                        T.C. Memo. 2007-34



                      UNITED STATES TAX COURT



         IVAN G. AND ROSEMARY J. SNOREK, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12863-05.            Filed February 8, 2007.



     Frank W. Bastian and Reggie L. Wegner, for petitioners.

     Blaine Holiday and Kristin T. Timmons, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   Respondent determined a $607 deficiency in

petitioners’ Federal income tax for 2001.    After concessions,1

the sole issue for decision is whether health insurance premiums


     1
      Both petitioners and respondent have conceded adjustments
to the amount of the business expense deductions petitioners
claimed on the return for 2001.
                               - 2 -

for petitioner Rosemary Snorek (Mrs. Snorek) are fully deductible

under section 162(a)2 or only 60 percent deductible under section

162(l).   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/BizPlan



     2
      All 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.
                               - 3 -

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 to

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(l).

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 employee

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(l).    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(l)(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(l).    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(l).

     To reflect the foregoing and the concessions of the parties,


                                           Decision will be entered

                                     under Rule 155.
