The Shellito case is another case of a Section 105 plan that was disallowed by the IRS. The Section 105 plan is one of the most fair advantages to running a mom and pop business. Now the IRS seems determined to keep chipping away at the plans until no one is safe using one.
I have gone beyond logic on this one. Usually the tax law makes no sense, but I can make sense out of the non-sense in advising my clients. In this case it seems that the IRS is using the very nature of marriage to disallow these deductions- which seems to go way beyond the intent of congress in allowing the Section 105 plans to taxpayers.
This is not a case of taxpayer abuse. In most cases I have read it seems to be the IRS trying to find small loopholes in record keeping to deny the deduction.
For example, the IRS used the fact that the spouse listed on the 1040 page 2 occupation as housewife against the couple. The IRS stated that Mrs. Shellito was not a bona fide employee, but provided services as part of a "shared enterprise of marriage." In other words she provided services that a husband could expect his wife to provide and should not have to pay for it in the sense of an employer employee relationship.
At what point do you distinguish whether there is a bona fide employment relationship between husband and wife separate from a "shared enterprise of marriage?" Is this denial simply based upon listing your occupation as "housewife" on the income tax return as implied in the Taxpro Monthly, Issue 6, Volume 32, June 2011, page 1 & 3? What would make the employment arrangement valid or "bona fide?"
A W-2 was prepared for the spouse in the amount of $1,292 in 2002. The section 105 plan covered a total of $22,202 for medical insurance premiums, and out of pocket medical expenses. Farmers used to be able to buy major medical with a low deductible for a couple for less than $5,000.
Medical expenses can be exorbitantly high now since laws were passed in most states prohibiting Farm Bureaus from providing group health insurance. The health care industry has more clout than these small associations and were able to up everyone's health insurance premiums by a factor of four or more by getting the lawmakers to pass these state laws. A Section 105 medical reimbursement plan can help to reduce the impact of these increased costs.
This also seems to be a fertile area for preparer penalties since the accuracy related penalty did not apply because the taxpayers "relied on the advice of their accountant." The Tax Court apparently abated the section 6662(a) and section 6662(b)(2) penalties due to the reliance on the advice of an accountant. I am unaware of whether the IRS assessed preparer penalties against the preparer. Does anyone know what happened to the preparer?
The court allowed a deduction for self-employed health insurance but only a Schedule A deduction limited by 7.5% of AGI (soon to become 10% of AGI) for the out of pocket medical expenses. Many small businesses and farmers are reducing their medical premiums by taking responsibility for more out of pocket and higher deductibles which are virtually not deductible on the schedule A. Decisions like this one may make small businesses and farmers look more carefully at their options for high deductible plans.
I would like to know what measures members are taking that they feel can protect against preparer penalties and tax assessments for converting section 105 medical reimbursement plans to only a deduction for self-employed health insurance.