Ralph E. and Mildred E. Galyen - Page 6

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          referrals by the program subscribers, and the program subscribers           
          were to display and distribute AdaCom brochures and display an              
          AdaCom window decal.                                                        
               AdaCom advised program subscribers to include $7,750 in                
          income, deduct $5,250 as an ordinary and necessary business                 
          expense pursuant to section 162, and claim a credit equal to                
          $5,000 pursuant to sections 38 and 44.  The deduction of $5,250             
          comprised the $2,500 cash paid plus the excess of the promotional           
          services income over the claimed credit amount--$7,750 minus                
          $5,000, which equals $2,750.  AdaCom issued a Form 1099-MISC,               
          Miscellaneous Income, in the amount of $7,750 to each program               
               None of the people referred by the program subscribers were            
          required to subscribe to the program in order for the referring             
          program subscriber to obtain credit towards the purchase price of           
          the program.                                                                
          Petitioners’ Tax Return                                                     
               During the taxable years 2000, 2001, and 2002, petitioner              
          Mildred E. Galyen was a retired teacher, and petitioner Ralph E.            
          Galyen was employed as an insurance salesman for the Ralph Galyen           
          Agency, Inc. (Galyen Agency), a Colorado subchapter S                       
          corporation.  Petitioner Ralph E. Galyen was sole shareholder and           
          president of the Galyen Agency during this period.  The Galyen              
          Agency provided insurance services to the general public.  During           

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Last modified: May 25, 2011