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law to operate the construction activity under the Robco name,
maintained liability insurance for Robco, and reported Robco’s
profits on petitioners’ Federal income tax returns.
In 1999, Mr. Goode suffered from major health problems and as
a consequence could no longer physically participate in
construction operations. Mr. Goode’s managerial skills became his
primary contribution to Robco’s activities. Nevertheless, Robco
continued to earn a profit until 2001. In 2001, 2002, and 2003,
Robco sustained losses, but it returned to profitability in 2004.
During 2002, the year in issue, Robco entered into a contract
with the homeowners association of which Mr. Goode was president
and a board member. Because the bylaws of the homeowners
association prohibited board members from profiting from their
membership on the board, the work Robco performed for the
homeowners association--the remodeling of the central recreation
facility and pool--was on a cost basis.
Petitioners owned a pickup truck and a stretch van that Mr.
Goode used in the construction activity. Petitioners owned other
vehicles that they used for personal purposes.
On Schedule C of their 2002 Federal income tax return,
petitioners reported, with respect to Robco, gross receipts of
$9,297, cost of goods sold of $8,517, and gross income of $780.
The Schedule C listed expenses totaling $12,212 and a resulting
loss of $11,432. Of the claimed expenses, respondent disputed the
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