                            T.C. Memo. 2007-350



                          UNITED STATES TAX COURT



              GEOFF EYLER & AUDREY EYLER, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 18183-05.              Filed November 27, 2007.



        Michael R. Horn, for petitioners.

     Henry N. Carriger, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION


        CHIECHI, Judge:    Respondent determined a deficiency of $964

in petitioners’ Federal income tax (tax) for their taxable year

2001.

     We must decide whether petitioners are entitled for their
                                - 2 -

taxable year 2001 to deduct under section 162(a)1 the $5,066

claimed for “Employee benefit programs” in Schedule C, Profit or

Loss From Business (petitioners’ 2001 Schedule C), included as

part of their tax return for that year.      We hold that they are

not.

                          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.

       Petitioners resided in Gibson, Iowa, at the time they filed

the petition in this case.

       At all relevant times, petitioner Geoff Eyler (Mr. Eyler)

owned and operated a tiling business that involved his using

certain specialized machinery for controlling water flow and for

draining water.

       During 2001, the year at issue, Mr. Eyler had one full-time

employee in his tiling business, viz., his spouse petitioner

Audrey Eyler (Ms. Eyler), who had been an employee of Mr. Eyler’s

tiling business since December 1997.    During 2001, Ms. Eyler

performed certain services for that business,2 for which Mr.




       1
      All section references are to the Internal Revenue Code in
effect for the year at issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
       2
      The record does not disclose the type of services that Ms.
Eyler provided during 2001 for Mr. Eyler’s tiling business.
                                 - 3 -

Eyler paid her certain annual wages.3

     At all relevant times, Ms. Eyler, who suffers from melanoma,

experienced difficulty in obtaining a health insurance policy in

her own name.     At those times, Mr. Eyler, as Ms. Eyler’s em-

ployer, provided a verbal plan (unwritten health plan), of which

Ms. Eyler was aware, for the benefit of Ms. Eyler and her spouse

Mr. Eyler.   Pursuant to the terms of that plan, Mr. Eyler, as Ms.

Eyler’s employer, agreed to pay for health insurance for Ms.

Eyler and her spouse Mr. Eyler.

     On a date not disclosed by the record prior to January 1,

2000, Mr. Eyler completed a preprinted application form (Mr.

Eyler’s Wellmark application)4 in which he applied to

Wellmark/Blue Cross and Blue Shield of Iowa (Wellmark) for a so-

called Plan III health insurance policy to cover himself and Ms.

Eyler.   In that application, Mr. Eyler identified himself as

“Applicant” and Ms. Eyler as “Spouse”.    The portion of Mr.

Eyler’s application entitled “Enrollment Information” stated in

pertinent part:




     3
      The record does not disclose the amount of annual wages
that Mr. Eyler paid Ms. Eyler during 2001. The record does,
however, disclose that Mr. Eyler issued to Ms. Eyler Form W-2,
Wage and Tax Statement, for 2001 that showed “Wages, tips, other
compensation” of $3,600.
     4
      The title of Mr. Eyler’s Wellmark application is not dis-
closed by the record.
                                           - 4 -

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 I Plan II Plan III[5] Plan IV               (check all that             all that apply)
   Plan V   Plan VI    Plan VII                      apply)                    9 New Enrollment
       Plan VIII    Plan IX   Plan X                 9 Self[6]                 : Change
   Are you applying for the Supplemental             : Spouse                  9 Adding/Removing
   Accident Option? : Yes 9 No                       9 Child(ren)               Dependents
          * * * * * * *

                      *       *       *       *        *       *        *

5. How do you want to pay your health premiums?
   9 Direct Bill. If so, on what basis? 9 Quarterly 9 Semi-annually 9 Annually
   : Automatic Account Withdrawal. If so, on what basis? (Include a voided check.)
    : Monthly-1st of the month 9 Monthly-5th of the month 9 Quarterly 9 Semi-annually
    9 Annually
    From: 9 Checking or 9 Savings * * *

6. The amount you are submitting for health insurance is: $179.10 (One check or money order per
   application, made payable to Wellmark, Inc.)
   The amount you are submitting for life insurance is: $
   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, check one
      item below:
      9 Applicant is owner of a sole proprietor business 9 Employer is deducting the full
      premium 9 Other, please explain
      9 Employer has only one eligible employee 9 Employer has been denied the opportunity to
      purchase insurance due to low participation
   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? 9 No 9 Yes

7. Qualifying previous coverage Date of termination of previous coverage: 01-26-00
   Has this coverage been in effect for 12 consecutive months or more? : Yes 9 No
   What type of coverage did you have? 9 Employer Group : Individual
   9 Short Term Major Medical 9 Group Conversion 9 Other (please identify)
   Who was your previous insurer? Golden Rule   If Blue Cross/Blue Shield (BCBS), give details
                                               below.
   Name of Contract Holder Audrey S. Eyler        * * *
   Group or Employer Name                         * * *



      Wellmark approved Mr. Eyler’s Wellmark application and

issued a health insurance policy to him (Mr. Eyler’s Wellmark

health policy) that covered himself and his spouse Ms. Eyler.

      During 2001, Mr. Eyler paid directly to Wellmark premiums of

$5,066 (health insurance premiums) for Mr. Eyler’s Wellmark



      5
      Mr. Eyler circled “Plan III” as the “Health Care Plan” for
which he was applying.
      6
      Although the box for “Self” in Mr. Eyler’s Wellmark appli-
cation was not checked, the record establishes, and we have
found, that that application was for a health insurance policy
covering both Mr. Eyler and Ms. Eyler.
                                   - 5 -

health policy.7

       Petitioners timely filed Form 1040, U.S. Individual Income

Tax Return, for their taxable year 2001.       Petitioners’ 2001

Schedule C pertained to Mr. Eyler’s tiling business.       In that

schedule, petitioners claimed, inter alia, a deduction of $5,066

for expenses for “Employee benefit programs”.

       On July 12, 2005, respondent issued to petitioners a notice

of deficiency (notice) for their taxable year 2001.       In that

notice, respondent determined to disallow the $5,066 deduction

that petitioners claimed in petitioners’ 2001 Schedule C for

“Employee benefit programs” because petitioners “did not estab-

lish that the health insurance expense incurred in 2001 qualifies

as a Schedule C deduction”.       In the notice, respondent also

determined to allow petitioners a deduction of $3,040 for “Self-

Employed Health Insurance”.

                                  OPINION

       The parties submitted this case fully stipulated under Rule

122.       That the parties submitted this case under that Rule does

not affect who has the burden of proof or the effect of a failure

of proof.       Rule 122(b); Borchers v. Commissioner, 95 T.C. 82, 91

(1990), affd. 943 F.2d 22 (8th Cir. 1991).

       The parties disagree over whether the burden of proof in


       7
      The record does not disclose the capacity in which or the
method by which Mr. Eyler paid the $5,066 of premiums for Mr.
Eyler’s Wellmark health policy.
                                - 6 -

this case shifts to respondent under section 7491(a).    In order

for the burden of proof to shift to the Commissioner of Internal

Revenue under that section, the taxpayer must (1) provide credi-

ble evidence with respect to any factual issue relevant to

determining the tax liability of the taxpayer and (2) comply with

the applicable requirements of section 7491(a)(2).    Although

section 7491(a) does not define the term “credible evidence”, the

legislative history of the statute does.    The legislative history

of section 7491(a) provides in pertinent part:

       Credible evidence is the quality of evidence which,
       after critical analysis, the court would find suffi-
       cient upon which to base a decision on the issue if no
       contrary evidence were submitted (without regard to the
       judicial presumption of IRS correctness). * * * The
       introduction of evidence will not meet this standard if
       the court is not convinced that it is worthy of belief.
       * * *

H. Conf. Rept. 105-599, at 240-241 (1998), 1998-3 C.B. 747, 994-

995.

       As discussed below, there is a material factual issue

relevant to determining the tax liability of petitioners for the

year at issue as to which petitioners have not introduced credi-

ble evidence within the meaning of section 7491(a)(1) and as to

which the burden of proof does not shift to respondent under that

section.

       We turn now to whether petitioners are entitled to deduct

under section 162(a) the $5,066 for “Employee benefit programs”

claimed in petitioners’ 2001 Schedule C.    A taxpayer, including
                                 - 7 -

the owner of an unincorporated business like Mr. Eyler, 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.8    However, a taxpayer, like Mr. Eyler, who owns an

unincorporated business is not entitled to deduct health insur-

ance costs that he pays or incurs for himself, his spouse, and

his dependents except as provided in section 162(l).9


     8
      See Albers v. Commissioner, T.C. Memo. 2007-144; Francis v.
Commissioner, T.C. Memo. 2007-33.
     9
      As applicable here, sec. 162(l)(1) provides that a tax-
payer, like Mr. Eyler, is entitled to deduct 60 percent of any
amount that such taxpayer paid or incurred during 2001 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-
             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
                                                       (continued...)
                                 - 8 -

     In support of their position that the $5,066 for “Employee

benefit programs” claimed in petitioners’ 2001 Schedule C is

deductible under section 162(a), petitioners maintain that in

2001 Mr. Eyler paid pursuant to the unwritten health plan the

premiums for Mr. Eyler’s Wellmark health policy and that such

premiums are excludable from Ms. Eyler’s income under sections

105(b) and/or 106(a).10    As a result, according to petitioners,

the health insurance premiums at issue are deductible under

section 162(a) by Mr. Eyler as ordinary and necessary business

expenses of his tiling business.     On the record before us, we

reject petitioners’ argument.

     Section 105(b) on which petitioners rely provides in perti-

nent part:


     9
      (...continued)
          the taxpayer, his spouse, and dependents.

                  (B) Applicable percentage.–-For purposes of
             subparagraph (A), the applicable percentage shall
             be determined under the following table:

             For taxable years beginning   The applicable
             in calendar year--            percentage is--

             1999 through 2001 . .. . . . . . . .60

     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).
     10
      Although petitioners rely on secs. 105(b) and 106(a) in
petitioners’ opening brief, they rely only on sec. 105(b) in
petitioners’ answering brief.
                                     - 9 -

     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)[11] 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
               * * *.[12]

     Section 106(a) on which petitioners also appear to rely

provides:

     SEC. 106.      CONTRIBUTIONS BY EMPLOYER TO ACCIDENT AND
                    HEALTH PLANS.

                    (a)   General Rule.-- Except as otherwise
               provided   in this section, gross income of an
               employee   does not include employer-provided
               coverage   under an accident or health plan.

A contribution by an employer to an accident or health plan

described in section 106 includes a payment that such employer


     11
          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.
     12
      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). Sec.
213(d)(1)(D).
                              - 10 -

makes of premiums for an accident or health insurance policy

covering an employee.   Sec. 1.106-1, Income Tax Regs.

     The record establishes that Mr. Eyler paid $5,066 of premi-

ums for Mr. Eyler’s Wellmark health policy.   However, petitioners

have failed to produce evidence, let alone credible evidence, see

sec. 7491(a)(1), such as business records or canceled checks

drawn on a business checking account of Mr. Eyler, that estab-

lishes (1) that Mr. Eyler paid those premiums in his capacity as

Ms. Eyler’s employer pursuant to the unwritten health plan and

(2) that he did not pay those premiums in his individual capacity

as the applicant for, and the primary insured under, Mr. Eyler’s

Wellmark health policy.13

     On the record before us, we find that petitioners have

failed to carry their burden of establishing that Mr. Eyler, as

Ms. Eyler’s employer, paid, directly or indirectly, to Ms. Eyler

pursuant to the unwritten health plan the claimed $5,066 of

health insurance premiums in order to reimburse her for expenses

incurred or paid for the medical care of her spouse and




     13
      The parties stipulated that “Audrey Eyler’s salary plus
benefits is reasonable compensation for the work she performed.”
However, the parties have not stipulated, and the record does not
otherwise establish, the “benefits” to which the parties are
referring. We have found that petitioners have failed to carry
their burden of showing that Mr. Eyler paid the premiums for Mr.
Eyler’s Wellmark health policy in his capacity as Ms. Eyler’s
employer pursuant to the unwritten health plan.
                                    - 11 -

herself.14       See sec. 105(b).   On that record, we further find

that petitioners have failed to carry their burden of establish-

ing that Mr. Eyler’s payment of those premiums constitutes a

contribution that Mr. Eyler, as Ms. Eyler’s employer, made to the

unwritten health plan.        See sec. 106(a); sec. 1.106-1, Income Tax

Regs.        On the record before us, we also find that petitioners

have failed to carry their burden of establishing that any

portion of the claimed health insurance premiums is an ordinary

and necessary expense paid or incurred by Mr. Eyler in carrying

on his tiling business.        See sec. 162(a); sec. 1.162-10, Income

Tax Regs.15

     Based upon our examination of the entire record before us,

we find that petitioners have failed to carry their burden of

establishing that they are entitled under section 162(a) to the

$5,066 deduction for “Employee benefit programs” claimed in




        14
      Petitioners’ reliance on Revenue Ruling 71-588, 1971-2
C.B. 91, is misplaced. That revenue ruling involved a taxpayer-
employer who operated a sole proprietorship with several full-
time employees, including his spouse, and who maintained an
accident and health plan for the benefit of those employees and
their families. In contrast to the instant case, pursuant to
that plan, the taxpayer-employer in Revenue Ruling 71-588 reim-
bursed each taxpayer-employer’s employees for expenses incurred
for the medical care of themselves, their spouses, and their
dependents. On such facts, Revenue Ruling 71-588 held that the
reimbursed amounts received by the employees are not includible
in their gross income pursuant to sec. 105(b) and that such
amounts are deductible by the taxpayer under sec. 162(a).
        15
             See also Albers v. Commissioner, T.C. Memo. 2007-144.
                              - 12 -

petitioners’ 2001 Schedule C.16

     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.

     To reflect the foregoing,


                                      Decision will be entered for

                                 respondent.




     16
      As discussed above, respondent allowed in the notice that
respondent issued to petitioners for their taxable year 2001
$3,040 of the claimed $5,066 of health insurance premiums as a
deduction for “Self-Employed Health Insurance”. See sec.
162(l)(1).
