Timothy Klusken - Page 2




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          claimed on Schedule C and allowed by respondent in the notice of            
          deficiency.1                                                                
               Some of the facts have been stipulated and are so found.               
          The written stipulation of facts and supplemental stipulation of            
          facts, with the attached exhibits, and the oral stipulation are             
          incorporated herein by this reference.  At the time the petition            
          was filed, petitioner resided in Los Angeles, California.                   
               During the year at issue, petitioner became involved with              
          Strategic, a company which sells prepaid phone cards.  Strategic            
          operates a multilevel marketing arrangement wherein a sponsor               
          recruits downline distributors, who then recruit additional                 
          representatives beneath them.  The upline distributors earn                 
          commissions on the sales generated by those below them.  This is            
          typically known as a “pyramid” system.                                      
               On February 7, 1996, petitioner signed an “Independent                 
          Representative Application and Agreement” (agreement) with                  
          Strategic.  In signing the agreement, petitioner became eligible            
          to sell and distribute Strategic’s goods and services and to                
          receive commissions in connection with such sales.  Petitioner              
          also agreed that he “is an independent contractor not an agent,             
          employee or franchisee of the Company” and that he will not be              


               1  At trial, counsel for respondent questioned the                     
          substantiation of expenses petitioner claimed on his Schedule C.            
          We note that in the notice of deficiency all of petitioner’s                
          claimed expenses were allowed, and we do not examine the                    
          substantiation of those items.                                              




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