95-0918
Income
Signed 3/11/96
BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX,
Petitioners, : ORDER
:
v. : Appeal No. 95-0918
:
AUDITING
DIVISION OF THE : Account No. XXXXX
UTAH STATE TAX COMMISSION, :
:
Respondent. : Tax Type: Audit
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for an Initial Hearing
pursuant to the provisions of Utah Code Ann. §59-1-502.5, on XXXXX. G. Blaine Davis, Administrative Law Judge,
heard the matter for and on behalf of the Commission. Present on the telephone and representing Petitioners was
XXXXX. Present and representing
Respondent were XXXXX and XXXXX from the Auditing Division.
Respondent
performed an audit on the individual income tax returns for Petitioners for
XXXXX and XXXXX. As a result of the
audit, an assessment of additional taxes was made in an amount of $$$$$,
together with a negligence penalty of XXXXX and interest at the statutory rate,
for a total amount due of $$$$$ as of XXXXX.
The
issue in the case is whether Petitioners have properly deducted medical
expenses incurred by them and reimbursed by XXXXX consulting business as a
qualified medical reimbursement plan under §162(A) Internal Revenue Code and
not includable as income under §105(B) Internal Revenue Code.
XXXXX
has a full time job at which he is employed, and from which he derives the
majority of his income. In addition to
his full time employment, he also has a consulting business as a second source
of income. For XXXXX, the adjusted
gross income for Petitioners was $$$$$.
For XXXXX, the adjusted gross income was $$$$$. The issue in this
proceeding results from the Schedule C business income for Petitioners, and for
XXXXX the gross income shown on the Schedule C was $$$$$. For XXXXX, the gross income shown on the
Schedule C was $$$$$. Based the total
gross income is on the Schedule C for the two years in question of less than
$$$$$, Petitioner deducted an amount of $$$$$ for medical reimbursement in
XXXXX, and $$$$$ for medical reimbursement in XXXXX. Those amounts of medical reimbursement were based upon a gross
salary paid to his wife of $$$$$ for XXXXX, and $$$$$ for XXXXX.
The
items paid for medical reimbursement would have been deductible by Petitioners
as an itemized deduction if it had been sufficient to exceed XXXXX of the
adjusted gross income. However, because
of the amount of the adjusted gross income of Petitioners, the medical expenses
would have been deductible only to the extent that they exceeded $$$$$ for
XXXXX, and $$$$$ for XXXXX. Thus, the
Petitioners have deducted more than $$$$$ in medical expenses for the two years
that would not have been deductible for them on their itemized deduction
schedule.
For
medical expenses to be deductible on a medical reimbursement plan, the
transaction must be shown to have economic substance beyond tax avoidance, and
there must be a legitimate business purpose for the transaction. Also, in determining the total economic
package, the items must have economic reality and must be entered into for
business purposes and not just for tax avoidance. In essence, there must be economic effects other than the
creation of income tax loses. In this
case, the Commission finds that there is no economic substance beyond tax
avoidance and there is no legitimate business purpose for the deduction. The payment of only a $$$$$ salary for one
year and a $$$$$ salary for the second year indicates that the employee, the
wife of XXXXX, ise only paid for tax avoidance purposes and that there is no
economic reality to the transactions.
Employee benefits, including medical reimbursement plans, are to permit
an employer to provide a total compensation package to its employees that will
help it obtain and retain the best qualified people to perform services for the
company. It is obvious that with less
than $$$$$ of gross income for the two year period that the business is not
dependent upon the qualifications of the employee for whom the medical
reimbursement plan was provided i.e., XXXXX.
Accordingly,
the Commission determines that the deduction is a sham transaction without
legitimate purpose and is not allowable.
DECISION AND ORDER
Based
upon the information presented at the hearing, and the records of the Tax
Commission, the Commission finds that the audit assessment made by Respondent
against Petitioner should be sustained, and the Petition for Redetermination of
Petitioners is hereby denied.
This
decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become
the Final Decision and Order of the Commission unless any party to this case
files a written request within thirty (30) days of the date of this decision to
proceed to a Formal Hearing. Such a
request shall be mailed to the address listed below and must include the
Petitioner's name, address, and appeal number:
Utah State Tax Commission
Appeals Division
210 North 1950 West
Salt Lake City, Utah 84134
Failure
to request a Formal Hearing will preclude any further administrative action or
appeal rights in this matter.
DATED
this 11 day of March, 1996.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
^^