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LOSING $67,738 FOR FUN AND...PROFIT?

August 09, 2007

Another multi-level marketer came to grief in Tax Court yesterday.

Robert and Carol Berryman had full time jobs, and they sold Melaleuca products on the side. The Tax Court describes some of the key elements of their business model:

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.

The court found the model flawed:

The one financial success, at least before respondent caught on, that petitioners enjoyed with their Melaleuca activities was offsetting their losses against wages of $95,824, $91,662, and $103,693 for 2002, 2003, and 2004, respectively, to create substantial tax savings. Of course, this itself is an indication that petitioners were more interested in the tax savings realized by converting personal expenses into tax deductions than they were with operating a business for profit.

In sum, we are satisfied that petitioners' primary purpose for engaging in the promotion of Melaleuca products was not to profit. Accordingly, petitioners are not entitled to the deductions here in dispute beyond those allowed by respondent under section 183(b).

The Moral: if the only profit from your multi-level marketing business is a bigger tax refund, the IRS is likely to be unamused.

Cite: Berryman, T.C. Summ. Op. 2007-138

Related: Losing Money - Some Hobby

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