Lazy direct seller: Other Income or Schedule C?

[Lee Choquette]

Taxpayer attended a meeting of a multi-level marketing association (MLM)
and was persuaded to sign up. She only bought some of the MLM materials
for her own use, and never at any time tried to recruit other members
into the MLM. She was eventually paid a total of less than $100, a
portion of the purchases made by people who joined the MLM after she
did, but were recruited by the same person who recruited her rather than
by herself.

On the one hand, the taxpayer's behavior seems to perfectly fit the
definition of a hobby. She did not sign up with the MLM for income or
profit and was not involved with "continuity and regularity". The
taxpayer has not even kept the receipts for materials purchased from the
MLM. Therefore it makes sense to me to report the <$100 on 1040 line 21,
"Other Income", and not report the purchases anywhere.

On the other hand, a direct seller is supposed to be treated as
self-employed (statutory nonemployee) according to Publication 15A and
presumably a provision in the IRC. Yet since the taxpayer never tried to
sell the MLM materials, it would seem that she is a direct seller in
name only, and therefore doesn't actually fall under this requirement.

What do you think: Other Income or Schedule C?

Thanks,
Lee

 

[Bob Sandler]

Taxpayer attended a meeting of a multi-level marketing association (MLM)

and was persuaded to sign up. She only bought some of the MLM materials
for her own use, and never at any time tried to recruit other members
into the MLM. She was eventually paid a total of less than $100, a
portion of the purchases made by people who joined the MLM after she
did, but were recruited by the same person who recruited her rather than
by herself.

On the one hand, the taxpayer's behavior seems to perfectly fit the
definition of a hobby. She did not sign up with the MLM for income or
profit and was not involved with "continuity and regularity". The
taxpayer has not even kept the receipts for materials purchased from the
MLM. Therefore it makes sense to me to report the <$100 on 1040 line 21,
"Other Income", and not report the purchases anywhere.

On the other hand, a direct seller is supposed to be treated as
self-employed (statutory nonemployee) according to Publication 15A and
presumably a provision in the IRC. Yet since the taxpayer never tried to
sell the MLM materials, it would seem that she is a direct seller in
name only, and therefore doesn't actually fall under this requirement.

What do you think: Other Income or Schedule C?

I agree that the income should go on line 21. She does not
meet the definition of "direct seller" in Pub. 15-A because
she is not "engaged in selling." Purchases for her own use
are not business expenses.

Bob Sandler

 

[Arthur Kamlet]

Taxpayer attended a meeting of a multi-level marketing association (MLM)
and was persuaded to sign up. She only bought some of the MLM materials
for her own use, and never at any time tried to recruit other members
into the MLM. She was eventually paid a total of less than $100, a
portion of the purchases made by people who joined the MLM after she
did, but were recruited by the same person who recruited her rather than
by herself.

On the one hand, the taxpayer's behavior seems to perfectly fit the
definition of a hobby. She did not sign up with the MLM for income or
profit and was not involved with "continuity and regularity". The
taxpayer has not even kept the receipts for materials purchased from the
MLM. Therefore it makes sense to me to report the <$100 on 1040 line 21,
"Other Income", and not report the purchases anywhere.

On the other hand, a direct seller is supposed to be treated as
self-employed (statutory nonemployee) according to Publication 15A and
presumably a provision in the IRC. Yet since the taxpayer never tried to
sell the MLM materials, it would seem that she is a direct seller in
name only, and therefore doesn't actually fall under this requirement.

What do you think: Other Income or Schedule C?

I must lead a very unadventurous life, because I occassionally see
a pink SUV with Mary Kay written on it, but I've never had a MLM client
with a schedule C profit.


Given your fact pattern I would vote hobby business, but would not
be surprised if the client walks away.