From the glutton for punishment category of the US Tax Court – An Indiana man decided he was on his way to a lucrative career selling health care products for a network marketing company. He was convinced to give it a try from a couple he met at a health club. This was his first attempt at network marketing or retail sales.
Like any other multi-level marketing company, sales of the actual product are incidental to the more lucrative goal of sponsoring other people. He would then be able to earn commissions on those people’s sales. Of course, if they take the approach that sales are only incidental I’m not sure how much a commission check would actually be.
However, a funny thing happened on the way to the top of the pyramid. From the time he became involved with the company the only thing he sold was to family members. The only people he sponsored were also family members. He was able to enlist his brother and his son. Of course, the only reason they became distributors were for the discounts on the health products. In fact, his son must have only placed a single order for the discount. His son quit the sales force in the same year he joined.
In addition to his attempt to make a fortune selling health care products, the taxpayer maintained a full-time job….80 miles from his home. He commuted 80 miles each way to his main job. On some days, he would stop at parking lots along his route and place business card on windshields of cars. These business cards offered ‘The Opportunity of a Lifetime’ while listing the taxpayer’s phone number. However, the name of the company was never mentioned. The taxpayer never received a phone call from any of these business cards, which must have come as quite a shock to everyone.
Three years after becoming involved with the product, the taxpayer began sending out direct mail information. The materials he sent told recipients that he had been using the products for many months and that they had reduced the symptoms of various chronic illnesses and contributed to his ‘overall good health’. Each week, the taxpayer would collect names and addresses of 48 women in his surrounding area and send them a postcard. He would then send a second and third postcard. After that he would attempt to call these women. He would occasionally talk to a few of them for 15 or 20 minutes making his sales pitch. On the rarest of occasions, he would meet with some women personally to deliver product materials. All of this occurred while operating out of his local library. From all indication these efforts resulted in no sales.
As you can guess the taxpayer’s efforts weren’t very profitable. From 1997 to 2003, the taxpayer lost money in every year ranging from a $2,600 to $11,700 in losses. Those familiar with tax rules know where this story is going to end. The Tax Court ruled that the taxpayer did not comply with the ‘hobby loss’ rules adding that in nearly 10 years the company had no profits, minimal amount of activity and the only customers were relatives. The ruling disallowed the deduction for all of the taxpayer’s losses.
Like any other multi-level marketing company, sales of the actual product are incidental to the more lucrative goal of sponsoring other people. He would then be able to earn commissions on those people’s sales. Of course, if they take the approach that sales are only incidental I’m not sure how much a commission check would actually be.
However, a funny thing happened on the way to the top of the pyramid. From the time he became involved with the company the only thing he sold was to family members. The only people he sponsored were also family members. He was able to enlist his brother and his son. Of course, the only reason they became distributors were for the discounts on the health products. In fact, his son must have only placed a single order for the discount. His son quit the sales force in the same year he joined.
In addition to his attempt to make a fortune selling health care products, the taxpayer maintained a full-time job….80 miles from his home. He commuted 80 miles each way to his main job. On some days, he would stop at parking lots along his route and place business card on windshields of cars. These business cards offered ‘The Opportunity of a Lifetime’ while listing the taxpayer’s phone number. However, the name of the company was never mentioned. The taxpayer never received a phone call from any of these business cards, which must have come as quite a shock to everyone.
Three years after becoming involved with the product, the taxpayer began sending out direct mail information. The materials he sent told recipients that he had been using the products for many months and that they had reduced the symptoms of various chronic illnesses and contributed to his ‘overall good health’. Each week, the taxpayer would collect names and addresses of 48 women in his surrounding area and send them a postcard. He would then send a second and third postcard. After that he would attempt to call these women. He would occasionally talk to a few of them for 15 or 20 minutes making his sales pitch. On the rarest of occasions, he would meet with some women personally to deliver product materials. All of this occurred while operating out of his local library. From all indication these efforts resulted in no sales.
As you can guess the taxpayer’s efforts weren’t very profitable. From 1997 to 2003, the taxpayer lost money in every year ranging from a $2,600 to $11,700 in losses. Those familiar with tax rules know where this story is going to end. The Tax Court ruled that the taxpayer did not comply with the ‘hobby loss’ rules adding that in nearly 10 years the company had no profits, minimal amount of activity and the only customers were relatives. The ruling disallowed the deduction for all of the taxpayer’s losses.
I guess he should have asked customers to 'Honk for Fonk'!
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