                     T.C. Summary Opinion 2008-18



                       UNITED STATES TAX COURT



            LEO AND SHAWN M. STEPHENS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9171-06S.              Filed February 25, 2008.



     Reggie L. Wegner, for petitioners.

     Milan H. Kim and David Conrad, for respondent.


     FOLEY, Judge:    This case was heard pursuant to the

provisions of section 74631 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,



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the years in issue.
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and this opinion shall not be treated as precedent for any other

case.   The issue for decision is whether, pursuant to section

162(a), petitioners are entitled to deduct expenses related to

employee benefit programs.

                              Background

     Petitioner Leo Stephens and his wife Shawn Stephens operated

a custom harvesting business, Stephens Family, LLC, that

consisted of cutting, hauling, and selling grain (the harvesting

business).   Through a joint venture with Mrs. Stephens’s mother,

Clair Schrock, Mr. Stephens also operated a farm on which they

grew various crops and raised 30 to 40 head of cattle.

     In January 1995, Mr. Stephens enrolled in a health plan

through Blue Cross/Blue Shield of Kansas.     Mr. Stephens was the

named policyholder and his family (i.e., his spouse and his four

children) was covered under the plan.      Mr. Stephens paid the plan

premiums out of a joint bank account he owned with Mrs. Stephens.

In December 1998, Mr. Stephens, through AgriPlan/BizPlan, adopted

an employer-provided accident and health plan for employees.     The

plan provided for full reimbursement for health insurance costs

to eligible employees and their families.     In addition, eligible

employees qualified for reimbursement of up to $15,000 for out-

of-pocket medical expenses.    To be reimbursed, eligible employees

were required to submit a transmittal form to AgriPlan/BizPlan
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indicating the amount the employee paid for health insurance and

out-of-pocket medical expenses during the year.    AgriPlan/BizPlan

would then process the transmittal form and issue a statement to

the employer stating the amount the employer should reimburse the

eligible employee.

     On January 1, 1999, Mrs. Stephens entered into an employment

agreement with Mr. Stephens.    Mrs. Stephens agreed to do

bookkeeping for the businesses, run errands, prepare meals for

the staff, answer phones, and do general field work and customary

duties.   The employment agreement specified that Mrs. Stephens

would be paid $2,000 annually and be an eligible enrollee under

the AgriPlan/BizPlan.

     In 2001, Mrs. Stephens worked 1,172 hours for the harvesting

business and the farm and was issued a Form W-2, Wage and Tax

Statement (Form W-2).    Thereafter, she submitted an employee

benefit expense transmittal form to AgriPlan/BizPlan claiming

that, in 2001, she had paid $8,650 for medical expenses.     Of this

total, $4,978 was attributable to the health insurance premiums

relating to the Blue Cross/Blue Shield plan, and $3,672 was

attributable to out-of-pocket medical expenses.    These expenses

were paid out of petitioners’ joint bank account, and petitioners

were not reimbursed.    On the Schedule F, Profit or Loss from
                                - 4 -

Farming, accompanying their 2001 return, petitioners deducted

$8,661 for employee benefits programs.

     In 2002, Mrs. Stephens worked 1,258 hours for the harvesting

business and the farm and was issued a Form W-2.   Thereafter,

Mrs. Stephens submitted an    employee benefit expense transmittal

form to AgriPlan/BizPlan claiming that, in 2002, she had paid

$11,242 for medical expenses.   Of this total, $5,985 was

attributable to the health insurance premiums relating to the

Blue Cross/Blue Shield plan, and $5,257 was attributable to out-

of-pocket medical expenses.   These expenses were paid out of

petitioners’ joint bank account, and petitioners were not

reimbursed.   On the Schedule F accompanying their 2002 return,

petitioners claimed an $11,531 deduction relating to employee

benefits programs.

     On February 17, 2006, respondent issued petitioners a notice

of deficiency and determined deficiencies relating to 2001 and

2002.   Respondent determined that petitioners were not entitled

to deduct 100 percent of their medical expenses on Schedule F as

ordinary and necessary business expenses.   Respondent did,

however, allow petitioners a deduction, pursuant to section

162(l), for 60 percent of the $4,978 health insurance premium

payments relating to 2001 and 70 percent of the $5,985 health

insurance premium payments relating to 2002.
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     On May 15, 2006, petitioners, while residing in Colby,

Kansas, filed their petition with the Court.

                             Discussion

     Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred in carrying on a trade or

business.    Ordinary and necessary business expenses include the

reimbursement of employee benefit plan expenses paid or incurred

by employees.   Sec. 162(a)(1); sec. 1.162-10, Income Tax Regs.

Petitioners contend that their health insurance and out-of-pocket

medical care expenses are fully deductible.    Pursuant to section

162(l), petitioners, however, are allowed to deduct only 60

percent of the amount paid for health insurance in 2001 and 70

percent of the amount paid for health insurance in 2002.   Sec.

162(l)(1)(A) and (B).   Accordingly, we sustain respondent’s

determinations that petitioners’ health insurance expenses are

subject to section 162(l).   In addition, pursuant to section

162(a), petitioners’ out-of-pocket medical care expenses are not

ordinary and necessary business expenses and, therefore, are not

deductible.

     Contentions we have not addressed are irrelevant, moot, or

meritless.
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To reflect the foregoing,



                                         Decision will be entered

                                    for respondent.
