Spouse Working for Spouse?

Spouse Working for Spouse
It's not an uncommon situation where the spouse of a sole proprietor works in the other spouse's business.  But is the spouse just a helper or also an employee?   Apparently, even the Tax Court gets confused on this question.  In a recent case (Shellito v. Comm'r.) the Court of Appeals for the Tenth Circuit "vacated" the Tax Court's decision and sent the case back to them for another review.
The Tax Court had wanted to disallow medical deductions paid as a reimbursement by the sole proprietor (employer husband) to his employee spouse.  The spouse had not only sought reimbursement for her medical expenses but also for her spouse employer (because he was her spouse under the reimbursement plan).   The Tax Court felt that the spouse employee was not an employee, and therefore the sole proprietorship shouldn't be able to deduct the reimbursements paid.
The appeals court first cited that under the IRS' own Revenue Ruling 71-588 "amounts reimbursed under an accident and health plan covering all bona fide employees, including the owner's wife, and their families are not includible in the employee's gross income and are deductible by the owner as business expense."   The court then did their own analysis of whether the spouse was really an employee and "found that the couple had 'cross all the Ts and dotted all the Is' in maintaining very good records."  Based on these records and other testimony at trial, the appeals court remanded the case back to the Tax Court  "for reconsideration" of  the employer-employee relationship.
The take aways from this trial are:  good supporting documentation may determine a positive outcome for the taxpayer;  "accident and health plans" under the Rev. Rul. 71-588 may provide an opportunity for tax savings; and not only the IRS, but the Tax Court, too, can misinterpret the tax law.
I invite your comments for further discussion.
CIRCULAR 230 NOTICE:  Internal Revenue Service regulations require me to advise you that, unless otherwise specifically noted, any tax advice contained in this correspondence and related information, cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Have questions? Contact me at  http://www.thisismytownusa.com/steve-mueller-tax.php for all your answers. Steve Mueller, The Smart Money Man