Direct ship sales business (scam)

[DexEA]

Company lures taxpayer into creating a website and purchasing success plans to the tune of $19,000 +/-. Website up and going in September 2012 and not a single sale to this day. More money is needed to continue the membership so the taxpayer is going to bail before any more loss. It seems more like the taxpayer was scammed. Could the $19,000 be amortized as start up costs in 2012, although no income was earned?

[JohnH]

In these day of internet information, how in the world do people get sucked into these scams?
Amazing.

[ATSMAN]

Depends

Did the taxpayer actually establish a business (the website) to solicit customers?

Is there a log of the business activities?

I gather he bailed out when more capital was required?

[DexEA]

What would you do?

Pub 535:

If your attempt to go into business is unsuccessful.

If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories.

1. The costs you had before making a decision to acquire or begin a specific business.
These costs are personal and nondeductible. They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility.

2. The costs you had in your attempt to acquire or begin a specific business.
These costs are capital expenses and you can deduct them as a capital loss.

If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss.

~~~~~~~~~~~~~~~~~~~~~
Would it be appropriate to deduct only any expenses after the launching of the Website as a capital loss, or because the website was launched and gross income is zero would Schedule C with costs amortized be appropriate?

Or all costs personal and nondeductible?

[DexEA]

Did the taxpayer actually establish a business (the website) to solicit customers?

Is there a log of the business activities?

I gather he bailed out when more capital was required?

Did the taxpayer actually establish a business (the website) to solicit customers? Yes

Is there a log of the business activities? Yes

I gather he bailed out when more capital was required? Yes

[ATSMAN]

Capital Loss

I would go with capital Loss and not Sch C.

The reason is that the business really never got going in a true sense. If they had some sales i could see a Sch C but looks like it failed right from the get go.