Category: Compensation & Employee Benefits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Revenue Ruling 71-588, see text below, deals with a sole proprietor who hires his wife as a legitimate, full time, employee and has an accident and health plan covering all employees and their dependents. As a dependent of his wife, the sole proprietor was covered under the plan. The ruling holds the expenses of the plan are not includible in income and are deductible on the sole proprietor's Schedule C. Thus, 100% of the health coverage expenses of the sole proprietor are deductible under this scenario. Note that the facts of the ruling provide that the sole proprietor has other employees as well. PLR 9409006, also included below, reaches exactly the same conclusion. In contrast, however, the published ruling specifically provides that the spouse is a full time employee and there are other full time employees as well. The private ruling is silent on both issues. Some commentators have indicated that the PLR takes us further
than the Rev. Rul. by extending the IRS's blessing to situations
in which the employee spouse is the only employee and/or a part
time employee. While the private ruling is silent on both accounts,
one wonders why the taxpayer in this case would have bothered
to request a PLR in the face of a published ruling directly on
point if it were not the case that the taxpayer's fact pattern
departed from that of the published ruling somehow. In any event,
I cannot discern any explicit difference in the fact patterns
of the two rulings based on what was actually reported. Also,
PLR's cannot be cited as precedent as you well know. You also mentioned a factual nuance whereby the sole proprietor and his or her spouse are separately treated under group health plan in order to have more than one individual under the plan so as to constitute a group. If this fact pattern really exists as a practical matter, I think the premiums for the employee spouse would be deductible and the premiums for the self employed person would be subject to the 30% rules. In the two rulings, the expenses related to the self employed person became deductible by virtue of dependent coverage for the employee spouse. Under your scenario, that is not the case; hence, the difference in result in my view. As an additional thought, note that health coverage must be provided pursuant to a plan. Clearly such a plan should be (and actually may be required to be) in written form. If your client wishes to hire his or her spouse on a part time basis, then any plan would necessarily need to cover all employees, both full and part time. If the client has any other part time employees other than the spouse (either now or in the future), these employees would need to be covered as well. This could significantly impair the advantage gained by this arrangement. REVENUE RULING 71-588 1971-2 CB 91 PLR 9409006 Section 162 -- Business Expense Deduction HEADNOTE: The Service has ruled in technical advice that a sole proprietor is entitled to deduct as a business expense amounts paid to her husband-employee as reimbursement of medical expenses under and employer-provided accident and health plan. The wife operates a consulting business and employs her husband to perform certain services in connection with the business. The husband receives compensation for the services he performs and includes the compensation in gross income on the couple's joint tax return. There is no question that a bona fide employer-employee relationship exists between the wife and the husband. The wife adopted a written employer-provided accident and health plan that, by its terms, covers all employees of her business. During the year in question, the wife reimbursed the husband, under the plan, for medical expenses he incurred on behalf of himself, his wife, and their dependents. In addition to concluding that the amounts paid to the husband under the plan as reimbursement for medical expenses are deductible under section 162(a), the Service also ruled that the husband may exclude the reimbursements from gross income under section 105(b). The Service cited Rev. Rul. 71-588, 1971-2 C.B. 91, as support for its conclusions. FULL TEXT: UIL Number(s) 0162.07-02, 0105.00-00
Date: November 12, 1993 Control No.: TR-32-242-93 Taxpayer's Name: * * * LEGEND: ISSUES: (1) Whether A, a sole proprietor, is entitled to deduct under section 162(a) of the Internal Revenue Code amounts paid to B, A's spouse and employee, as reimbursement of medical expenses under an employer-provided accident or health plan. (2) Whether amounts B receives as reimbursement of expenses that B incurs on behalf of B, A, and their dependents are excluded from B's gross income under section 105(b). FACTS: A operates a consulting business as a sole proprietor and employs B, A's spouse, to perform certain services in connection with the business. B receives compensation for the services B performs and includes the compensation in gross income on the couple's jointly-filed federal income tax return. A adopted a written employer-provided accident and health plan that, by its terms, covers all employees of A's business. During the year in question, A reimbursed B, pursuant to the plan, for the expenses of medical care that B incurred on behalf of B, A, and their dependents. You agreed that there is a bona fide employer-employee relationship between A and B. LAW: Section 162(a) of the Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including reasonable salaries and other compensation for services rendered. Section 213(a) of the Code allows a deduction for the expenses paid during the taxable year, not compensated by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse, or a dependent, to the extent that such expenses exceed 7.5 percent of the taxpayer's adjusted gross income. The term "medical care" is defined in section 213(d). Section 105(b) of the Code generally allows an employee to exclude from gross income employer-paid reimbursements for the expenses of medical care (as defined in section 213(d)) of the employee and the employee's spouse and dependents. Rev. Rul. 71-588, 1971-2 C.B. 91, holds that amounts paid by a sole proprietor to his spouse, a bona fide employee of the business, under an accident and health plan covering all employees are (1) excludable from the employee-spouse's gross income under section 105(b) of the Code and (2) deductible by the employer-spouse as a business expense under section 162(a). CONCLUSION: Applying the law to the facts of the present case, the amounts paid to B under the plan as reimbursement for medical expenses are deductible by A as a business expense under section 162(a) of the Code. Further, B may exclude these amounts from gross income under section 105(b). A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. |
