2004 Tax Ct. Summary LEXIS 63">*63 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DEAN, Special Trial Judge: This case was heard pursuant to the provisions of
Respondent determined deficiencies in petitioners' Federal income taxes of $ 5,404 for 1996, $ 5,978 for 1997, and $ 2,478 for 1998. The issue for decision is whether Brenda Konchar (petitioner) conducted her Mary Kay Cosmetics distribution activity with the intent to earn a profit, and if so, whether she has substantiated that she incurred ordinary and necessary business expenses.
Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits received in evidence are incorporated2004 Tax Ct. Summary LEXIS 63">*64 herein by reference. At the time the petition was filed, petitioners resided in Hobart, Indiana.
Background
[4] During the years at issue petitioners had four minor children all of whom lived with them at home. Mr. Konchar worked full time in construction. In 1996 and 1997, petitioner worked about 17 hours a week at a Montgomery Ward department store as a furniture salesperson. Petitioner changed her place of work to the men's fragrance department of a May department store for about a month, full time during the Christmas season of 1998.
In May of 1996, petitioner joined Mary Kay Cosmetics as an "Independent Beauty Consultant". Before 1996, petitioner's sister was a Mary Kay consultant. When petitioner became a consultant in 1996, she took over 12 of her sister's customers consisting of family members and friends.
During the subject years, three of petitioner's customers lived in Pennsylvania, two lived in Florida, and seven lived in Texas. In addition, all of petitioner's extended family live in those three States, including her parents, who live in San Antonio, Texas.
Petitioner owned a Dodge Caravan that she used in her Mary Kay2004 Tax Ct. Summary LEXIS 63">*65 activity. For the year 1996 she maintained a mileage log for her use of the Caravan. The log consisted of a notebook containing dates, odometer readings, and daily mileage driven. During 1996 petitioner, accompanied by her children and sometimes her husband, made several trips to Pennsylvania, Dallas and San Antonio, Texas, and Florida. She recorded the trips in her log and deducted the mileage on the Schedule C, Profit or Loss From Business, attached to her 1996 Federal income tax return. Petitioner did not produce any log for 1997 or 1998, nor did she provide substantiation for Schedule C expenses in those years. Petitioner did not maintain a separate checking account for her Mary Kay activity for any year.
Petitioner reported returns and allowances plus cost of goods sold (COGS) in excess of gross receipts on Schedule C for 1996 and 1997 for her Mary Kay activity. For 1998 petitioner reported gross income, gross receipts exceeding returns and allowances plus COGS, of $ 438. Net reported business losses for the 3 years were $ 19,300, $ 21,308 and $ 9,132. Included in petitioner's business expense deductions are automobile and travel, and meals and entertainment expenses of over2004 Tax Ct. Summary LEXIS 63">*66 $ 10,000 for 1996 and 1997 and over $ 7,000 for 1998.
The parties agree that petitioner did not assess the profitability of her Mary Kay activity and did not analyze any records to determine whether she could improve her Mary Kay profitability.
Respondent determined that petitioner did not conduct her Mary Kay activity with the honest objective to make a profit and that if she did so conduct her activity, she has failed to substantiate some of her business expenses for 1996 and has failed to substantiate any of her business expenses for 1997 and 1998.
Discussion
[11] Because petitioner failed to meet the requirements of
2004 Tax Ct. Summary LEXIS 63">*67
Deductions are allowed under
Whether the required profit objective exists is to be determined on the basis of all the facts and circumstances of each case. See
No single factor is controlling, and we do not reach our decision by merely counting the factors that support each party's position. See
After considering all the factors, we agree with respondent that petitioner did not have an actual and honest objective of making a profit from her Mary Kay activity.
Petitioner did2004 Tax Ct. Summary LEXIS 63">*71 not carry on the activity in a businesslike manner. See
According to her Schedule C, petitioner's returns and allowances and COGS exceeded her gross receipts for two of the tax years at issue, an indication that the activity was not conducted with a profit objective. See
Petitioner's Mary Kay activity had a substantial component of personal pleasure. See
The expertise of the taxpayer2004 Tax Ct. Summary LEXIS 63">*72 or her advisers is a factor to be considered. See
There could have been no expectation that the assets petitioner used in the Mary Kay activity would appreciate in value. See
Another important factor is that there is no indication that petitioner had any chance of ever recovering the losses she suffered. See
Petitioners have substantial income from sources other than petitioner's Mary Kay activity. The Mary Kay expense deductions sheltered that income to a large degree. Only the significant salary of Mr. Konchar enabled petitioner to incur the losses generated by her Mary Kay activity.
The Court has considered the remaining factors and finds them either neutral or unhelpful to petitioner.
The Court finds that petitioner did not engage in her Mary Kay activity with the actual and honest objective of making a profit. Petitioner's Schedules C for her Mary Kay activity indicate that she is not entitled to claim any deductions "otherwise allowable" under
For 1998 petitioner reported gross income of2004 Tax Ct. Summary LEXIS 63">*74 $ 438, and her deductions for that year are limited to that amount. Id. Respondent, however, determined that petitioner did not substantiate any of her expenses for the year, and petitioner produced no such evidence at trial. Petitioner is therefore not entitled to any deductions for her Mary Kay activity for 1998.
Reviewed and adopted as the report of the Small Tax Case Division.
Decision will be entered for respondent.
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