FACTS
For over a decade, Mr. Mookie (taxpayer) worked at least 40 hours per week as an attorney/employee for Bogarts Sports, Inc. (Bogarts), a company that makes baseball bats, where he makes approximately
$162,000 a year. Mr. Mookie filed Forms 1040, U.S. Individual Income Tax Return, for the 2008 and 2009 tax years and reported salary income from Bogarts. With each return, Mr. Mookie also filed a Schedule C on which he claimed deductions for expenses and, for 2009, reported limited gross receipts. The Schedules C identified Mr. Mookie's business activity as "International Consulting" and the name of his business as "JBJ Industries". JBJ Industries' business address is the same as the taxpayer's home address and he worked approzimately 10-20 hours per week on JBJ Industries' projects. For the 2003 through 2012 tax years, Mr. Mookie reported on his Forms 1040 (1) salary income, (2) gross income, expenses, and net profit or loss from JBJ Industries, and (3) adjusted gross income, as follows:
|
From JBJ Industries
|
|
Year
|
Salary income
|
Gross income
|
Expenses
|
Net profit (loss)
|
Adjusted gross income
|
|
2003
|
$125,741
|
-
|
$35,263
|
($35,263)
|
$91,988
|
|
2004
|
135,527
|
-
|
70,892
|
(70,892)
|
67,268
|
|
2005
|
137,069
|
-
|
80,345
|
(80,345)
|
62,217
|
|
2006
|
133,527
|
-
|
88,578
|
(88,578)
|
49,606
|
|
2007
|
138,750
|
-
|
84,240
|
(84,240)
|
59,501
|
|
2008
|
159,229
|
-
|
88,184
|
(88,184)
|
77,329
|
|
2009
|
165,305
|
$5,000
|
91,808
|
(86,808)
|
94,710
|
|
2010
|
172,779
|
-
|
41,818
|
(41,818)
|
47,345
|
|
2011
|
967,058
|
-
|
44,071
|
(44,071)
|
926,849
|
|
2012
|
219,103
|
-
|
32,825
|
(32,825)
|
198,863
|
|
Total
|
2,354,088
|
5,000
|
658,024
|
(653,024)
|
1,775,676
|
Mr. Mookie claims that JBJ Industries provides services such as identifying potentially lucrative business opportunities and:
• generates substantial income and profit for JBJ Industries and its clients,
• determines the best markets for company products through industrial analysis reports,
• develops an effective marketing strategy for products,
• evaluates international competition,
• identifies legal and regulatory issues,
• locates financing and development projects that support manufacturing and promotion of products
• negotiates and writes contracts, and
• settles trade disputes
JBJ Industries engaged in many business ventures between 2002 through 2008. Nearly all were abandoned. The only ventures not abandoned were its ownership of an interest in a graphic design company in Guam, a Filipino jewelry export business, and efforts to determine the feasibility of establishing a bakery to serve call center workers in the Philippines. Although an attorney for a bat making company, Mr. Mookie claimed to take an equity position as payment for present and future services to these companies. He also claimed to retain consultants with the necessary expertise to identify lucrative opportunities and advise on abandoning projects that may not generate profits.
However, his vetting of these individuals is suspect.
JBJ Industries maintained no formal books and records except for a hodgepodge of receipts, credit card statements, invoices, and bills. These records showed charges related to six round trips to the Philippines and include:
• air travel, ground transportation, lodging, meal, and incidental expenses incurred for travel to and within the Philippines
• subscriptions to the Los Angeles Times and to the Golf Magazine
• cable, Internet, and telephone service for taxpayer's home
• mobile telephone service
• taxpayer's auto, health, and life insurance
• annual California Bar membership dues
• membership fee for the Divers Alert Network
• foreign transaction fees and finance charges imposed by various credit card providers
Mr. Mookie prepared a "Business Travel & Expense Report" for each trip on which he described the trips' purpose as, uniformly, "to assist client with business opportunities in Philippines. To pursue business ops.".
Its business plan described itself as follows: "Engage in international trade of U.S. companies into foreign markets, engage in international trade of foreign companies into U.S. markets, and invest in developing businesses in foreign markets all with the intent to produce income and profit."
Questions: For 2008 and 2009, is the activity reported on taxpayer's Schedule C, Profit or Loss from Business, an activity engaged in for profit? Are the expenses listed above deductible?
Research Project-
Parameters:
- You are an advocate in your role here. If you find statutory evidence that does not support your clients most tax advantageous position, then try to find case law to mitigate the affect.
- You must provide a properly formatted bibliography that annotates the sources you used to draw your conclusions. A URL is not an adequate substitute for a properly formatted reference. Check the Tax Research chapter of your text for examples of proper formatting.
- In your write up, do not quote directly, but rather paraphrase - this includes framing the issue, reasoning from your sources, etc. I will set up a Turnitin account where you will submit your papers. This tool will flag the places where your paper directly quotes another source. If your paper is more than 30% from other sources, I will consider it plagiarized.
- NOTE: The purpose of your submission to Turnitin.com is to give you the opportunity to correct any plagiarism before I grade the paper. Submission to Turnitin.com is NOT a submission of the paper for grading. If you are taking the course online, the paper MUST be submitted through the assignment tab on Blackboard by the time indicated on the Calendar. If that tab disappears, it means you are late. If you are taking the course on campus, in addition to submitting the paper on time through Blackboard, you must bring a printed copy of this assignment to the first class meeting after the due date of the assignment.
- Use primary sources ONLY. The Federal Standard Reporter's narrative is not a primary source. Look to the CCH database in the UML library for these sources. Go to the UML Library website. Click on Databases and again on Business / Management. Scroll down to the CCH Omnipoint option and click. If you are on campus, you will not be asked for login credentials. If you are off campus, your login credentials are your UML email credentials. Note: Standard Reporter narrative is not a primary source.
- You are expected to do this project on your own without collaboration.
- Please be sure to write clearly and concisely as appropriate writing skills will be part of the final grade.
- Use point 12 font using standard margins. Limit yourself to a maximum of 5 pages, 1 and ½ spaced.