                     T.C. Summary Opinion 2008-56



                        UNITED STATES TAX COURT



          AARON D. BROWN AND LESLIE P. BROWN, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 4460-07S.               Filed May 20, 2008.


        Aaron D. Brown and Leslie P. Brown, pro sese.

        Ric D. Hulshoff, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.    Pursuant to section 7463(b),

the decision to be entered is not reviewable by any other court,

and this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, subsequent section references

are to the Internal Revenue Code (Code) as amended, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
                               - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $1,800 for 2003 and $1,162 for 2004.

     The only issue for decision is whether petitioners are

entitled to deductions for simplified employee pension (SEP)

contributions for 2003 and 2004.1

                            Background

     The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference.   At the time the

petition was filed, petitioners resided in Arizona.

     Petitioner Aaron D. Brown (Mr. Brown) is president and a

shareholder of Aaron Brown Mortgage, Inc. (corporation).   The

corporation has elected to be taxed as an S corporation.

Petitioners are the only employees of the corporation.

Petitioner Leslie P. Brown (Mrs. Brown) reported wages from the

corporation of $18,000 for each of 2003 and 2004.   Mr. Brown

reported wages from the corporation of $36,000 for each of 2003

and 2004.

     The corporation established an SEP account with the Vanguard

Group on October 1, 2001.   A Form 5305-SEP, Simplified Employee

Pension - Individual Retirement Accounts Contribution Agreement

(agreement), was signed by Mr. Brown as president of the

corporation.   Article I - Eligibility Requirements provides that


     1
      Resolution of this issue will determine the amount of
petitioners’ allowable deductions on Schedule A, Itemized
Deductions.
                               - 3 -

the employer agrees to make yearly discretionary contributions to

the individual retirement account (IRA) of all employees who are

18 years or older and have worked for the employer at least one-

half year out of the last 5 years.2    The instructions on the form

caution the employer:   “All eligible employees must be allowed to

participate in the SEP.”

     In April of 2004 the corporation made a $7,200 SEP

contribution to an IRA for 2003 for Mr. Brown.     On their Forms

1040, U.S. Individual Income Tax Return, for 2003 and 2004

petitioners deducted $7,200 from their gross income representing

the contributions made by the corporation to the Vanguard SEP

plan for Mr. Brown.   Petitioners also deducted $3,000 from gross

income for 2003 and 2004 for IRA contributions made by Mrs.

Brown.

     Respondent examined the returns and disallowed the SEP

deductions in both years because petitioners had not “established

that you are entitled to this deduction.”

                            Discussion

     The Commissioner’s deficiency determinations are presumed

correct, and taxpayers generally have the burden of proving that

the determinations are incorrect.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     Under certain


     2
      The corporation chose terms on the form agreement that are
less restrictive than the statutory requirements. See sec.
408(k).
                                    - 4 -

circumstances, however, section 7491(a) may shift the burden to

the Commissioner with respect to any factual issue affecting the

liability for tax.     Because there is no factual issue in dispute,

section 7491(a) is inapplicable, and the burden of proof does not

shift to respondent.

         An SEP is an individual retirement account or annuity (IRA)

to which an employer makes a contribution.      Sec. 401(k).   The

employer may deduct SEP contributions for the taxable year if

they are made no later than the due date of the return for the

taxable year.     Sec. 404(h)(1).    The arrangement will qualify as

an SEP for a taxable year only if certain requirements are met.

The employer must contribute to the SEP of each employee who:

(a) Has attained the age of 21, (b) has performed service for the

employer for at least 3 of the immediately preceding 5 years, and

(c) has received at least $450 in compensation from the employer

for the year.     Sec. 408(k)(2).3

     Respondent argues that the corporation was the proper entity

to have claimed the deduction, if at all, and not petitioners.

Petitioners’ claiming the deduction instead of the corporation is

not what causes the deficiency, however.      See sec. 1366(a).

Respondent argues, further, that the deduction is improper

because no SEP contribution was made for the only other employee


     3
      Certain types of employees are excluded from these
requirements. See sec. 410(b)(3)(A), (C).
                                - 5 -

of the corporation, Mrs. Brown.    The contribution does not meet

the requirements of section 408(k)(2), according to respondent.

     Petitioners argued at trial that they have been caught by a

mere “technicality”.    The Court disagrees with petitioners’

contention that the failure of the corporation to contribute to

an IRA in favor of an employee, Mrs. Brown, was a mere

technicality.    The requirement, aimed at fairness and equitable

treatment for employees, is one of the few basic provisions of

the SEP regime.

     Even if the provision could fairly be characterized as a

“technicality”, it is one that was brought to the attention of

the president of the corporation, Mr. Brown, more than once in

the agreement.    Mr. Brown, as president, signed and agreed to the

provisions contained in the agreement, including the requirement

that each employee receive from the corporation a contribution to

his or her IRA.

     Petitioners’ contention in their petition is that the

section 318 rules of attribution treat the contribution to Mr.

Brown’s IRA as a contribution to Mrs. Brown’s IRA.    The problem

with this position is that section 318, Constructive Ownership of

Stock, as the title implies, addresses stock ownership, not IRA

or SEP contributions.   For example, an individual shall be

considered as owning the stock owned, directly or indirectly, by

or for his spouse.   Sec. 318(a)(1)(A)(i).   In addition, section
                                 - 6 -

318 applies to “those provisions of this subchapter to which the

rules contained in this section are expressly made applicable”.

Sec. 318(a).   Section 318(b) lists the “provisions to which the

rules contained in subsection (a) apply”.   Section 408 is not one

of the provisions listed in section 318(b) and is not in the same

subchapter of the Code as section 318.

     For the reasons stated, respondent’s determination is

sustained.

     To reflect the foregoing,

                                          Decision will be entered

                                     for respondent.
