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1. Product-Related Expenses
Petitioner claimed deductions for "advertising" on line 8 of
her 1998 and 1999 Schedules C in the amounts of $4,964 and
$5,160, respectively. Approximately $1,000 of her claimed
advertising expense for 1998 and $1,500 for 1999 was for samples
which she gave away. The remaining $3,964 for 1998 and $3,660
for 1999 of petitioner's advertising expenses was for Herbalife
products which petitioner used personally. Petitioner did not
maintain any records of the products that she gave away or for
the products she used herself.
The amounts petitioner deducted as advertising expenses were
based upon the retail value of the items, not on the amount which
petitioner had actually paid for the products. Petitioner's
actual merchandise costs were $3,276 in 1998, and $3,406 in 1999.
Respondent disallowed all of petitioner's claimed advertising
expenses.
Petitioner also reported costs of goods sold on her 1998 and
1999 Schedules C in the amounts of $6,240 and $5,913,
respectively. In calculating costs of goods sold, line 36 of
Schedule C reports "Purchases less cost of items withdrawn for
personal use". Petitioner entered the total amounts she paid for
Herbalife products for each year. Those amounts were $6,009 and
$6,128 for 1998 and 1999, respectively. Petitioner did not
subtract from these amounts the value of products which she used
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