Michael and Colleen Ogden lived in Pearland, Texas. Michael worked as a civil engineer, and the couple, part of the time, sold Amway products and recruited others to sell them. For the three years the Internal Revenue Service examined, the Ogdens' Amway per year average sales after merchandise cost were $2,804 - expenses, $37,518. Costs included fliers, telemarketing and driving more than 30,000 miles per year.

The court said they didn't use the operation for profit but for deductions to offset wage income. It said they failed to keep adequate records and should have stopped the unprofitable business. Average entrepreneurs would have packed it in.

To deduct losses, the facts must show the activity had a profit objective.

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During the week, Paul Farrell worked as a car assembler and his wife, Rose, as a deputy city clerk.

On weekends, the couple traveled 54 miles from their St. Louis home to their nine-acre farm.

They studied farming and cattle raising by reading books. They bought a barn, well, pump and farm machinery. They worked hard clearing overgrown brush and building fences and a chicken coop. And they grew fruit and vegetables and raised chickens.

Cattle quickly proved unprofitable, so they sold their calves. Under their rudimentary bookkeeping system, they posted sales in a tablet and filed bills and canceled checks away for future reference.

Every year they lost money, so the IRS disallowed the losses. The Tax Court, however, allowed them. It said the Farrells worked hard, kept good enough records and made a substantial capital investment.

Planning Tip: For losses to be deductible, maintain good records, consult an expert or study to become one and show reasonable projections that your venture can be profitable. Determine why you lose money B and how to change that. If you can't stop the bleeding, cut losses and bury the activity. The IRS won't keep a losing business on life support forever.(more at Hobby vs. Business)

Released 2-4-02