Jorge N. and Vivian Lopez - Page 7

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          their principal business as “Sales:Distribution”.  Petitioners              
          reported their Schedule C income and expenses for the years in              
          issue as follows:                                                           
               Income:                          1998        1999                      
               Gross receipts or sales       $7,139      $7,061                       
               Less: cost of goods sold     3,439       6,368                         
               Gross income                   3,700         693                       
               Expenses:                                                              
               Car/truck expenses            $6,901      $6,238                       
               Supplies                         500         503                       
          Travel                           911       2,172                            
               Meals/entertainment              742         868                       
               Utilities                      2,248       2,130                       
          Other expenses:                                                             
               Misc. business expense           325         330                       
               Tools                          7,774       4,752                       
               Functions                      2,687       2,060                       
               Total expenses              22,088      19,053                         
               Net profit or (loss)           (18,388)    (18,360)                    

               Petitioners prepared a budget applicable to both years in              
          issue.  According to the budget, which consists of a single                 
          handwritten page, financing petitioners’ Amway activity would               
          cost $737 per month, or $8,844 per year.  The expenses deducted             
          on petitioners’ returns are more than double the budgeted amount.           
               In the notice of deficiency, respondent disallowed                     
          petitioners’ Schedule C expenses on the ground that petitioners’            
          Amway activity was not entered into for profit.  However, to                
          the extent of income realized from this activity, respondent                
          allowed these expenses as miscellaneous itemized deductions on              







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