Raymond J. and Ilene H. Pavelko - Page 5

                                        - 4 -                                         
                    Gross receipts or sales            $10                            
                    Cost of goods sold                  -0-                           
                    Gross profit                        10                            
               Advertising                        275                                 
                    Car and truck expense            7,351                            
                    Insurance                        1,925                            
                    Supplies                        14,761                            
                    Taxes and licenses                 100                            
                    Utilities                          502                            
                    Professional dues                  225                            
                    Business use of home               154                            
                    Net profit (loss)              (25,283)                           
          In the notice of deficiency, respondent determined that the                 
          activities listed on each of the Schedules C filed in 1996, 1997,           
          and 1998, and the “developmental research” Schedule C in 1999,              
          did not “constitute bona fide business ventures entered into for            
          profit”.2  Respondent accordingly disallowed the deductions                 
          claimed for the expenses on each of these schedules and                     
          recharacterized the gross profits shown thereon as “other                   
               Under section 162(a), a taxpayer may deduct the ordinary and           
          necessary expenses paid or incurred during the taxable year in              
          carrying on a trade or business.  A taxpayer is engaged in a                
          trade or business if the taxpayer is involved in the activity               
          with continuity and regularity and with the primary purpose of              
          making a profit.  Commissioner v. Groetzinger, 480 U.S. 23, 35              

          2The record is not clear why this determination was not made                
          with respect to the 1999 “mental health and other services”                 
          Schedule C.                                                                 

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Last modified: May 25, 2011