T.C. Memo. 2010-41



                     UNITED STATES TAX COURT



         MILO L. AND SHARLYN K. SHELLITO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10223-06.                Filed March 3, 2010.



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

     Peter N. Scharff, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined deficiencies of

$3,995 and $6,947 in petitioners’ 2001 and 2002 Federal income

taxes, respectively, and a $1,389 accuracy-related penalty under

section 6662(a) for 2002.1   The issues for decision are:

     1
      All Rule references are to the Tax Court Rules of Practice
                                                   (continued...)
                                 - 2 -

(1) Whether petitioners are entitled for 2001 and 2002 to deduct

under section 162(a) amounts they claimed for employee benefit

programs on Schedules F, Profit or Loss From Farming; and (2)

whether petitioners are liable for the section 6662(a) accuracy-

related penalty for 2002.

                           FINDINGS OF FACT

     The parties have stipulated some facts, which we incorporate

herein.     When they petitioned the Court, petitioners resided in

Kansas.     During the years at issue and for an unspecified period

before then, petitioners were married, with two dependent

children.     Hereinafter, references to petitioner are to Milo

Shellito and references to Mrs. Shellito are to Sharlyn Shellito.

     Petitioner has engaged in a farming business since about

1978.     In 2001 and 2002 his farming operation covered about 2,300

acres.     Most of this land he leased from his father or other

parties.     Petitioners jointly owned about 47 acres.   They also

jointly owned three pickup trucks that were used on the farm.

Petitioner individually owned other farm equipment, including a

tractor and a combine.

         Petitioners held a joint checking account.   They each wrote

checks from the account to pay expenses.      During 2001, 2002, and



     1
      (...continued)
and Procedure, and all section references are to the Internal
Revenue Code in effect for the years at issue. Numbers have been
rounded to the nearest dollar.
                               - 3 -

prior years a number of commercial/agricultural loans were taken

out to finance petitioner’s farming operations.    Both petitioners

signed most of the promissory notes for the loans.

     Mrs. Shellito has assisted on the farm since at least 1982.

The nature of her services has remained fairly constant over

time.   Before, during, and after the years at issue her services

included:   Assisting with the planting and harvesting of crops;

operating tractors and equipment; feeding and caring for cattle;

building and repairing fencing; maintaining and performing basic

equipment repairs; running various errands; and performing

accounting and bookkeeping services.   Before 2001, at least, Mrs.

Shellito received no compensation for these services.

     In 2001, upon the advice of his banker, petitioner engaged a

certified public accountant (C.P.A.) to prepare taxes and perform

payroll services for the farming business.    The C.P.A. advised

petitioner that he could qualify for an employee medical

reimbursement plan if Mrs. Shellito were petitioner’s employee.

The C.P.A. created a document which petitioners signed on or

about May 29, 2001.   The document states:

                       EMPLOYMENT AGREEMENT

          Agreement made effective as of May 29, 2001 by
     Milo Shellito to employee Sharlyn Shellito. Employer
     is engaged in the business of farming at the following
     address * * *

          Employer employs, engages, and hires employee as a
     hired hand to operate farm machinery work and handle
     cattle, do repairs, run errands, and another farm
                                - 4 -

     related chores, and employee accepts and agrees to such
     hiring, engagement, and employment, subject to the
     orders, advice and directions of employer.

          The employer has the right to terminate the
     employee at anytime. The employee has the right to
     quit at anytime.

     The C.P.A. helped petitioners fill out a preprinted

application for AgriPlan/BIZPLAN, a medical expense reimbursement

plan, which offered medical expense reimbursements to eligible

employees.   Petitioner signed this application on May 29, 2001.

The application lists Mrs. Shellito as the only eligible employee

of petitioner.   It indicates that available benefits for Mrs.

Shellito were to consist of unlimited reimbursement of health

insurance premiums for her and her family, reimbursement of up to

$15,000 of out-of-pocket medical expenses for her and her family,

and $50,000 of term life insurance for Mrs. Shellito.2

     Also on May 29, 2001, an individual checking account was

opened in Mrs. Shellito’s name.    Acting on the C.P.A.’s advice,

on June 7, 2001, and each month thereafter in 2001 and 2002,

petitioner wrote Mrs. Shellito a $100 check from their joint

checking account, which she deposited into her individual

checking account.    The memo line on most of the checks and each

accompanying deposit ticket stated that the check represented

wages or salary.    Mrs. Shellito used these funds to pay for



     2
      There is no indication in the record that petitioner ever
provided Mrs. Shellito any term life insurance.
                                  - 5 -

medical care for herself, petitioner, and their dependent

children.

2001 Items and Tax Treatment

     For the part of 2001 after May 29, 2001, Mrs. Shellito paid

$7,899 in expenses for medical care and health insurance premiums

for herself, petitioner, and their dependent children, as

follows:

                Expense/Premium              Amount

     Out-of-pocket medical expenses1         $4,671
     Medical mileage                             97
     Insurance premiums2                      3,131
          Total                               7,899
            1
           This amount includes $4,479 that Mrs. Shellito
     paid from her separate checking account and $192 that
     she paid directly from petitioners’ joint checking
     account.
            2
           This $3,131 of insurance premiums comprised these
     three items: (1) $689 that Mrs. Shellito paid to
     Conesco Health Insurance Co. for an insurance policy
     under which she was the primary insured; (2) $1,990
     that Mrs. Shellito paid to American Republic Insurance
     Co. for an insurance policy under which petitioner was
     the primary insured; and (3) $452 that was
     automatically debited from petitioners’ joint checking
     account for premiums paid to American Fidelity
     Insurance Co. for a cancer expense insurance policy
     that listed petitioner as the named insured.

     Beginning July 18, 2001, and continuing periodically

thereafter throughout 2001, petitioner wrote Mrs. Shellito checks

totaling $5,400, drawn on their joint checking account.   She

deposited them in her separate checking account.   The
                                - 6 -

accompanying deposit tickets indicate that the deposits

represented medical reimbursements from Mr. Shellito.3

     On January 11, 2002, petitioners executed a document

entitled “Employee Benefit Expense Transmittal”, which they sent

to AgriPlan/BIZPLAN.    In this document petitioner claimed

eligible expenses incurred for eligible plan participants during

2001 of $10,323.4   On February 20, 2002, AgriPlan/BIZPLAN sent a

yearend report to petitioner.    The report indicated that on the

basis of a review of the Employee Benefit Expense Transmittal,

the total submitted benefit expenses were $15,593 and that this

amount could be deducted as a business expense on petitioner’s

business tax return.5




     3
      Petitioners allege that petitioner actually paid Mrs.
Shellito more than the $5,400 of reimbursements described above
because he paid additional amounts directly to insurance
companies on Mrs. Shellito’s behalf. Although we do not find
petitioners’ allegations well founded, because our analysis does
not depend upon the exact amount of reimbursements that
petitioner allegedly paid Mrs. Shellito, we need not address this
issue further.
     4
      We are unable to correlate this number with other evidence
in the record.
     5
      The record does not conclusively explain the discrepancy
between the $15,593 listed on this yearend report and the $10,323
of expenses that petitioner claimed on the Employee Benefit
Expense Transmittal or the $7,899 of medical expenses that Mrs.
Shellito incurred after May 29, 2001.
                               - 7 -

     Petitioner issued to Mrs. Shellito a Form W-2, Wage and Tax

Statement, reporting wages paid of $754 in 2001.6   Petitioners

reported this amount as wages on their 2001 Form 1040, U.S.

Individual Income Tax Return, which their C.P.A. prepared.    On

the Schedule F attached to their 2001 Form 1040, petitioners

claimed a $15,593 deduction for “Employee benefit programs” and a

$700 deduction for “Labor hired”.   On their 2001 Form 1040

petitioners listed Mrs. Shellito’s occupation as “HOUSE WIFE”.

     In the notice of deficiency respondent disallowed $14,904 of

the amount that petitioners had claimed for “Employee benefit

programs”; i.e., all but $689.7   Respondent allowed petitioners a

$2,898 offsetting adjustment for “Self Employed Health

Insurance”.8

2002 Items and Tax Treatment

     For 2002 Mrs. Shellito incurred or paid $22,307 of expenses

for medical care and health insurance premiums for herself,

petitioner, and their dependent children, as follows:



     6
      This amount represents $700 of total monthly cash payments
plus $54 of employment taxes that petitioner reported paying on
Mrs. Shellito’s behalf. On Form 943, Employer’s Annual Tax
Return for Agricultural Employees, petitioner reported liability
for employment taxes of $107 for 2001.
     7
      The parties agree that this $689 represents the premium
that Mrs. Shellito paid in 2001 on the Conesco Health Insurance
Co. insurance policy that listed her as the primary insured.
     8
      The record does not indicate how this adjustment was
calculated.
                                   - 8 -

             Expense/Premium                      Amount

     Out-of-pocket medical expenses              $15,975
     Medical mileage                                 435
     Insurance premiums1                           5,897
          Total                                   22,307
             1
           This $5,897 of insurance premiums comprised these
     two items: (1) $1,702 that Mrs. Shellito paid to
     Conesco Health Insurance Co. for the insurance policy
     under which she was the primary insured; and (2) $4,195
     that Mrs. Shellito paid to American Republic Insurance
     Co. for an insurance policy that listed petitioner as
     the primary insured.

     During 2002 petitioner wrote Mrs. Shellito, on their joint

checking account, checks totaling $20,800, which she deposited in

her separate checking account.       The accompanying deposit tickets

indicate that the deposits represented medical reimbursements

from petitioner.

     On January 30, 2003, petitioners executed a document

entitled “Employee Benefit Expense Transmittal”, which they sent

to AgriPlan/BIZPLAN.       In this document petitioner claimed

expenses for eligible plan participants during 2002 of $22,202,

consisting of $5,897 insurance premiums and $16,305 of medical

expenses.9       On February 14, 2003, AgriPlan/BIZPLAN sent a yearend

report to petitioner.       The report indicated that on the basis of

a review of the Employee Benefit Expense Transmittal, the total

submitted benefit expenses were $22,202 and that after a $1,305



     9
      Although $22,202 is close to the $22,307 of medical
expenses incurred or paid by Mrs. Shellito during 2002, the
record does not explain the seeming discrepancy.
                              - 9 -

negative adjustment, the total benefit expenses that could be

claimed as a business expense on petitioner’s business tax return

were $20,897.10

     Petitioner issued to Mrs. Shellito a Form W-2 reporting

wages paid of $1,292 in 2002.11   Petitioners reported this amount

as wages on their 2002 Form 1040, which their C.P.A. prepared.

On the Schedule F attached to their 2002 Form 1040, petitioners

claimed a $20,897 deduction for “Employee benefit programs” and a

$1,200 deduction for “Labor hired”.   On their 2002 Form 1040

petitioners listed Mrs. Shellito’s occupation as “HOUSE WIFE”.

     In the notice of deficiency respondent disallowed $20,208 of

the amount that petitioners had claimed for “Employee benefit

programs”; i.e., as for 2001, all but $689.12   Respondent allowed




     10
      The report contains no explanation of the $1,305 negative
adjustment. It appears, however, that this was the amount by
which petitioner’s $16,305 of reported medical expenses exceeded
the $15,000 limit on reimbursements of out-of-pocket expenses as
indicated on petitioner’s AgriPlan/BIZPLAN application.
     11
      This amount represents $1,200 of total monthly cash
payments plus $92 of employment taxes that petitioner reported
paying on Mrs. Shellito’s behalf for 2002. On Form 943
petitioner reported liability for employment taxes of $184 for
2002.
     12
      As noted supra note 7, the parties agree that $689
represents the premium that Mrs. Shellito paid in 2001 on the
Conesco Health Insurance Co. insurance policy under which she was
the primary insured. In 2002 the premium that Mrs. Shellito paid
on this insurance policy was actually $1,702. The record
contains no explanation as to why respondent allowed this
deduction for 2002 in the amount of the 2001 premium.
                             - 10 -

petitioners a $3,646 offsetting adjustment for “Self Employed

Health Insurance”.13

                            OPINION

I.   Employee Benefit Plan Expenses

     Before 2001 Mrs. Shellito had worked on petitioners’ family

farm without compensation for about 20 years.    In 2001, upon the

advice of their C.P.A., petitioners signed a document whereby

Mrs. Shellito purportedly became her husband’s at-will employee.

Although the document makes no reference to compensation,

petitioner purportedly agreed to pay Mrs. Shellito $100 a month

plus medical benefits in the form of reimbursements for medical

expenses and health insurance premiums incurred for herself,

petitioner, and their dependent children.    Petitioners contend

that pursuant to section 162(a) they are entitled to deduct these

purported reimbursements as employee benefit plan expenses.    For

the reasons explained below, we disagree.

     A.   Burden of Proof

     As a general matter, the Commissioner’s determination is

presumptively correct, and the taxpayer bears the burden of

proving entitlement to claimed deductions.    Rule 142(a); INDOPCO,

Inc. v. Commissioner, 

, 84 (1992).    In certain

circumstances, the burden of proof with respect to any factual



     13
      The record does not indicate how this adjustment was
calculated.
                               - 11 -

issue may be shifted to the Commissioner.   Sec. 7491(a).   The

parties disagree as to whether petitioners have met the statutory

requirements to shift the burden of proof to respondent.    Because

we do not decide this case by reference to the placement of the

burden of proof, we need not and do not decide whether

petitioners have met the requirements under section 7491(a) to

shift the burden of proof to respondent.

     B.   Section 162(a)

     Section 162(a)(1) allows a deduction for all ordinary and

necessary expenses paid or incurred in carrying on any trade or

business, including a reasonable allowance for “salaries or other

compensation for personal services actually rendered”, such as

any amount paid to an employee pursuant to an employee benefit

plan for an expense that the employee pays or incurs.    Sec.

1.162-10(a), Income Tax Regs.; see Frahm v. Commissioner, T.C.

Memo. 2007-351.14   Respondent concedes that pursuant to this


     14
      Under sec. 105(b), accident and health insurance payments
made directly or indirectly to an employee to reimburse expenses
for medical care are, with certain limitations, excludable from
the employee’s gross income. For this purpose, amounts received
under an “accident or health plan for employees” are treated as
amounts received through accident or health insurance. Sec.
105(e). Ostensibly pursuant to this provision, petitioners have
excluded from Mrs. Shellito’s gross income the medical expense
reimbursements that petitioner allegedly paid to her. This
claimed exclusion, which is not at issue in this case, is
inconsequential in the light of our holding that Mrs. Shellito
was not petitioner’s employee and received no compensation from
him.

                                                    (continued...)
                              - 12 -

provision petitioners are entitled to most of the claimed

deductions for “Employee benefit programs” if Mrs. Shellito is

properly considered her husband’s employee.15   Respondent

contends, however, that petitioners are not entitled to these

deductions because Mrs. Shellito was not a bona fide employee of

her husband.   We agree with respondent.

     C.   Analysis

     Citing Matthews v. Commissioner, 

, 361 (1989),

affd. 

(D.C. Cir. 1990), and like cases, petitioners

contend that under the common law agency test, the crucial

consideration is the right of control, or lack of it, which the

employer may exercise over the putative employee.   Petitioners

assert that petitioner has employed Mrs. Shellito since 1982


     14
      (...continued)
     Pursuant to sec. 162(l)(1), a self-employed individual may
deduct a percentage (60 percent in 2001, 70 percent in 2002) of
any amount paid or incurred for insurance that constitutes
medical care for the taxpayer or the taxpayer’s spouse or
children. In the notice of deficiency respondent allowed
petitioners adjustments for “Self Employed Health Insurance” for
each year at issue, ostensibly pursuant to sec. 162(l)(1).
Although we are unable to correlate the derivation of the amounts
of these adjustments with the evidence of record, the parties
have not raised and accordingly we do not reach any issue
regarding these adjustments.
     15
      Respondent contends that even if Mrs. Shellito were deemed
petitioner’s employee, petitioners are not entitled to deduct
certain relatively small amounts that respondent alleges were
paid before May 29, 2001, or amounts that respondent contends
exceed petitioner’s actual reimbursements to Mrs. Shellito. In
the light of our holding that Mrs. Shellito was not a bona fide
employee of petitioner, it is unnecessary to address these
contentions.
                              - 13 -

because since then she has performed her services on the family

farm under petitioner’s control and instruction.   They contend

that petitioners entered into an employment agreement on May 29,

2001, to “formalize” this preexisting employer-employee

relationship.

     We do not agree that the purported employment agreement

formalized a preexisting employer-employee relationship because

we do not believe there was any such preexisting relationship.

The existence of remuneration is an “‘essential condition’” of an

employer-employee relationship.   O’Connor v. Davis, 

,

116 (2d Cir. 1997) (quoting Graves v. Women’s Profl. Rodeo

Association, Inc., 

, 73 (8th Cir. 1990)); see

McGuinness v. Univ. of N.M. Sch. of Med., 

, 979 (10th

Cir. 1998).   Absent remuneration, there is no “plausible”

employment relationship and consequently no need to undertake a

common law agency analysis.   Graves v. Women’s Profl. Rodeo

Association, Inc., supra at 73-74.

     According to petitioners’ own testimony, before May 29,

2001, Mrs. Shellito received no remuneration for her services.16

Consequently, because this essential condition of an employment

relationship was missing, Mrs. Shellito was not her husband’s



     16
      Mrs. Shellito testified that petitioner did not pay her or
provide her any form of compensation before May 29, 2001.
Similarly, petitioner testified that he started paying Mrs.
Shellito and providing her “medical insurance” in 2001.
                               - 14 -

employee before 2001, irrespective of the degree of control he

might have exercised over her.    Rather, it appears to us that

during these many years Mrs. Shellito rendered her services as

part of the “‘shared enterprise’” of marriage, Cray v. Cray, 

, 299 (Kan. 1994) (quoting Berish v. Berish, 

, 184 (Ohio 1982)), as petitioners worked together to make a

living and raise their family.

       We are not convinced that anything happened in 2001 that

materially changed the nature of petitioners’ economic

relationship.    Mrs. Shellito’s tasks on the farm were unchanged.

More significantly, Mrs. Shellito’s purported “compensation” was,

we believe, illusory.

       In essence, the purported compensation arrangement was that

petitioner would reimburse Mrs. Shellito for family medical

expenses and insurance premiums that she paid.17   In paying these

expenses from her separate checking account, Mrs. Shellito

ostensibly assumed the obligation to pay family medical expenses

that under Kansas law were as much her husband’s liability as her

own.    See St. Francis Regl. Med. Ctr., Inc. v. Bowles, 

      Although petitioner “paid” Mrs. Shellito (from their joint
checking account) $100 “wages” each month in addition to
reimbursements for medical expenses, he testified that he
reimbursed her for the amount of “medical bills and stuff” that
was “above and beyond the $100 that I’d paid her prior to.” In
essence, then, the $100 per month of “wages” appears to have been
simply a component of the medical expense reimbursements that
petitioner allegedly paid Mrs. Shellito.
                              - 15 -

1123, 1125 (Kan. 1992) (pursuant to the common law “doctrine of

necessaries”, as recognized under Kansas law based upon the

concept of “unity of marriage”, each spouse is liable for the

other’s “necessaries”, including “medical services”).   We do not

see that Mrs. Shellito obtained any economic benefit from her

husband’s “reimbursing” her, from their joint checking account,

for medical expenses for which he was also liable.18

     In the absence of proof to the contrary, petitioners are

presumed to own equally the funds in their joint checking

account.   See Walnut Valley State Bank v. Stovall, 

(Kan. 1978).   Consequently, we consider the funds paid from their

joint checking account to have been paid equally by each of them.

Cf. Higgins v. Commissioner, 

(1951) (husband was

entitled to deduct on his separate return only half of the

interest paid from his and his wife’s joint checking account).

Insofar as Mrs. Shellito was “reimbursed” with her own funds from

the joint checking account, she clearly obtained no economic

benefit.   Insofar as she was “reimbursed” with her husband’s

funds from the joint checking account, any resulting economic




     18
      Relatively small amounts of the medical expenses in
question were automatically debited from petitioners’ joint
checking account. In addition, Mrs. Shellito paid small amounts
of the medical expenses in question from petitioners’ joint
checking account. These circumstances do not affect our
conclusion that Mrs. Shellito obtained no economic benefit from
the purported employment agreement.
                              - 16 -

benefit is directly offset and negated by her assuming and paying

her husband’s liability for the family medical expenses.

     When all is said and done, it appears to us that Mrs.

Shellito’s and her family’s medical expenses and health insurance

premiums continued, in effect, to be paid from petitioners’ joint

checking account just as they always had been.   We conclude that

Mrs. Shellito received no remuneration under the purported

employment arrangement and consequently during the years at

issue, as in the preceding years, there was no bona fide

employment relationship.

     Petitioners executed the purported employment agreement for

tax reasons on the advice of their C.P.A., who had prepared the

document for them.   Petitioner testified forthrightly that he

started paying Mrs. Shellito in June of 2001 because “it would be

a tax break that I could use.”   Citing Seidel v. Commissioner,

T.C. Memo. 1971-238, petitioners contend that the mere fact that

petitioner had a tax-savings motive does not affect the validity

of the purported employee benefit plan that he adopted.    This may

be true but is beside the point--even a valid employee benefit

plan is unavailing in the absence of a bona fide employment

relationship.   Although a “tax-avoidance motive for structuring a

transaction in a particular way is not inherently fatal,” a

transaction between family members deserves a heightened level of

“skepticism and scrutiny” to determine the transaction’s
                               - 17 -

substance.    True v. United States, 

, 1174 n.6 (10th

Cir. 1999); see Hamdi v. Commissioner, T.C. Memo. 1993-38, affd.

without published opinion 

(6th Cir. 1994).

Exercising that heightened skepticism and scrutiny, we conclude

that in substance petitioners’ purported employment agreement was

a mere formalism that, for the reasons previously discussed, did

not give rise to a true employment relationship.19

     In support of their argument that Mrs. Shellito was

petitioner’s bona fide employee, petitioners note that in the

notice of deficiency respondent did not disallow the deduction

petitioners claimed on Schedule F for “wages” that petitioner

paid Mrs. Shellito and also allowed for each year at issue $681

of the expenses that petitioners claimed for employee benefit

programs.    The notice of deficiency does not explain the

treatment of these items, and respondent has offered no

explanation in this proceeding.20   Whatever inferences might be


     19
      This conclusion is not altered by the fact that petitioner
reported Mrs. Shellito’s “wages” on Forms W-2 and paid relatively
small amounts of employment taxes in furtherance of the claimed
deductions for employee benefit programs, the economic benefit of
which, if sustained, would far exceed the relatively small amount
of employment taxes incurred.
     20
      It might be inferred that respondent’s allowing the
deduction for “wages” paid might have been meant to
counterbalance petitioners’ including these amounts in gross
income as wages. Cf. Haeder v. Commissioner, T.C. Memo. 2001-7
n.10 (noting that the Commissioner had determined that the
taxpayers’ income should be reduced by wages the husband
allegedly paid to his wife). The allowance of the $689 deduction
                                                    (continued...)
                               - 18 -

drawn from respondent’s treatment of these items are

counterbalanced, however, by inferences that might be drawn from

petitioners’ describing, on their Forms 1040 for each year at

issue, Mrs. Shellito’s occupation as “HOUSE WIFE”--a

characterization that we believe was accurate.

     In sum, we conclude that because she received no

remuneration and the purported employment agreement was a mere

formalism, Mrs. Shellito was not petitioner’s bona fide employee

for the years at issue.21   Consequently, petitioner is not


     20
      (...continued)
for employee benefit programs for both 2001 and 2002 is more
puzzling. The parties agree that this $689 deduction represents
the premium that Mrs. Shellito paid in 2001 on her Conesco Health
Insurance Co. policy. In 2002, however, her premium on this
policy was $1,702.
     21
      Cf. Frahm v. Commissioner, T.C. Memo. 2007-351 (holding
that employee benefit plan expenses were allowable under sec.
162(a); the Commissioner conceded the existence of a valid
employment relationship between the married taxpayers); Eyler v.
Commissioner, T.C. Memo. 2007-350 (disallowing claimed sec.
162(a) deduction for want of proof that the taxpayer husband paid
health insurance premiums in his capacity as his wife’s employer
pursuant to an unwritten health plan rather than in his
individual capacity as the primary insured under the health
policy); Albers v. Commissioner, T.C. Memo. 2007-144 (disallowing
claimed sec. 162(a) deduction because taxpayers failed to prove
that the employer husband paid his employee wife, pursuant to an
employee benefit plan, amounts to reimburse her for medical
expenses that she incurred or paid); Francis v. Commissioner,
T.C. Memo. 2007-33 (without deciding the bona fides of a
purported employment relationship between the married taxpayers,
disallowing disputed amounts of sec. 162(a) deduction for want of
evidence that any compensation the taxpayer husband paid his wife
was reasonable in amount); Haeder v. 

,
(disallowing claimed sec. 162(a) deduction on the basis that the
taxpayer’s wife was not his bona fide employee because she
                                                   (continued...)
                                 - 19 -

entitled under section 162(a) to any deduction for employee

program benefits in excess of the amounts respondent has allowed.

II.   Accuracy-Related Penalty

      Respondent determined that for 2002 petitioners are liable

for an accuracy-related penalty under section 6662(a).   Section

6662(a) and (b)(2) imposes a 20-percent accuracy-related penalty

on any portion of a tax underpayment that is attributable to,

among other things, any substantial understatement of income tax,

defined in section 6662(d)(1)(A) as an understatement that

exceeds the greater of 10 percent of the tax required to be shown

on the return or $5,000.   Sec. 6662(d)(1).

      The accuracy-related penalty does not apply with respect to

any portion of the underpayment if it is shown that the taxpayer

had reasonable cause and acted in good faith.   Sec. 6664(c)(1).

Such a determination is made by taking into account all facts and

circumstances, including the experience and knowledge of the

taxpayer and his or her reliance on a professional tax adviser.

See sec. 1.6664-4(b)(1), Income Tax Regs.

      Petitioners sought and in good faith, we believe, followed

the tax advice of their C.P.A., who steered them into setting up

the medical reimbursement plan, helped them fill out the

application for it, drafted the purported employment agreement


      21
      (...continued)
performed no services “other than those reasonably expected of a
family member”).
                              - 20 -

for them, and prepared their tax returns for the years at issue.

Taking into account all the facts and circumstances, including

petitioners’ lack of experience and knowledge regarding tax

matters, we conclude that they reasonably relied upon the

C.P.A.’s advice in claiming the disputed deductions.   Cf. United

States v. Boyle, 

, 251 (1985) (“When an accountant or

attorney advises a taxpayer on a matter of tax law, such as

whether a liability exists, it is reasonable for the taxpayer to

rely on that advice.”).   We do not sustain imposition of the

accuracy-related penalty.

     To reflect the foregoing,


                                         An appropriate decision

                                    will be entered.