse has a duty to inquire when he knows enough facts to put him on notice that such an understatement exists thomassen v commissioner tcmemo_2011_88 slip op pincite however petitioner had no reason to know about ms tompkins’ omitted income and there were no factual inconsistencies to investigate ms tompkins was home most of the time when petitioner arrived home from work and she had been a stay-at-home mother in the past petitioner was not put on notice of ms tompkins’ employment so a duty to inquire was not triggered see haltom v 1the requirement of sec_6015 is substantially identical to the requirement of former sec_6013 as a result cases interpreting former sec_6013 remain instructive to our analysis under sec_6015 114_tc_276 commissioner slip op pincite therefore petitioner has met his burden under sec_6015 petitioner has met the remaining requirements of b petitioner and ms tompkins filed a joint tax_return for taxable_year see sec_6015 the understatement_of_tax is attributable solely to the erroneous items of ms tompkins see sec_6015 erroneous items of income are allocated to the spouse who was the source of the income sec_1_6015-3 income_tax regs wage income is allocated to the spouse who performed the services producing the wages id it was ms tompkins who earned the wages that were not included in petitioner and ms tompkins’ joint tax_return investment_income is allocated to the person who owns the investment id it was ms tompkins who received the interest from tcf national bank sec_6015 requires that all of the facts and circumstances be taken into account in determining whether it would be inequitable to hold a nonrequesting spouse liable for a deficiency in tax attributable to an understatement_of_tax on a joint_return one of the relevant factors for this purpose is whether the requesting spouse significantly benefited directly or indirectly from the understatement a significant benefit is in excess of normal support see sec_1_6015-2 income_tax regs in cases of omitted income a requesting spouse is considered to have received a significant benefit if he or she has received property from the nonrequesting spouse that is traceable to items of omitted income see id petitioner did not receive any benefit from the omitted income the amount of omitted income was small compared with petitioner’s wages petitioner provided support for his family he was not aware that ms tompkins had income we conclude that it would be inequitable to hold petitioner liable for the deficiency in tax attributable to the understatement that was due to ms tompkins’ income we hold that petitioner is entitled to innocent spouse relief under sec_6015 as a result we do not address the application of sec_6015 and f to reflect the foregoing decision will be entered for petitioner


t c memo united_states tax_court milo l and sharlyn k shellito petitioners v commissioner of internal revenue respondent docket no filed date frank w bastian and reggie l wegner for petitioners peter n scharff for respondent memorandum findings_of_fact and opinion thornton judge respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ and federal income taxes respectively and a dollar_figure accuracy-related_penalty under sec_6662 for the issues for decision are 1all rule references are to the tax_court rules_of_practice continued whether petitioners are entitled for and to deduct under sec_162 amounts they claimed for employee benefit programs on schedules f profit or loss from farming and whether petitioners are liable for the sec_6662 accuracy- related penalty for findings_of_fact the parties have stipulated some facts which we incorporate herein when they petitioned the court petitioners resided in kansas during the years at issue and for an unspecified period before then petitioners were married with two dependent_children hereinafter references to petitioner are to milo shellito and references to mrs shellito are to sharlyn shellito petitioner has engaged in a farming_business since about in and his farming operation covered about big_number acres most of this land he leased from his father or other parties petitioners jointly owned about acres they also jointly owned three pickup trucks that were used on the farm petitioner individually owned other farm equipment including a tractor and a combine petitioners held a joint checking account they each wrote checks from the account to pay expenses during and continued and procedure and all section references are to the internal_revenue_code in effect for the years at issue numbers have been rounded to the nearest dollar prior years a number of commercial agricultural loans were taken out to finance petitioner’s farming operations both petitioners signed most of the promissory notes for the loans mrs shellito has assisted on the farm since at least the nature of her services has remained fairly constant over time before during and after the years at issue her services included assisting with the planting and harvesting of crops operating tractors and equipment feeding and caring for cattle building and repairing fencing maintaining and performing basic equipment repairs running various errands and performing accounting and bookkeeping services before at least mrs shellito received no compensation_for these services in upon the advice of his banker petitioner engaged a certified_public_accountant c p a to prepare taxes and perform payroll services for the farming_business the c p a advised petitioner that he could qualify for an employee medical reimbursement plan if mrs shellito were petitioner’s employee the c p a created a document which petitioners signed on or about date the document states employment agreement agreement made effective as of date by milo shellito to employee sharlyn shellito employer is engaged_in_the_business_of_farming at the following address employer employs engages and hires employee as a hired hand to operate farm machinery work and handle cattle do repairs run errands and another farm related chores and employee accepts and agrees to such hiring engagement and employment subject_to the orders advice and directions of employer the employer has the right to terminate the employee at anytime the employee has the right to quit at anytime the c p a helped petitioners fill out a preprinted application_for agriplan bizplan a medical expense reimbursement plan which offered medical expense reimbursements to eligible employees petitioner signed this application on date the application lists mrs shellito as the only eligible_employee of petitioner it indicates that available benefits for mrs shellito were to consist of unlimited reimbursement of health insurance premiums for her and her family reimbursement of up to dollar_figure of out-of-pocket medical_expenses for her and her family and dollar_figure of term life_insurance for mrs shellito also on date an individual checking account was opened in mrs shellito’s name acting on the c p a ’s advice on date and each month thereafter in and petitioner wrote mrs shellito a dollar_figure check from their joint checking account which she deposited into her individual checking account the memo line on most of the checks and each accompanying deposit ticket stated that the check represented wages or salary mrs shellito used these funds to pay for 2there is no indication in the record that petitioner ever provided mrs shellito any term life_insurance medical_care for herself petitioner and their dependent_children items and tax treatment for the part of after date mrs shellito paid dollar_figure in expenses for medical_care and health insurance premiums for herself petitioner and their dependent_children as follows expense premium out-of-pocket medical expense sec_1 medical mileage insurance premium sec_2 total amount dollar_figure big_number big_number 1this amount includes dollar_figure that mrs shellito paid from her separate checking account and dollar_figure that she paid directly from petitioners’ joint checking account 2this dollar_figure of insurance premiums comprised these three items dollar_figure that mrs shellito paid to conesco health insurance co for an insurance_policy under which she was the primary insured dollar_figure that mrs shellito paid to american republic insurance co for an insurance_policy under which petitioner was the primary insured and dollar_figure that was automatically debited from petitioners’ joint checking account for premiums_paid to american fidelity insurance co for a cancer expense insurance_policy that listed petitioner as the named insured beginning date and continuing periodically thereafter throughout petitioner wrote mrs shellito checks totaling dollar_figure drawn on their joint checking account she deposited them in her separate checking account the accompanying deposit tickets indicate that the deposits represented medical reimbursements from mr shellito on date petitioners executed a document entitled employee benefit expense transmittal which they sent to agriplan bizplan in this document petitioner claimed eligible expenses_incurred for eligible_plan participants during of dollar_figure on date agriplan bizplan sent a yearend report to petitioner the report indicated that on the basis of a review of the employee benefit expense transmittal the total submitted benefit expenses were dollar_figure and that this amount could be deducted as a business_expense on petitioner’s business tax_return 3petitioners allege that petitioner actually paid mrs shellito more than the dollar_figure of reimbursements described above because he paid additional_amounts directly to insurance_companies on mrs shellito’s behalf although we do not find petitioners’ allegations well founded because our analysis does not depend upon the exact amount of reimbursements that petitioner allegedly paid mrs shellito we need not address this issue further 4we are unable to correlate this number with other evidence in the record 5the record does not conclusively explain the discrepancy between the dollar_figure listed on this yearend report and the dollar_figure of expenses that petitioner claimed on the employee benefit expense transmittal or the dollar_figure of medical_expenses that mrs shellito incurred after date petitioner issued to mrs shellito a form_w-2 wage and tax statement reporting wages paid of dollar_figure in petitioners reported this amount as wages on their form_1040 u s individual_income_tax_return which their c p a prepared on the schedule f attached to their form_1040 petitioners claimed a dollar_figure deduction for employee benefit programs and a dollar_figure deduction for labor hired on their form_1040 petitioners listed mrs shellito’s occupation as house wife in the notice_of_deficiency respondent disallowed dollar_figure of the amount that petitioners had claimed for employee benefit programs ie all but dollar_figure respondent allowed petitioners a dollar_figure offsetting adjustment for self employed health insurance items and tax treatment for mrs shellito incurred or paid dollar_figure of expenses for medical_care and health insurance premiums for herself petitioner and their dependent_children as follows 6this amount represents dollar_figure of total monthly cash payments plus dollar_figure of employment_taxes that petitioner reported paying on mrs shellito’s behalf on form_943 employer’s annual tax_return for agricultural employees petitioner reported liability for employment_taxes of dollar_figure for 7the parties agree that this dollar_figure represents the premium that mrs shellito paid in on the conesco health insurance co insurance_policy that listed her as the primary insured 8the record does not indicate how this adjustment was calculated expense premium out-of-pocket medical_expenses medical mileage insurance premium sec_1 total amount dollar_figure big_number big_number 1this dollar_figure of insurance premiums comprised these two items dollar_figure that mrs shellito paid to conesco health insurance co for the insurance_policy under which she was the primary insured and dollar_figure that mrs shellito paid to american republic insurance co for an insurance_policy that listed petitioner as the primary insured during petitioner wrote mrs shellito on their joint checking account checks totaling dollar_figure which she deposited in her separate checking account the accompanying deposit tickets indicate that the deposits represented medical reimbursements from petitioner on date petitioners executed a document entitled employee benefit expense transmittal which they sent to agriplan bizplan in this document petitioner claimed expenses for eligible_plan participants during of dollar_figure consisting of dollar_figure insurance premiums and dollar_figure of medical_expenses on date agriplan bizplan sent a yearend report to petitioner the report indicated that on the basis of a review of the employee benefit expense transmittal the total submitted benefit expenses were dollar_figure and that after a dollar_figure 9although dollar_figure is close to the dollar_figure of medical_expenses incurred or paid_by mrs shellito during the record does not explain the seeming discrepancy negative adjustment the total benefit expenses that could be claimed as a business_expense on petitioner’s business tax_return were dollar_figure petitioner issued to mrs shellito a form_w-2 reporting wages paid of dollar_figure in dollar_figure petitioners reported this amount as wages on their form_1040 which their c p a prepared on the schedule f attached to their form_1040 petitioners claimed a dollar_figure deduction for employee benefit programs and a dollar_figure deduction for labor hired on their form_1040 petitioners listed mrs shellito’s occupation as house wife in the notice_of_deficiency respondent disallowed dollar_figure of the amount that petitioners had claimed for employee benefit programs ie as for all but dollar_figure respondent allowed 10the report contains no explanation of the dollar_figure negative adjustment it appears however that this was the amount by which petitioner’s dollar_figure of reported medical_expenses exceeded the dollar_figure limit on reimbursements of out-of-pocket expenses as indicated on petitioner’s agriplan bizplan application 11this amount represents dollar_figure of total monthly cash payments plus dollar_figure of employment_taxes that petitioner reported paying on mrs shellito’s behalf for on form_943 petitioner reported liability for employment_taxes of dollar_figure for 12as noted supra note the parties agree that dollar_figure represents the premium that mrs shellito paid in on the conesco health insurance co insurance_policy under which she was the primary insured in the premium that mrs shellito paid on this insurance_policy was actually dollar_figure the record contains no explanation as to why respondent allowed this deduction for in the amount of the premium petitioners a dollar_figure offsetting adjustment for self employed health insurance dollar_figure i employee_benefit_plan expenses opinion before mrs shellito had worked on petitioners’ family farm without compensation_for about years in upon the advice of their c p a petitioners signed a document whereby mrs shellito purportedly became her husband’s at-will employee although the document makes no reference to compensation petitioner purportedly agreed to pay mrs shellito dollar_figure a month plus medical benefits in the form of reimbursements for medical_expenses and health insurance premiums incurred for herself petitioner and their dependent_children petitioners contend that pursuant to sec_162 they are entitled to deduct these purported reimbursements as employee_benefit_plan expenses for the reasons explained below we disagree a burden_of_proof as a general matter the commissioner’s determination is presumptively correct and the taxpayer bears the burden of proving entitlement to claimed deductions rule a 503_us_79 in certain circumstances the burden_of_proof with respect to any factual 13the record does not indicate how this adjustment was calculated issue may be shifted to the commissioner sec_7491 the parties disagree as to whether petitioners have met the statutory requirements to shift the burden_of_proof to respondent because we do not decide this case by reference to the placement of the burden_of_proof we need not and do not decide whether petitioners have met the requirements under sec_7491 to shift the burden_of_proof to respondent b sec_162 sec_162 allows a deduction for all ordinary and necessary expenses paid_or_incurred in carrying on any trade_or_business including a reasonable allowance for salaries or other compensation_for_personal_services actually rendered such as any amount_paid to an employee pursuant to an employee_benefit_plan for an expense that the employee pays or incurs sec_1_162-10 income_tax regs see frahm v commissioner t c memo 2007-dollar_figure respondent concedes that pursuant to this 14under sec_105 accident_and_health_insurance payments made directly or indirectly to an employee to reimburse expenses for medical_care are with certain limitations excludable from the employee’s gross_income for this purpose amounts received under an accident_or_health_plan for employees are treated as amounts received through accident_or_health_insurance sec_105 ostensibly pursuant to this provision petitioners have excluded from mrs shellito’s gross_income the medical expense reimbursements that petitioner allegedly paid to her this claimed exclusion which is not at issue in this case is inconsequential in the light of our holding that mrs shellito was not petitioner’s employee and received no compensation from him continued provision petitioners are entitled to most of the claimed deductions for employee benefit programs if mrs shellito is properly considered her husband’s employeedollar_figure respondent contends however that petitioners are not entitled to these deductions because mrs shellito was not a bona_fide employee of her husband we agree with respondent c analysis citing 92_tc_351 affd 907_f2d_1173 d c cir and like cases petitioners contend that under the common_law agency test the crucial consideration is the right of control or lack of it which the employer may exercise over the putative employee petitioners assert that petitioner has employed mrs shellito since continued pursuant to sec_162 a self-employed_individual may deduct a percentage percent in percent in of any amount_paid or incurred for insurance that constitutes medical_care for the taxpayer or the taxpayer’s spouse or children in the notice_of_deficiency respondent allowed petitioners adjustments for self employed health insurance for each year at issue ostensibly pursuant to sec_162 although we are unable to correlate the derivation of the amounts of these adjustments with the evidence of record the parties have not raised and accordingly we do not reach any issue regarding these adjustments 15respondent contends that even if mrs shellito were deemed petitioner’s employee petitioners are not entitled to deduct certain relatively small amounts that respondent alleges were paid before date or amounts that respondent contends exceed petitioner’s actual reimbursements to mrs shellito in the light of our holding that mrs shellito was not a bona_fide employee of petitioner it is unnecessary to address these contentions because since then she has performed her services on the family farm under petitioner’s control and instruction they contend that petitioners entered into an employment agreement on date to formalize this preexisting employer-employee relationship we do not agree that the purported employment agreement formalized a preexisting employer-employee relationship because we do not believe there was any such preexisting relationship the existence of remuneration is an ‘essential condition’ of an employer-employee relationship 126_f3d_112 2d cir quoting 907_f2d_71 8th cir see 170_f3d_974 10th cir absent remuneration there is no plausible employment relationship and consequently no need to undertake a common_law agency analysis graves v women’s profl rodeo association inc supra pincite according to petitioners’ own testimony before date mrs shellito received no remuneration for her servicesdollar_figure consequently because this essential condition of an employment relationship was missing mrs shellito was not her husband’s 16mrs shellito testified that petitioner did not pay her or provide her any form of compensation before date similarly petitioner testified that he started paying mrs shellito and providing her medical insurance in employee before irrespective of the degree of control he might have exercised over her rather it appears to us that during these many years mrs shellito rendered her services as part of the ‘shared enterprise’ of marriage cray v cray p 2d kan quoting berish v berish n e 2d ohio as petitioners worked together to make a living and raise their family we are not convinced that anything happened in that materially changed the nature of petitioners’ economic relationship mrs shellito’s tasks on the farm were unchanged more significantly mrs shellito’s purported compensation was we believe illusory in essence the purported compensation arrangement was that petitioner would reimburse mrs shellito for family medical_expenses and insurance premiums that she paiddollar_figure in paying these expenses from her separate checking account mrs shellito ostensibly assumed the obligation to pay family medical_expenses that under kansas law were as much her husband’s liability as her own see st francis regl med ctr inc v bowles p 2d 17although petitioner paid mrs shellito from their joint checking account dollar_figure wages each month in addition to reimbursements for medical_expenses he testified that he reimbursed her for the amount of medical bills and stuff that was above and beyond the dollar_figure that i’d paid her prior to in essence then the dollar_figure per month of wages appears to have been simply a component of the medical expense reimbursements that petitioner allegedly paid mrs shellito kan pursuant to the common_law doctrine_of necessaries as recognized under kansas law based upon the concept of unity of marriage each spouse is liable for the other’s necessaries including medical services we do not see that mrs shellito obtained any economic benefit from her husband’s reimbursing her from their joint checking account for medical_expenses for which he was also liabledollar_figure in the absence of proof to the contrary petitioners are presumed to own equally the funds in their joint checking account see walnut valley state bank v stovall p 2d kan consequently we consider the funds paid from their joint checking account to have been paid equally by each of them cf 16_tc_140 husband was entitled to deduct on his separate_return only half of the interest_paid from his and his wife’s joint checking account insofar as mrs shellito was reimbursed with her own funds from the joint checking account she clearly obtained no economic benefit insofar as she was reimbursed with her husband’s funds from the joint checking account any resulting economic 18relatively small amounts of the medical_expenses in question were automatically debited from petitioners’ joint checking account in addition mrs shellito paid small amounts of the medical_expenses in question from petitioners’ joint checking account these circumstances do not affect our conclusion that mrs shellito obtained no economic benefit from the purported employment agreement benefit is directly offset and negated by her assuming and paying her husband’s liability for the family medical_expenses when all is said and done it appears to us that mrs shellito’s and her family’s medical_expenses and health insurance premiums continued in effect to be paid from petitioners’ joint checking account just as they always had been we conclude that mrs shellito received no remuneration under the purported employment arrangement and consequently during the years at issue as in the preceding years there was no bona_fide employment relationship petitioners executed the purported employment agreement for tax reasons on the advice of their c p a who had prepared the document for them petitioner testified forthrightly that he started paying mrs shellito in june of because it would be a tax break that i could use citing seidel v commissioner tcmemo_1971_238 petitioners contend that the mere fact that petitioner had a tax-savings motive does not affect the validity of the purported employee_benefit_plan that he adopted this may be true but is beside the point--even a valid employee_benefit_plan is unavailing in the absence of a bona_fide employment relationship although a tax-avoidance motive for structuring a transaction in a particular way is not inherently fatal a transaction between family members deserves a heightened level of skepticism and scrutiny to determine the transaction’s substance 190_f3d_1165 n 10th cir see hamdi v commissioner tcmemo_1993_38 affd without published opinion 23_f3d_407 6th cir exercising that heightened skepticism and scrutiny we conclude that in substance petitioners’ purported employment agreement was a mere formalism that for the reasons previously discussed did not give rise to a true employment relationshipdollar_figure in support of their argument that mrs shellito was petitioner’s bona_fide employee petitioners note that in the notice_of_deficiency respondent did not disallow the deduction petitioners claimed on schedule f for wages that petitioner paid mrs shellito and also allowed for each year at issue dollar_figure of the expenses that petitioners claimed for employee benefit programs the notice_of_deficiency does not explain the treatment of these items and respondent has offered no explanation in this proceedingdollar_figure whatever inferences might be 19this conclusion is not altered by the fact that petitioner reported mrs shellito’s wages on forms w-2 and paid relatively small amounts of employment_taxes in furtherance of the claimed deductions for employee benefit programs the economic benefit of which if sustained would far exceed the relatively small amount of employment_taxes incurred 20it might be inferred that respondent’s allowing the deduction for wages paid might have been meant to counterbalance petitioners’ including these amounts in gross_income as wages cf haeder v commissioner tcmemo_2001_7 ndollar_figure noting that the commissioner had determined that the taxpayers’ income should be reduced by wages the husband allegedly paid to his wife the allowance of the dollar_figure deduction continued drawn from respondent’s treatment of these items are counterbalanced however by inferences that might be drawn from petitioners’ describing on their form sec_1040 for each year at issue mrs shellito’s occupation as house wife --a characterization that we believe was accurate in sum we conclude that because she received no remuneration and the purported employment agreement was a mere formalism mrs shellito was not petitioner’s bona_fide employee for the years at issuedollar_figure consequently petitioner is not continued for employee benefit programs for both and is more puzzling the parties agree that this dollar_figure deduction represents the premium that mrs shellito paid in on her conesco health insurance co policy in however her premium on this policy was dollar_figure 21cf frahm v commissioner tcmemo_2007_351 holding that employee_benefit_plan expenses were allowable under sec_162 the commissioner conceded the existence of a valid employment relationship between the married taxpayers eyler v commissioner tcmemo_2007_350 disallowing claimed sec_162 deduction for want of proof that the taxpayer husband paid health insurance premiums in his capacity as his wife’s employer pursuant to an unwritten health plan rather than in his individual capacity as the primary insured under the health policy albers v commissioner tcmemo_2007_144 disallowing claimed sec_162 deduction because taxpayers failed to prove that the employer husband paid his employee wife pursuant to an employee_benefit_plan amounts to reimburse her for medical_expenses that she incurred or paid francis v commissioner tcmemo_2007_33 without deciding the bona fides of a purported employment relationship between the married taxpayers disallowing disputed amounts of sec_162 deduction for want of evidence that any compensation the taxpayer husband paid his wife was reasonable in amount haeder v commissioner supra disallowing claimed sec_162 deduction on the basis that the taxpayer’s wife was not his bona_fide employee because she continued entitled under sec_162 to any deduction for employee program benefits in excess of the amounts respondent has allowed ii accuracy-related_penalty respondent determined that for petitioners are liable for an accuracy-related_penalty under sec_6662 sec_6662 and b imposes a 20-percent accuracy-related_penalty on any portion of a tax underpayment that is attributable to among other things any substantial_understatement_of_income_tax defined in sec_6662 as an understatement that exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 the accuracy-related_penalty does not apply with respect to any portion of the underpayment if it is shown that the taxpayer had reasonable_cause and acted in good_faith sec_6664 such a determination is made by taking into account all facts and circumstances including the experience and knowledge of the taxpayer and his or her reliance on a professional tax adviser see sec_1_6664-4 income_tax regs petitioners sought and in good_faith we believe followed the tax_advice of their c p a who steered them into setting up the medical reimbursement plan helped them fill out the application_for it drafted the purported employment agreement continued performed no services other than those reasonably expected of a family_member for them and prepared their tax returns for the years at issue taking into account all the facts and circumstances including petitioners’ lack of experience and knowledge regarding tax matters we conclude that they reasonably relied upon the c p a ’s advice in claiming the disputed deductions cf 469_us_241 when an accountant or attorney advises a taxpayer on a matter of tax law such as whether a liability exists it is reasonable for the taxpayer to rely on that advice we do not sustain imposition of the accuracy-related_penalty to reflect the foregoing an appropriate decision will be entered


internal_revenue_service number release date index number ------------------------- ---------------------- ---------------------------------------- ------------- ---------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- telephone number ---------------------- refer reply to cc tege eoeg et2 plr-116979-16 date date legend parent_corporation y corporation l corporation m corporation n corporation o year one function a ---------------------- ------------------------ ------------------------------------------------- ------------------------ -------------------------------------- ------------------------ -------------------------------------------------------------- ------------------------ ------------------------------------------------------ ------------------------ ----------------------------------------------- ------------------------ ------- --------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ -------------------------- plr-116979-16 f g ------ ----- dear ------------------- this is in reply to your request for a ruling concerning whether corporation y a subsidiary of parent will qualify as successor employer for purposes of the annual wage limitations under sec_3121 and sec_3306 of the internal_revenue_code code with respect to wages paid to certain employees who you represent will become employees of corporation y in a corporate_reorganization in which the employees' employment is intended to be transferred from corporations l m n and o facts you indicate that the purpose of the reorganization and transfer of employees is to enable parent to satisfy certain federal regulatory requirements u s employees working for the parent are currently employed by u s subsidiaries of the parent some employees of subsidiaries of the parent are business employees who perform business functions that are considered to be revenue generating other employees of subsidiaries are support employees who perform activities in support of the business employees and in support of the business operations of the parent and its subsidiaries this transaction involves support employees of four subsidiaries of the parent each of which perform some of the function a support functions function a support employees the four subsidiaries you characterize as predecessor employers in this transaction for purposes of the annual wage limitation are comprised of corporations l m n and o the ruling_request discusses the assets of the four subsidiaries that are transferring employees the request provides that own is defined for purposes of the request by reference to an amount carried on the related subsidiary balance_sheet or in the case of contracts by reference to the signatory corporations l m n and o own operating_assets used by support employees and business employees included among the operating_assets are such items as leasehold improvements computer equipment telecommunications equipment software furniture fixtures and contracts any operating_assets owned by affiliates of the parent other than corporations l m n and o that are used by the support employees and business employees of corporations l m n and o respectively are made available to such employees through leasing contractual and similar intercompany arrangements assets owned by such other affiliates of the parent include commonly shared items such as real_property and corporate vehicles as well as additional computer equipment telecommunications equipment furniture fixtures and contracts proposed transaction plr-116979-16 in the transaction on a date to be determined in year one after january corporations l m n and o will transfer their respective function a support employees to corporation y a shared service entity on the same date as the transfer of employees corporations l m n and o will also transfer to corporation y substantially_all those operating_assets owned by them that are determined to relate to the function a support employees being transferred to corporation y also on the same date corporation y will succeed to the leasing contractual or similar intercompany arrangements with regard to the assets that are owned by parent’s other affiliates and used by the function a support employees immediately after the transaction the function a support employees who have transferred will continue to perform their functions supporting business employees and business activities of the subsidiary from which they have transferred and other affiliates of the parent in the same capacity and manner as prior to the transfer the transferred employees will have the same use of all the assets used in the function a support functions either through ownership transfer of the assets or through transfer of leasing contractual or similar intercompany arrangements which the employees were using prior to the transfer the taxpayer represents that of the function a support employees of corporations m and n are common_law employees of their respective corporation before the transfer and that the employees will be transferred to corporation y and immediately become the common_law employees of corporation y this transfer includes all supervisors and managers within the function a support functions at corporations m and n therefore according to your representations at the conclusion of the transaction of the function a support employees formerly employed by corporation m and corporation n will be employed by corporation y and will be under the supervision and direction of supervisors and managers employed by corporation y the taxpayer represents that of the function a support employees of corporations l and o are common_law employees of their respective corporation before the transfer and that between f and g of the function a support employees will be transferred to corporation y and immediately become the common_law employees of corporation y corporations l and o are subject_to legal requirements that may limit the transfer of certain employees this transfer of the function a support employees will include all supervisors and managers within the function a support functions at corporations l and o except as limited by legal requirements therefore according to your representations at the conclusion of the transaction between f and g of the function a support employees formerly employed by corporation l and o will be employed by corporation y and will be under the supervision and direction of supervisors and managers employed by corporation y law and analysis plr-116979-16 fica_taxes are imposed on wages as defined in sec_3121 of the code fica_taxes are composed of old-age_survivors_and_disability_insurance_tax social_security_taxes and hospital insurance taxes medicare taxes social_security_taxes are imposed by sec_3101 employee's portion and a employer's portion sec_3121 provides an exception from the social_security_tax portion of the fica for remuneration paid_by an employer to an employee with respect to employment during the calendar_year after the employer has paid wages to the employee equal to the contribution_and_benefit_base for the year there is generally no exception from wages for an employer because another employer has already paid wages to the employee equal to the contribution_and_benefit_base during the calendar_year remuneration paid_by the second employer is generally subject_to social_security_taxes on remuneration that is not otherwise excepted up to the amount of a new contribution_and_benefit_base applicable to that employer with respect to the employee although the employee can obtain a refund of the employee portion of social_security_taxes on his or her income_tax return to the extent the employee portion of social_security_taxes have been paid on wages in excess of the contribution benefit base as a result of the employee having two or more employers the employer is not entitled to a refund of the employer portion of social_security_tax on such wages the predecessor-successor rule in sec_3121 provides an exception to the general_rule that a new contribution_and_benefit_base applies in the case of a second employer sec_3121 provides that if an employer referred to as a successor employer during any calendar_year acquires substantially_all the property used in a trade_or_business of another employer hereinafter referred to as a predecessor or used in a separate_unit of a trade_or_business of a predecessor and immediately after the acquisition employs in his trade_or_business an individual who immediately prior to the acquisition was employed in the trade_or_business of such predecessor then for the purpose of determining whether the successor employer has paid remuneration with respect to employment equal to the contribution_and_benefit_base to such individual during such calendar_year any remuneration paid with respect to employment paid to such individual by such predecessor during such calendar_year and prior to the acquisition shall be considered as having been paid_by such successor employer sec_31_3121_a_1_-1 of the regulations provides that three tests must be met for the wages paid_by a predecessor to an employee to be for purposes of the annual wage limitation treated as having been paid to such employee by a successor i the successor during a calendar_year acquired substantially_all the property used in a trade_or_business or used in a separate_unit of a trade_or_business of the predecessor plr-116979-16 ii such employee was employed in the trade_or_business of the predecessor immediately prior to the acquisition and is employed by the successor in the successor's trade_or_business immediately after the acquisition and iii such wages were paid during the calendar_year in which the acquisition occurred and prior to such acquisition sec_31_3121_a_1_-1 of the regulations provides that the method of acquisition by an employer of the property of another employer is immaterial the acquisition may occur as a consequence of the incorporation of a business by a sole_proprietor or a partnership the continuance without interruption of the business of a previously existing partnership by a new partnership or by a sole_proprietor or a purchase or any other transaction whereby substantially_all the property used in a trade_or_business or used in a separate_unit of a trade_or_business of one employer is acquired by another employer sec_31_3121_a_1_-1 of the regulations provides that substantially_all the property used in a separate_unit of a trade_or_business may consist of substantially_all the property used in the performance of an essential operation of the trade_or_business or it may consist of substantially_all the property used in a relatively self-sustaining entity which forms a part of the trade_or_business sec_31_3121_a_1_-1 of the regulations provides two examples of the requirement that the successor acquired substantially_all the property used in a separate_unit of a trade_or_business in example the m corporation which is engaged in the manufacture of automobiles including the manufacture of automobile engines discontinues the manufacture of the engines and transfers all the property used in such manufacturing operation to the n company under the regulations the n company is considered to have acquired a separate_unit of the trade_or_business of the m corporation namely its engine manufacturing unit in example the r corporation which is engaged in the operation of a chain of grocery stores transfers one of such stores to the s company the regulations provide that the s company is considered to have acquired a separate_unit of the trade_or_business of the r corporation sec_31_3121_a_1_-1 of the regulations provides that a successor may receive credit for wages paid to an employee by a predecessor only if immediately prior to the acquisition the employee was employed by the predecessor in his trade_or_business which was acquired by the successor and if immediately after the acquisition such employee is employed by the successor in his trade_or_business whether or not in the same trade_or_business in which the acquired property is used if the acquisition involves only a separate_unit of a trade_or_business of the predecessor the employee need not have been employed by the predecessor in that unit provided he was employed in the trade_or_business of which the acquired unit was a part plr-116979-16 revrul_68_105 1968_1_cb_418 considered the issue of whether an employer who is a successful bidder for a united_states air force usaf maintenance contract may qualify as a successor employer to the prior contractor under a similar contract for purposes of applying the annual wage limitations provided by sec_3121 the maintenance contract required the contractor to maintain repair and overhaul usaf airplanes for the work on the contract the contractor used government-owned equipment and tooling of substantial value the equipment was provided to the contractor through an inventory_accounting arrangement under the facts of revrul_68_105 on july of the calendar_year a new employer assumed responsibility under a similar contract obtained on a competitive bid all government-owned property formerly used by the first employer was turned over to the second employer for use in a continuous unbroken performance of the maintenance job the first employer had been doing thus the second employer acquired the possession and use of all the government-owned property used in the maintenance operation through an inventory_accounting arrangement similar to that made with the first employer revrul_68_105 concludes that under the facts of the ruling because the second employer obtained the possession and use of all the government-owned property used by the first employer it satisfies the requirement of acquiring substantially_all of the property used in the separate_unit of the trade_or_business the ruling states that it is immaterial that the second employer did not acquire an interest in the property used in performing the contract from the first employer because the other requirements for being a successor employer under sec_3121 were also met the ruling concludes that the second employer is a successor employer of the first employer for purposes of the annual wage limitation under sec_3121 revrul_72_269 1972_1_cb_313 considered whether a subcontractor performing an essential operation under a government contract may treat wages paid_by a predecessor employer formerly the prime contractor as paid_by the subcontractor for purposes of the annual wage limitation provisions of the fica and the futa under the facts of the ruling for some years one employer was the operating contractor for the united_states atomic energy commission aec in the operation of one of its facilities upon expiration of the first employer's contract on june the operation of that facility was transferred under an aec contract to a second employer the second employer had entered into a contract with a third employer for the performance of an essential operation of the facility then under contract by the aec to the first employer the subcontract was effective july simultaneously with the second employer's government contract under the subcontract the third employer gained operating control of and was responsible and held accountable for substantial government- owned property and equipment related to the essential operation of the facility plr-116979-16 revrul_72_269 concludes that the third employer meets the requirement to acquire substantially_all the assets in a separate_unit of a trade_or_business and states that inasmuch as the third employer acquired the use of the government-owned property used by the first employer in an essential operation of the facility it is immaterial that the third employer did not acquire an interest in the property used in performing the subcontract because the other requirements necessary to qualify to take the wages of the predecessor into account for purposes of sec_3121 and sec_3306 were also met the ruling concluded that the third employer qualified as a successor employer to take into account the wages of the predecessor first employer in determining whether the annual wage limitation for fica and futa were met as noted above sec_31_3121_a_1_-1 of the regulations provides that three requirements must be met for the wages paid_by a predecessor to an employee to be for purposes of the annual wage limitation treated as having been paid to such employee by a successor the first requirement is that the successor during a calendar_year acquired substantially_all the property used in a trade_or_business or used in a separate_unit of a trade_or_business of the predecessor sec_31_3121_a_1_-1 of the regulations provides that substantially_all of the property used in a separate_unit of a trade_or_business may consist of substantially_all the property used in the performance of an essential operation of a trade_or_business or it may consist of substantially_all the property used in a relatively self-sustaining entity which forms a part of the trade_or_business the first test is met because corporation y has acquired substantially_all the assets of an essential operation of corporations l m n and o because it meets this test as interpreted by revrul_72_269 revrul_72_269 concludes that a successor employer meets the requirement to acquire substantially_all the assets in a separate_unit of a trade_or_business or essential operation if the successor employer acquires the use of the property used by the predecessor in the essential operation it is represented for purposes of the ruling_request that corporations l m n and o will transfer to corporation y all those operating_assets owned by each respective corporation that are determined to relate to their respective function a support employees transferring to corporation y corporation y will also succeed to the leasing contractual or similar intercompany arrangements with regard to the assets that are owned by the taxpayer's other affiliates and used by the function a support employees based on the specific facts presented the function a support functions constitute essential operations of corporations l m n and o because the operations are necessary to complete or support a process executed by business employees or other support employees in the conduct of their activities and to enable parent to meet all of its management administration reporting compliance legal financial risk technological and operational obligations that are germane to parent's business the function a support functions are distinct and substantial operations that provide activities that are essential for the operations of corporations l m n and o accordingly because corporation y plr-116979-16 is acquiring substantially_all the assets of essential operations function a support functions of corporation l m n and o the first test is met the second requirement is that employees to whom the predecessor paid wages must have been employed in the trade_or_business of the predecessor immediately prior to the acquisition and must be employed by the successor in the successor's trade_or_business immediately after the acquisition parent has represented that the function a support employees being transferred are the common_law employees of corporations l m n and o in the function a support functions’ trade_or_business of corporations l m n and o immediately prior to the acquisition and will be common_law employees of corporation y in corporation y's trade_or_business immediately after the acquisition based on that representation the second requirement is also met the third requirement is that such wages were paid during the calendar_year in which the acquisition occurred and prior to such acquisition according to the taxpayer because of the date of the acquisition wages will be paid_by the predecessor during the calendar_year in which the acquisition will occur and prior to such acquisition therefore we conclude that with regard to the transaction corporation y is a successor employer of corporations l m n and o for purposes of the annual wage limitations contained in sec_3121 and sec_3306 except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in particular the ruling is based on the representation that after the transaction the transferred function a support employees will be common_law employees of corporation y rather than corporations l m n or o respectively and is not a separate ruling on the identification of the common_law employer based of all the facts and circumstances furthermore the ruling only applies with respect to wages paid to a particular function a support employee if the employee becomes an employee of corporation y after the transaction this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent plr-116979-16 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives sincerely lynne camillo branch chief employment_tax branch exempt_organizations employment_tax government entities tax exempt government entities