                  T.C. Summary Opinion 2006-25



                      UNITED STATES TAX COURT



          PETER F. & MAUREEN L. SPELTZ, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5851-04S.            Filed February 14, 2006.



     Thomas B. Copeland, for petitioners.

     Melissa J. Hedtke, for respondent.



     KROUPA, Judge:   This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in

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




     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, unless otherwise indicated, and
Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 2 -

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

should not be cited as authority.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $9212 for 2000 and $1,082 for 2001.   The issues

for decision are:

     1.   Whether petitioners, husband and wife, had an employer-

employee relationship.   We find that they did.

     2.   Whether petitioners may exclude from gross income

medical benefits of $3,279 in 2000 and $4,539 in 2001 paid by an

employer-spouse to an employee-spouse.   We find that they may.

     3.   Whether petitioners may deduct from gross income medical

benefits of $3,279 in 2000 and $4,539 in 2001 paid by an

employer-spouse to an employee-spouse.   We find that they may.

                            Background

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

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.   Petitioners resided in

Rollingstone, Minnesota, at the time they filed the petition.

Maureen Speltz

     Petitioner Maureen Speltz (Mrs. Speltz) has operated a sole

proprietorship daycare business in petitioners’ home since 1982.

Mrs. Speltz has an elementary education degree, and she has been



     2
      All monetary amounts have been rounded to the nearest
dollar.
                               - 3 -

licensed by the State of Minnesota to run the daycare business

since 1987.   Mrs. Speltz cared for up to 16 children daily during

the years at issue.

     Mrs. Speltz has managed the daycare since 1987 through the

years at issue.   Mrs. Speltz established the daycare’s rules,

policies, and hours of operation.   She established a daycare

business checking account and credit card account in her name and

purchased a professional pre-school curriculum that she has used

to instruct the children.3   In addition, Mrs. Speltz drafted all

parental contracts, addressed parental complaints, negotiated

daycare rates, collected payment, administered bookkeeping,

handled State of Minnesota regulatory personnel, utilized the

services of Mr. Speltz, and taught the curriculum.

     In comparison, Mr. Speltz, while integral to the daycare,

had a limited and narrowly defined role during 2000 and 2001.

Mr. Speltz assisted Mrs. Speltz by monitoring the children from

approximately 2:30 p.m. until 6:00 p.m. and by performing other

maintenance-type tasks.   Mr. Speltz’s part-time role was designed

specifically to fit a medical reimbursement plan that Mrs. Speltz

established with the help of a tax adviser.

Medical Reimbursement Insurance Plan

     Mrs. Speltz established an employer-provided accident and

health plan for employees with the help of a tax adviser in 2000.

     3
      The curriculum was a pre-kindergarten program designed to
teach children colors, letters, and numbers.
                               - 4 -

Mrs. Speltz executed three documents in 2000, an employment

contract, a salary redirection document, and a client data sheet.

     The employment contract described Mr. Speltz’s job duties.

Mrs. Speltz and Mr. Speltz signed the contract.   Mr. Speltz’s

duties were described as childcare, lawn care, chopping firewood,

and repairing toys and sundry items.   Mr. Speltz was also

required to work an “average” of 12.5 hours weekly in return for

a medical reimbursement benefit limited to $6,500 per year.

Medical benefits, according to the contract, included

deductibles, insurance premiums, and medical costs not covered by

insurance.

     The Employee Salary Redirection document provided that $542

per month would be directed to a flexible spending account on Mr.

Speltz’s behalf to pay for Mr. Speltz’s insured and uninsured

healthcare costs.   Mr. Speltz signed the employee salary

redirection document as an “employee” and Mrs. Speltz as his

“employer.”

     In addition, Mrs. Speltz signed a client data sheet

requiring Mr. Speltz to work a “minimum” of 12.5 hours a week and

a “minimum” of 7 months a year.   The client data sheet also

stated that Mr. Speltz’s medical reimbursement was limited to

$6,500 per year.

     Mrs. Speltz relied upon an Internal Revenue Service

Coordinated Issue Paper, entitled “Health Insurance Deductibility
                                 - 5 -

for Self-Employed Individuals,” dated March 29, 1999, and Rev.

Rul. 71-588, 1971-2 C.B. 91, in setting up the plan.4 Each

document permits, under certain circumstances, a sole-proprietor

employer-spouse to deduct medical benefits provided to an

employee-spouse, and the employee-spouse to exclude those same

benefits from his or her gross income.

Mr. Speltz

     Mr. Speltz has provided childcare services (and other

general services) for the daycare since 2000 and has been

reimbursed under the daycare’s accident and health plan for a

limited amount of medical care expenses and insurance premiums as

compensation for his services.

     Mr. Speltz also worked full time during the years at issue

as a machinist for Fastenal Company, Inc. (Fastenal).       Mr.

Speltz’s hours at Fastenal were from approximately 6 a.m. until

approximately 2:15 p.m.   Mr. Speltz had medical and dental

insurance through Fastenal.   Mr. Speltz’s spouse and dependents

were eligible to receive benefits.       Mr. Speltz also had a snow

removal and lawncare service during 2000 and 2001.

     Mr. Speltz began working for the daycare when he returned

home from his full-time job on weekdays, around 2:30 p.m., and he

     4
      Internal Revenue Service Coordinated Issue Papers and
Revenue Rulings are generally not entitled to deference in this
Court. See Lunsford v. Commissioner, 117 T.C. 159, 182 (2001);
see also N. Ind. Pub. Serv. Co. v. Commissioner, 105 T.C. 341,
350 (1995), affd. 115 F.3d 506 (7th Cir. 1997).
                               - 6 -

worked until at least 6 p.m., when the daycare closed.   Mr.

Speltz cared for all the children if Mrs. Speltz was absent,

usually when Mrs. Speltz had doctor or dentist appointments.      For

a short period of time, Mr. Speltz cared for a small boy whose

mother had to work very early from 5 a.m. until 6 a.m.

Generally, however, Mrs. Speltz directed Mr. Speltz to monitor

and care for about five or six older children when he arrived

home.5   Mr. Speltz monitored the children indoors and whenever

possible outdoors, where the children could be active playing

kickball, soccer, and basketball, and sledding on the vast

stretch of property that petitioners maintained according to

State of Minnesota daycare standards.   Sometimes Mr. Speltz took

the children on nature walks along the creek running through

petitioners’ property.   Mr. Speltz also took the children for

rides in a trailer connected to his tractor, and he often took

them across the many acres of petitioners’ farm to collect

firewood that Mr. Speltz chopped to heat petitioners’ home.6      In

addition, Mr. Speltz spent time repairing the children’s toys,

cleaning, and organizing the daycare areas.

     Mr. Speltz also performed tasks benefiting petitioners

personally, including picking up mail, groceries, chopping

     5
      When the children were split into two groups, Mrs. Speltz
watched the younger children, whose care involved diapering,
toilet training, and playing with toys.
     6
      Firewood was the only source of heat in their home.
                                - 7 -

firewood, and transporting the wood by tractor from their distant

farmhouse to their home.    If Mr. Speltz took the older children

in the trailer when he picked up the firewood, he might spend up

to 2 hours returning because he drove the children around the

property.

     During the snowy Minnesotan winter months, Mr. Speltz plowed

petitioners’ driveway and shoveled snow from the walkway to

petitioners’ house.    Mr. Speltz did this several times daily on

blustery days as Mrs. Speltz’s clients were usually mothers

carrying small children who dropped them off and picked them up

at several times during the day (Mr. Speltz sometimes left his

full-time job to do this).

     Mrs. Speltz directed that Mr. Speltz perform only childcare

and maintenance tasks, and she made contemporaneous notes

detailing his activities.    Mr. Speltz’s assistance was integral

to Mrs. Speltz’s daycare business.      Moreover, as the nature of

Mr. Speltz’s daycare-related work varied little, he required

minimal instruction.   Though petitioners derived a personal

benefit from some of Mr. Speltz’s activities, Mr. Speltz would

not have spent the amount of time or devoted the degree of care

to those activities were there no daycare business.
                                - 8 -

Training

     Mrs. Speltz directed Mr. Speltz to take classes in nutrition

and general childcare because the State of Minnesota and County

in which petitioners resided required daycare personnel to have

this training.   Mr. Speltz’s training consisted of about 2 hours

of child-nutrition training and about 4 hours of child-behavioral

guidance.

     Mrs. Speltz substantiated that Mr. Speltz worked 525.25

hours in 2000 and 735 hours in 2001, an average of 12.84 hours a

week in 2000 and 14.13 hours a week in 2001.

License

     Mrs. Speltz had a State of Minnesota issued daycare license.

From 1987 through February 1999, Mrs. Speltz’s license listed her

name only.    In February 1999, the State issued the license in

Mrs. Speltz’s and Mr. Speltz’s names.    Mr. Speltz did not apply

for the license and took no part in interviews or inspections

required to obtain the license.    The State of Minnesota listed

Mrs. Speltz’s and Mr. Speltz’s names most likely because they

were listed as co-owners of the home where Mrs. Speltz maintained

the daycare.   The license issued in August 2001 omitted Mr.

Speltz’s name and listed only Mrs. Speltz’s name.

Tax Returns

     Petitioners reported daycare income and expenses on

Schedules C, Profit or Loss From Business, of their joint Federal
                                - 9 -

income tax returns for 2000 and 2001, listing their principal

business as “child care.”    Petitioners deducted $3,279 as an

employee benefit program expense in 2000, including $705.82 for

health insurance premiums.    Petitioners deducted $4,539 as an

employee benefit program expense in 2001, including $968.06 for

health insurance premiums.

     Respondent disallowed petitioners’ claimed employee benefit

program expense deductions because respondent found petitioners

failed to establish that the amounts were ordinary and necessary

business expenses or that Mr. Speltz was a bona fide employee of

the daycare.   Respondent mailed petitioners a deficiency notice

on February 23, 2004, and petitioners timely filed a petition.

                             Discussion

     We are presented with two issues, the excludability of

medical premiums and reimbursements from petitioners’ gross

income and the deductibility of those same amounts from the

daycare business income.    Regarding the excludability issue, we

must determine whether petitioners entered into a valid

arrangement for the payment of health benefits under section

105(b) and whether Mr. Speltz was a bona fide employee of the

daycare.   Regarding the deductibility issue, we must determine

whether the deduction amount was an ordinary and necessary

business expense of the daycare.
                               - 10 -

     Respondent makes a number of alternative arguments to

disallow the deductions and exclusions.   Respondent argues that

petitioners’ section 105(b) plan was improper and/or failed on

its own terms, that Mr. Speltz was not a bona fide employee of

the daycare, and that the expenses were not ordinary and

necessary business expenses.   Petitioners counter that the

medical premiums and reimbursements should be excluded from Mr.

Speltz’s gross income because petitioners set up a proper section

105(b) plan for daycare employees and that Mr. Speltz was a bona

fide employee.   Petitioners also contend that the medical

premiums and reimbursements are deductible from the daycare

business income because they were ordinary and necessary business

expenses of the daycare.   We first address the burden of proof.

I.   Burden of Proof

     The Commissioner’s determinations are presumptively correct,

and the taxpayers bear the burden of proving that the

Commissioner’s determinations are erroneous.    Rule 142(a); see

Welch v. Helvering, 290 U.S. 111, 115 (1933).   Taxpayers also

bear the burden of proving that they are entitled to the claimed

deductions.   INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).

     A taxpayer’s burden, however, may shift to the Commissioner

if the taxpayer introduces “credible evidence” complete with the
                                 - 11 -

necessary substantiation and documentation.     See sec. 7491(a);

Higbee v. Commissioner, 116 T.C. 438, 440-443 (2001).     To shift

the burden, the taxpayer must also have complied with

requirements to cooperate with the Commissioner’s reasonable

requests for witnesses, information, documents, meetings, and

interviews.   Sec. 7491(a)(2).    The taxpayer has the burden to

prove the requirements have been met.     Snyder v. Commissioner,

T.C. Memo. 2001-255 (citing H. Conf. Rept. 105-599, at 240-241

(1998), 1998-3 C.B. 747, 994-995).

      Petitioners reasonably complied with respondent’s requests

for information, documents, and meetings.     Petitioners also

produced credible evidence to establish that Mr. Speltz worked a

sufficient number of hours and the nature of the activities he

performed.7   Accordingly, we find that section 7491 shifts the

burden of proof to respondent.     Respondent therefore bears the

burden of proving that petitioners are not entitled to exclude or

deduct Mr. Speltz’s reimbursements for insurance premiums and

medical expenses.

II.   Excludability of Medical Premiums and Reimbursements

      Gross income generally includes all income from whatever

source derived.   Sec. 61(a).    This section has been interpreted


      7
      Petitioners conceded that some of the hours Mrs. Speltz
noted were personal and could not be counted. Mrs. Speltz
subtracted those hours from the tabulation of the hours Mr.
Speltz spent performing daycare-related tasks.
                               - 12 -

broadly to encompass all gains except those specifically excluded

by Congress.   See Commissioner v. Glenshaw Glass Co., 348 U.S.

426, 430 (1955).

     Consistent with this rule, payments by an employer to an

employee through accident and health insurance for personal

injuries or sickness are generally included in gross income.

Sec. 105(a).   An exception exists, however.   Employees may

exclude from gross income employer-paid “reimbursements” for

medical care expenses.    See secs. 105(b), 106(a), 213(d); Schmidt

v. Commissioner, T.C. Memo. 2003-325; see also Rev. Rul. 71-588,

1971-2 C.B. 91 (sanctioning payments from an employer-spouse to

an employee-spouse).8    We must therefore determine whether the

exception applies and whether petitioners may exclude benefits

from income.

     To qualify for excludability, benefits must be received

under a proper plan, notice or knowledge of the plan must be

reasonably available to those covered, and there must be a bona


     8
      We are aware that revenue rulings are not binding on this
Court or other Federal courts. Rauenhorst v. Commissioner, 119
T.C. 157, 171 (2002); Frazier v. Commissioner, 111 T.C. 243, 248
(1998). The public has a right, however, to rely on positions
taken by the Commissioner in published guidance. Alumax, Inc. v.
Commissioner, 109 T.C. 133, 163 n.12 (1997), affd. 165 F.3d 822
(11th Cir. 1999); Am. Campaign Acad. v. Commissioner, 92 T.C.
1053, 1070 (1989); Nissho Iwai Am. Corp. v. Commissioner, 89 T.C.
765, 778 (1987); see also Rev. Proc. 89-14, sec. 7.01(5), 1989-1
C.B. 814, 815 (taxpayers may rely on published revenue rulings in
determining the tax treatment of their own transactions).
                              - 13 -

fide employee.   See secs. 105(b),(e), and 106(a); Larkin v.

Commissioner, 48 T.C. 629, 635 (1967), affd. 394 F.2d 494 (1st

Cir. 1968); Tschetter v. Commissioner, T.C. Memo. 2003-326 (there

need not be a written plan or enforceable employee rights under

the plan so long as the participant has notice or knowledge of

the plan); sec. 1.105-5(a), Income Tax Regs.

     Respondent argues that Mr. Speltz’s medical premiums and

reimbursements should not be excluded from petitioners’ income

because there was no proper plan under section 105(b).

Alternatively, if there was a proper plan, respondent argues that

notice or knowledge of the plan was not reasonably available to

Mr. Speltz.   Respondent also argues that Mr. Speltz did not meet

his contractual obligations under the “client data sheet” to work

12.5 hours each week.   Finally, respondent argues that Mr. Speltz

was not an employee of the daycare.    We address each argument in

turn.

Whether There Was a Proper Plan

     Section 105(b) and the underlying regulations provide

guidelines as to what constitutes an accident and health plan.

See sec. 105(e); sec. 1.105-5(a), Income Tax Regs.   A plan may be

nonfunded or funded, insured or uninsured, it may cover one or

more employees, and different plans may exist for different

classes of employees.   See sec. 105(e); Wigutow v. Commissioner,

T.C. Memo. 1983-620 (the regulation contemplates a plan for the
                              - 14 -

benefit of a single employee); sec. 1.105-5(a), Income Tax Regs.

So long as the participant has notice or knowledge of the plan,

there is no requirement that it be in writing or that an

employee’s rights under the plan be enforceable.   See Wigutow v.

Commissioner, supra.

     The daycare accident and health plan is detailed in Mrs.

Speltz’s “client data sheet,” which states that the medical

benefits plan would be effective in March 2000, that employees

were eligible to receive up to $6,500 a year in reimbursements,

and that employees had to work a minimum of 12.5 hours a week to

be eligible to receive benefits.   On these facts, we find that

the daycare established a proper accident and health plan.

Whether Mr. Speltz Had Notice or Knowledge of the Plan

     Respondent also argues that notice or knowledge of the plan

was not reasonably available to Mr. Speltz.   We disagree.   Mr.

Speltz signed a document indicating that his salary would be in

the form of reimbursements for insurance premiums and medical

expenses up to $6,500 a year, he credibly testified that he had

knowledge of the accident and health plan, and most importantly,

Mr. Speltz used the plan.   See id. (a taxpayer’s signing the

document declaring the plan is evidence that the taxpayer had

knowledge of the plan); see also Charles Schneider & Co. v.

Commissioner, 500 F.2d 148, 155 (8th Cir. 1974) (the Court is the

exclusive judge of the credibility of the witnesses in making its
                             - 15 -

factual findings), affg. T.C. Memo. 1973-130.    We therefore find

that Mr. Speltz had notice and knowledge of the plan.

Whether Mr. Speltz Met the Hourly Requirement

     Respondent also argues that Mr. Speltz worked less than the

minimal hour requirement and, consequently, failed to fulfill his

contractual obligations under the accident and health plan.   More

specifically, respondent cites Mrs. Speltz’s “client data sheet,”

which states that employees are to work a “minimum” of 12.5 hours

a week and a minimum of 7 months a year.   Respondent interprets

the term “minimum” as requiring Mr. Speltz to work 12.5 hours

“every” week, rather than an average of 12.5 hours a week.

     Interpreting the client data sheet, as respondent contends,

to require Mr. Speltz to work 12.5 hours every week would render

the 7 month a year minimum requirement superfluous-–Mr. Speltz

would by definition have to work 12 months a year.   Moreover,

petitioners’ employment contract requires employees to work an

“average” of 12.5 hours a week, not a “minimum” of 12.5 hours.

We find that Mrs. Speltz intended employees to work an average of

12.5 hours a week.

     Interpreting the client data sheet in this manner produces

consistency among the client data sheet, the employment contract,

petitioners’ stated intent that Mr. Speltz work an average of

12.5 hours a week, and that petitioners documented that Mr.

Speltz worked an average of 12.5 hours a week.   Accordingly, Mr.
                                - 16 -

Speltz fulfilled his contractual obligations under the accident

and health plan.    We next determine whether Mr. Speltz was a bona

fide employee of the daycare.

Whether Mr. Speltz Was an Employee

     Whether an employer-employee relationship exists is a

factual question.    See Profl. & Executive Leasing, Inc. v.

Commissioner, 862 F.2d 751, 753 (9th Cir. 1988), affg. 89 T.C.

225 (1987); Air Terminal Cab, Inc. v. United States, 478 F.2d

575, 578 (8th Cir. 1973); Packard v. Commissioner, 63 T.C. 621,

629-630 (1975); see also Haeder v. Commissioner, T.C. Memo.

2001-7.   Courts typically apply a common law agency test to

determine whether an employer-employee relationship exists.    See,

e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-324

(1992); Community for Creative Non-Violence v. Reid, 490 U.S.

730, 751-752 (1989); Matthews v. Commissioner, 92 T.C. 351, 360

(1989), affd. 907 F.2d 1173 (D.C. Cir. 1990).   Moreover, 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 the

employer-employee relationship or on account of the family

relationship.   See Denman v. Commissioner, 48 T.C. 439 (1967);

Haeder v. Commissioner, supra; Shelley v. Commissioner, T.C.

Memo. 1994-432; Martens v. Commissioner, T.C. Memo. 1990-42,

affd. without published opinion 934 F.2d 319 (4th Cir. 1991);
                               - 17 -

Jenkins v. Commissioner, T.C. Memo. 1988-292, affd. without

published opinion 880 F.2d 414 (6th Cir. 1989); Furmanski v.

Commissioner, T.C. Memo. 1974-47.    Because we shifted the burden

under section 7491, respondent has the burden to prove that Mr.

Speltz was not a bona fide employee of the daycare during the

years at issue.

     In determining whether a hired person is an employee under

the general common law of agency, we consider several non-

exclusive factors.9    See Nationwide Mut. Ins. Co. v. Darden,

supra; NLRB v. United Ins. Co., 390 U.S. 254, 258 (1968); Profl.

& Executive Leasing, Inc. v. Commissioner, 89 T.C. 225, 232

(1987), affd. 862 F.2d 751, 753 (9th Cir. 1988).    Inevitably

cases turn on the particular facts of each case, and no one

factor is controlling.    See Profl. & Executive Leasing, Inc. v.

Commissioner, supra.

     The “fundamental” test of whether an employer-employee

relationship exists is whether the hiring party has the “right to


     9
      Courts have looked to factors including the hiring party’s
right to control the employee, the skill required, the source of
the instrumentalities and tools, the location of the work, the
duration of the relationship between the parties, whether the
hiring party has the right to assign additional projects to the
hired party, the extent of the hired party’s discretion over when
and how long to work, the method of payment, the hired party’s
role in hiring and paying assistants, whether the work is part of
the regular business of the hiring party, whether the hiring
party is in business, provides employee benefits, and the tax
treatment of the hired party. See Community for Creative
Non-Violence v. Reid, 490 U.S. 730, 751-752 (1989).
                              - 18 -

control” the activities of the individual whose status is in

issue.   See Profl. & Executive Leasing, Inc. v. Commissioner,

supra; McGuire v. United States, 349 F.2d 644, 646 (9th Cir.

1965); Packard v. Commissioner, supra at 629; Weber v.

Commissioner, 103 T.C. 378, 387 (1994), affd. 60 F.3d 1104 (4th

Cir. 1995); see also Alsco Storm Windows, Inc. v. United States,

311 F.2d 341, 343 (9th Cir. 1962); secs. 31.3401(c)-1(b),

31.3121(d)-1(c)(2), Employment Tax Regs.   We consider this factor

first.

     Mr. Speltz was contractually obligated to work for the

daycare, and he credibly testified that he understood Mrs. Speltz

had the right to control his activities.   See Charles Schneider &

Co. v. Commissioner, 500 F.2d at 155.   When Mr. Speltz arrived

home, Mrs. Speltz generally split the children into two groups,

directing which children Mr. Speltz cared for and where he cared

for them.   Mrs. Speltz also controlled the amount of compensation

Mr. Speltz received, and she had the contractual right to

discharge Mr. Speltz.

     Further, Mr. Speltz did not require repetitious instruction.

His tasks were limited and consistent. See Ewens & Miller v.

Commissioner, 117 T.C. 263, 270 (2001) (the employer need not

supervise every detail of the work environment or set the

employee’s hours to control the employee) (citing Gen. Inv. Corp.

v. United States, 823 F.2d 337, 342 (9th Cir. 1987)); Weber v.
                              - 19 -

Commissioner, supra at 387 (the degree of control necessary to

find employee status varies with the nature of the services

provided).   Mrs. Speltz provided a sufficient level of direction

and control for Mr. Speltz to perform his required duties under

the circumstances.   We find on the record that Mrs. Speltz had

the right to control Mr. Speltz.

     In addition to the control factor, other factors support

petitioners’ employer-employee characterization.   For instance,

Mrs. Speltz’s calendar notations during the years at issue

confirm that Mr. Speltz consistently worked for the daycare, she

paid Mr. Speltz in employee benefits, Mr. Speltz’s work was

integral to the daycare’s operation, Mr. Speltz was trained to

work in childcare, and petitioners’ employment contract evidences

petitioners’ intent to create an employer-employment arrangement.

See generally Community for Creative Non-Violence v. Reid, 490

U.S. 730, 751-752 (1989).

     Moreover, this case is distinguishable from cases finding

that no employer-employee relationship existed among family

members, usually where the taxpayers failed to substantiate the

services provided.   See, e.g., Shelley v. Commissioner, supra

(taxpayer did not document any services the taxpayer’s spouse

performed); Martens v. Commissioner, supra (little to no records

substantiated the services provided).   Petitioners substantiated

the tasks Mr. Speltz performed in detail.
                                - 20 -

     We also find Haeder v. Commissioner, supra, which respondent

cited, distinguishable.   In Haeder, the Court found no employer-

employee relationship existed between two spouses, where one

spouse had a legal practice at home and the other spouse assisted

with secretarial, clerical, bookkeeping, and cleaning services.

Haeder v. Commissioner, T.C. Memo. 2001-7.   In Haeder, the

taxpayer-attorney admitted that the law practice had few clients

during the years at issue and required little assistance.

Moreover, only the taxpayer-attorney testified, and the Court

found that testimony vague, generalized, and conclusory.    Nor did

the taxpayers document the spouse’s purported work activities or

the time spent working.   Id.

     Our case is therefore distinguishable from Haeder.     While

the record in Haeder was “devoid” of credible evidence that an

employer-employee relationship existed, petitioners submitted

credible evidence and testimony concerning the nature of Mr.

Speltz’s activities and Mrs. Speltz’s direction of those

activities.

     Finally, we have applied close scrutiny to the facts and

find that the daycare payments were made on account of the

employer-employee relationship and not on account of the family

relationship.   See Denman v. Commissioner, 48 T.C. 439 (1967);

Haeder v. Commissioner, supra; Shelley v. Commissioner, T.C.

Memo. 1994-432; Martens v. Commissioner, T.C. Memo. 1990-42.     Mr.
                              - 21 -

Speltz’s activities were essential to the daycare business

operations.   Accordingly, we find that payments made under the

daycare’s medical benefits plan in the form of reimbursements are

excludable from petitioners’ gross income under section 105(b).

III. Deductibility of Medical Premiums and Reimbursements

     We next determine whether Mrs. Speltz may deduct the medical

cost of insurance premiums and medical reimbursements paid on Mr.

Speltz’s behalf from daycare business income.   Petitioners may

deduct medical costs attributable to Mr. Speltz if they

substantiated the amount deducted and established that the

amounts were ordinary and necessary and reasonable in amount.10

Whether Payments to Mr. Speltz Were Ordinary and Necessary
Business Expenses

     Respondent argues that petitioners’ employee benefit program

expense should be disallowed because petitioners deducted, in

part, personal expenses, which are not ordinary and necessary

business expenses and are therefore not deductible.   Petitioners

aver that the amounts deducted were ordinary and necessary

business expenses and that the personal characteristics of the

activities Mr. Speltz performed should not supplant the

predominant business purpose of those activities.

     Taxpayers may deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade

     10
      We previously determined that an employer-employee
relationship existed.
                                - 22 -

or business, including a reasonable allowance for salaries or

other compensation for personal services actually rendered.    Sec.

162(a)(1).   An expense is considered “ordinary” if commonly or

frequently incurred in the trade or business of the taxpayer.

Deputy v. du Pont, 308 U.S. 488, 495-496 (1940).     An expense is

“necessary” if it is appropriate or helpful in carrying on a

taxpayer’s trade or business.    Commissioner v. Heininger, 320

U.S. 467, 475 (1943); Welch v. Helvering, 290 U.S. at 113.

     Ordinary and necessary business expenses include payments to

employees for sickness, hospitalization, medical expense, or a

similar benefit plan.   Secs. 162(a), 213(a); sec. 1.162-10(a),

Income Tax Regs.   The test for deductibility in the case of

compensation payments is whether they are reasonable in amount

and are in fact payments purely for services.   See Cardwell v.

Commissioner, T.C. Memo. 1982-453 (citing United States v. Haskel

Engg. & Supply Co., 380 F.2d 786, 788 (9th Cir. 1967)); sec.

1.162-7(a), Income Tax Regs.    Expenses must also be directly or

proximately related to the taxpayer’s trade or business.     Deputy

v. du Pont, supra at 494-495; sec. 1.162-1, Income Tax Regs.

     While taxpayers may generally deduct ordinary and necessary

expenses paid or incurred in carrying on a trade or business,

taxpayers may not deduct personal, living, or family expenses.

See secs. 162(a), 262; see also Feldman v. Commissioner, 86 T.C.

458, 464 (1986); Sharon v. Commissioner, 66 T.C. 515, 522-525

(1976), affd. 591 F.2d 1273, 1275 (9th Cir. 1978).    Moreover,
                              - 23 -

where there is a mixture of business and personal aspects, some

discretion is permitted to determine which considerations

predominate and whether any part of the expenditure may qualify

for a deduction.   See Feldman v. Commissioner, supra at 464;

Heineman v. Commissioner, 82 T.C. 538, 542 (1984) (the

distinction between business expenses and personal expenses is

based on a weighing and balancing of the facts and circumstances

in each case); Sharon v. Commissioner, supra at 524 (a weighing

and balancing of the facts is required to give the business and

personal characteristics their proper order of importance).

     We agree with respondent that the hours Mr. Speltz spent

picking up mail and groceries and those spent transporting

firewood without children are not sufficiently business oriented

to warrant an expense deduction.   Nonetheless, Mr. Speltz

completed a substantial number of hours of business-oriented

services for the daycare that Mrs. Speltz credibly substantiated.

We therefore find that the medical expense deductions

attributable to Mr. Speltz’s business-oriented activities were

ordinary and necessary business expenses of the daycare.

Whether the Payments Were Reasonable in Amount

     We must also determine whether the amounts paid to Mr.

Speltz as compensation were reasonable in amount.   Mr. Speltz was

paid $3,279 in 2000 and $4,539 in 2001.   Whether amounts paid as

wages are reasonable compensation for services rendered is a

question of fact to be decided on the basis of the facts and
                              - 24 -

circumstances of each case.   See Estate of Wallace v.

Commissioner, 95 T.C. 525, 553 (1990), affd. 965 F.2d 1038 (11th

Cir. 1992).   Further, there are no fixed rules or exact standards

for determining what constitutes reasonable compensation.    See

Golden Constr. Co. v. Commissioner, 228 F.2d 637, 638 (10th Cir.

1955), affg. T.C. Memo. 1954-221.   With these rules in mind, we

determine whether the compensation Mr. Speltz received for

business-related services was reasonable in amount.

      Mrs. Speltz recorded that Mr. Speltz worked 517.25 hours in

2000 and 655 hours in 2001.   During those years, Mr. Speltz

received medical benefits of $3,279 and $4,255.58, respectively.

Mr. Speltz therefore received approximately $6.34 an hour in 2000

($3,279/517.25) and $6.50 an hour in 2001 ($4,255.58/655).     Mr.

Speltz’s hourly rate is comparatively low considering the $13 an

hour that Mrs. Speltz testified she would have had to pay a

daycare substitute.   Eliminating even half of Mr. Speltz’s hours

would produce a not unreasonable amount of compensation at $12.69

an hour in 2000 ($3,279/258.5) and $13.06 an hour in 2001

($4,255.58/325.75).   Even assuming arguendo, therefore, that half

the hours Mrs. Speltz logged for Mr. Speltz were personal and

disallowable, we would nonetheless still find the compensation

provided Mr. Speltz in the years at issue reasonable in amount.

IV.   Whether Petitioners May Deduct Insurance Premiums

      In the alternative, respondent argues that the “insurance

premium” component of Mr. Speltz’s reimbursements is not
                             - 25 -

deductible under section 162(l).     On the contrary, petitioner

contends that section 162(l) applies only to self-employed

individuals and that because the deductions are attributable to

Mr. Speltz, an employee, section 162(l) does not apply.11     We

agree.

     Under section 162(l), a self-employed taxpayer may deduct

the cost of medical insurance premiums under certain conditions.

A self-employed taxpayer may not deduct the cost of medical

insurance premiums, however, if the self-employed taxpayer is

eligible to participate in a subsidized health plan of another

employer of the taxpayer or of a spouse’s employer.    Sec.

162(l)(2)(B).

     Mrs. Speltz is self-employed.    She deducted on the daycare

Schedules C the cost of medical insurance premiums paid for Mr.

Speltz under the daycare’s accident and health plan for

employees, and she was eligible to receive medical benefits

through Mr. Speltz’s subsidized health plan with Fastenal, his

full-time employer.

     While section 162(l) applies to Mrs. Speltz because she is

self-employed, section 162(l) does not apply to Mr. Speltz.        See

secs. 162(l)(1)(A), 401(c)(3).   Because the premiums were paid

for medical insurance for Mr. Speltz, the limits of section



     11
      The deduction amounts of $705.82 in 2000 and $968.06 in
2001 constituted medical, dental, and cancer insurance premiums.
The full amounts deducted were $3,279 in 2000 and $4,539 in 2001.
                             - 26 -

162(l) and section 162(l)(2)(B) do not apply.    Accordingly,

petitioners are entitled to deduct their expenses for medical

insurance premiums for Mr. Speltz.

     In reaching our holding, we have considered all arguments

made, and, to the extent not mentioned, we conclude that they are

moot, irrelevant, or without merit.    To reflect the foregoing and

the concessions of the parties,


                                           Decision will be entered

                                      for petitioners.
