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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
subscriber.
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