                  T.C. Summary Opinion 2001-91



                     UNITED STATES TAX COURT



          JAMES A. AND DEBRA J. POYDA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18313-99S.                     Filed June 22, 2001.



     James A. Poyda and Debra J. Poyda, pro sese.

     George W. Bezold, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   The decision to be

entered is not reviewable by any other court, and this opinion

should not be cited as authority.   Unless otherwise indicated,

subsequent section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $1,648 and $1,159 for the taxable years 1995 and

1996.

     The sole issue for decision is whether certain medical

expenses are deductible under section 162(a).1

     Some of the facts have been stipulated and are so found.

The stipulations of fact and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

Medford, Wisconsin, on the date the petition was filed in this

case.

     Among several other endeavors, petitioners owned and

operated a Christmas tree farm during 1995 and 1996.    The

property on which the trees were grown was titled in both

petitioners’ names and is subject to a mortgage for which both

are responsible.   At the time of trial, there were approximately

55,000 trees on an 80-acre portion of the farm and petitioners

sold Christmas trees on 14 lots.   However, during the years in

issue the farm was in an earlier stage of development and

petitioners were not yet cutting and selling trees.    At that


     1
      Respondent’s adjustments for each year to the earned income
credit and the self-employment income tax deduction, as well as
his calculation of petitioners’ liability for self-employment
income tax, are computational and will be resolved by the Court’s
holding on the issue in this case.
                              - 3 -

time, work on the farm directly involving the trees--such as

mowing, fertilizing, pruning, and shearing--occurred in the

months of May through September.    Other business activity

continued through winter months, but these months were not as

busy as summer.

     During 1995 and 1996, Ms. Poyda worked 2 days a week at the

Medford Area Chamber of Commerce.    In addition, she worked an

undetermined amount of time with the Christmas tree farm and also

helped in keeping the books and records for petitioners’ other

endeavors in logging and the growing of ginseng.    All of

petitioners’ activities were conducted out of a home office.      No

records were maintained by petitioners documenting the amount of

time Ms. Poyda spent on farm activities.

     According to the Forms W-2 issued by Mr. Poyda to Ms. Poyda

in 1995 and 1996, she respectively earned $5,200 and $5,400, or

an average monthly salary of approximately $433 and $450.      Ms.

Poyda earned $6,857 in 1995 and $6,525 in 1996 from her 2-day-

per-week job at the Medford Area Chamber of Commerce.    She

received no compensation for work done in connection with

petitioners’ logging and ginseng activities.

     Mr. and Ms. Poyda and their four children received benefits

in the form of health insurance coverage and medical expense

reimbursement from a plan provided to Ms. Poyda, purportedly in

connection with her status as an employee of the farm.    This
                                 - 4 -

plan, administered by Mr. Poyda, was provided by him to his

employees who were aged 25 and older, had worked for him for 36

months, and who worked at least 35 hours per week.2       Expenditures

pursuant to this plan were incurred in the following amounts:

                                     1995         1996

            Insurance premiums     $1,742        $1,243
            Reimbursements          3,274         3,734
               Total                5,016         4,977

Petitioners filed joint Federal income tax returns in 1995 and

1996.    Deductions were claimed by petitioners on Schedules F,

Profit or Loss From Farming, for employee benefits in the amounts

of $5,016 in 1995 and $4,977 in 1996.       These expenses were

disallowed by respondent because petitioners did not establish

that these amounts claimed as employee benefits constituted

ordinary and necessary business expenses.       The adjustments in the

notice of deficiency increase petitioners’ self-employment income

by $5,016 in 1995 and by $5,000 in 1996.

     Respondent argues that the disallowed expenses are not

deductible as trade or business expenses under section 162(a)

because Ms. Poyda was not a bona fide employee of her husband.

     A taxpayer generally may deduct “all the ordinary and

necessary expenses paid or incurred during the taxable year in



     2
      Respondent asserts in his trial memorandum that Ms. Poyda
was the only eligible employee under this plan. There is no
evidence in the record indicating whether or not there were other
eligible employees.
                                - 5 -

carrying on any trade or business”.     Sec. 162(a).   This includes

expenditures for “a sickness, accident, hospitalization, medical

expense, * * * or similar benefit plan * * * if they are ordinary

and necessary expenses of the trade or business.”      Sec. 1.162-

10(a), Income Tax Regs.

     An ordinary expense is one that relates to a transaction “of

common or frequent occurrence in the type of business involved”,

Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary

expense is one that is “appropriate and helpful” for “the

development of the petitioner’s business,” Welch v. Helvering,

290 U.S. 111, 113 (1933).

     We first address the question whether Ms. Poyda was an

employee of her husband.    Whether an individual is an employee is

a question of fact.    See Packard v. Commissioner, 63 T.C. 621,

629-630 (1975); Haeder v. Commissioner, T.C. Memo. 2001-7.      To

determine whether an employer-employee relationship exists,

courts generally apply a common law agency test.       See Matthews v.

Commissioner, 92 T.C. 351, 360-361 (1989), affd. 907 F.2d 1173

(D.C. Cir. 1990).   Where a family relationship is involved, close

scrutiny is required to determine whether a bona fide employer-

employee relationship existed, and whether payments were made on

account of such a relationship or instead on account of the

family relationship.   See Haeder v. Commissioner, supra.
                                - 6 -

     Petitioners presented as evidence a document alleged to be

an employment contract between Ms. Poyda and her husband.

According to the terms of this document, dated January 1, 1992,

Ms. Poyda agreed to work 35 hours per week for her husband at a

monthly salary of $100.    Whether petitioners intended this

document to be an actual, binding contract is doubtful, primarily

because of the following reasons.

     First, the document required Ms. Poyda to work 35 hours per

week at a monthly salary of $100, which would amount to less than

$1 per hour.   Ms. Poyda actually earned a monthly salary of

approximately $433 and $450 in 1995 and 1996, respectively.

Although these amounts are more reasonable, they do not conform

to the document.

     Second, we are not convinced that Ms. Poyda spent 35 hours

per week throughout the year on the farm, as specified in the

document.   Mr. Poyda testified that Ms. Poyda worked 35 hours per

week throughout the year doing “the majority of the work in the

Christmas trees,” including participation in planting,

fertilizing, mowing, pruning, and related activity, as well as

all of the “bookworks, phone works, any orders coming in.”     Ms.

Poyda did not testify concerning her own activities.    Petitioners

presented no evidence corroborating Mr. Poyda’s testimony, nor

did they provide any details other than these general and

conclusory statements.    Furthermore, the work on the farm was
                               - 7 -

subject to seasonal variations, and Ms. Poyda was engaged in

other time-consuming activities--employment with the Medford Area

Chamber of Commerce, helping with petitioners’ other business

activities, and her role in raising their four children.   Both of

these facts support the conclusion that Ms. Poyda did not adhere

to the alleged contract by working 35 hours each week.

     Third, while Ms. Poyda did perform some services in

connection with the tree farm, these services were performed more

in the nature of a co-owner than an employee.   Petitioners

stipulated the fact that they owned and operated the tree farm

and that they jointly owned the property on which the farm was

located.   This signifies joint responsibility for the farm,

rather than the existence of an employer-employee relationship.

Furthermore, Ms. Poyda also assisted her husband with similar

activities in their other business endeavors without receiving

compensation therefor.   This indicates she was not treated as an

employee in any of these contexts.

     We find that the expenses were not ordinary and necessary

expenses incurred in connection with the tree farm.   See Welch v.

Helvering, supra.   There is nothing in the record to indicate any

connection between the medical benefits Ms. Poyda received and

her assistance on the farm, or even her assistance with

petitioners’ other endeavors, regardless of whether that

assistance was as an employee or as a co-owner.   We find the
                                 - 8 -

medical expenses were not business expenses, but rather were

personal expenses of Mr. and Ms. Poyda.      See Haeder v.

Commissioner, supra.   Personal, living, and family expenses

generally are not deductible.     See sec. 262(a).   As respondent

concedes, these expenses would be deductible by petitioners, to

the extent allowed under section 213(a), without reference to the

tree farm.   However, such a deduction would not affect

petitioners’ tax liability.3    Although neither party addressed

the applicability of section 162(l) in this case, we note that

because petitioners incurred a loss in the farming activity

section 162(l) does not entitle petitioners to deduct a portion

of the insurance premiums.     See sec. 162(l)(2)(A).

     Finally, a Rule 155 computation will be required in this

case to correct an adjustment made in the notice of deficiency

with respect to taxable year 1996.       Petitioners deducted $4,977

in employee benefits on the Schedule F in that year.

Respondent’s adjustment of $5,000 overstates petitioners’ self-

employment income by $23.

     Reviewed and adopted as the report of the Small Tax Case

Division.


     3
      Petitioners have zero taxable income in each of 1995 and
1996. The deficiencies in this case arise solely from increases
in petitioners’ self-employment income and petitioners’ adjusted
gross income (the latter causing an adjustment to the earned
income credit). A deduction under sec. 213(a) would affect
neither the amount of petitioners’ self-employment income nor the
amount of their adjusted gross income. See secs. 62(a), 1402(b).
                            - 9 -

To reflect the foregoing,

                                    Decision will be entered

                            under Rule 155.
