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success in actually recruiting others to join Melaleaca. For
each individual petitioners were able to recruit, petitioners
received a commission from $10 to $150.
Petitioners timely filed their Federal income tax returns
with attached Schedules C, Profit or Loss From Business, for the
years in issue. On their respective Schedules C for 2002, 2003,
and 2004, petitioners reported gross receipts from their
Melaleuca activities of $5,300, $3,674, and $3,030. Petitioners
then claimed losses of $49,590, $45,114, and $67,738 for 2002,
2003, and 2004, respectively. These losses included numerous
personal expenses claimed as business deductions. For instance,
petitioners claimed deductions for cat litter, golf balls,
tickets to Oklahoma State University football games, and a Dish
Network subscription. Petitioners also claimed a deduction for a
life insurance policy they purchased. Petitioners offset these
losses against combined wages of $95,824, $91,662, and $103,693
for 2002, 2003, and 2004, respectively.
In the notice of deficiency, respondent disallowed the
losses claimed on the Schedules C and asserted penalties under
section 6662(a). In addition, for 2002, respondent disallowed
$1,462 of petitioners’ claimed mortgage interest deduction, for
lack of substantiation.
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Last modified: November 10, 2007