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both 2004 and 2005, these numbers are misleading. Beginning in
2004, Mrs. Smith stopped claiming deductions for car and truck
expenses, office expenses, and the business use of petitioners’
home. In 2005, Mrs. Smith stopped claiming a deduction for wages
paid to petitioners’ sons. Had Mrs. Smith included these
expenses, as she had in the years at issue, her direct marketing
activities would have reported a loss.
Mrs. Smith explained that these expenses could no longer be
claimed on her return because the nature of her business had
changed in that she had become more focused on using the Internet
to carry on her business. If anything, however, the fact that
Mrs. Smith’s activities were focused on using the Internet
suggests that she was using her home to conduct her business more
than ever.
This factor favors respondent.
7. The Amount of Occasional Profits, If Any
The amount of any occasional profits the taxpayer earned
from the activity may show that the taxpayer had a profit
objective. Sec. 1.183-2(b)(7), Income Tax Regs. Mrs. Smith did
not earn a profit in any of the years at issue or in prior years
in which she was engaged in her direct marketing activities.
While she maintains that they are now profitable, as discussed
above, we find her characterization of profits to be
unpersuasive. This factor favors respondent.
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Last modified: November 10, 2007