                  T.C. Summary Opinion 2001-173



                     UNITED STATES TAX COURT



      BROADRICK R. MOORE AND DAWN J. INGRAM, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5686-00S.                   Filed October 30, 2001.



     Broadrick R. Moore and Dawn J. Ingram, pro se.

     Ross W. Greenberg, for respondent.




     PANUTHOS, Chief Special Trial Judge:    This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.    The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.    Unless otherwise
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indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     Respondent determined deficiencies in petitioners’ Federal

income taxes of $2,138 in 1996 and $2,250 in 1997.   The issues

for decision are whether petitioners’ Amway activity was an

activity engaged in for profit under section 183, and, if so,

whether petitioners have substantiated the claimed deductions

related to the activity.

Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

     Petitioners were married during the tax years 1996 and 1997.

Their children, Chelsea and Kendall, were born in 1991 and 1995,

respectively.   Petitioner Broadrick Moore (hereinafter

petitioner) worked full time as a lineman for an electric

company, which required him to travel on occasion.   He was often

on call 24 hours a day, 7 days a week.   Petitioner Dawn Ingram

(hereinafter Ms. Ingram) worked full time as a receptionist in a

medical office during the years in issue.   Petitioners resided in

Beverly Hills, Florida, at the time that they filed their

petition.
                                - 3 -

     Petitioners were recruited in 1994 as “downline”

distributors of Amway Corp. (Amway) consumer products by an

“upline” distributor, and they registered as Amway independent

business owners (IBO).    The originating distributor is an

“upline” distributor in relation to his recruit, who is a

“downline” distributor.    An upline distributor receives points or

commissions and, therefore, profits, based on a downline

distributor’s sale of the Amway products and on the downline

distributor’s success in developing his own downline distribution

network.   Additionally, a distributor profits from the sale of

the Amway products to third-party clients.    See Elliott v.

Commissioner, 90 T.C. 960 (1988), affd. without published opinion

899 F.2d 18 (9th Cir. 1990), for a general discussion of the

operation of an Amway activity.

     Petitioners “counseled upline”, that is, they sought

direction and training from their upline distributors.

Petitioners purchased motivational tapes and a marketing plan

from Amway.   In addition, they attended weekend training seminars

with educational groups that work in conjunction with Amway.

     Because their only previous business experience had been

petitioner’s involvement in a partnership that bought and sold

real estate, petitioners hired a certified public accountant

(C.P.A.) in 1994.   Upon the C.P.A.’s advice, petitioners

purchased a computer-based accounting program, Peachtree, which
                                - 4 -

they used to prepare monthly and long-term expense and income

reports used for budgeting.   With the exception of the advice

from their C.P.A., petitioners did not seek guidance from an

independent source.

     Petitioners prepared a handwritten outline of their

statement of goals in their January 1995 calendar notes.

Petitioners’ goals included recruiting three downline

distributors every month who would, in turn, find three of their

own downline distributors.    The goals also project and calculate

commissions to be received from the downline distributors and

customers.   For example, the goals included as follows: “Increase

300PV Per Month” and “Find 10 Customers = 500 - 1000 PV”.

     Petitioners maintained calendars for 1996 and 1997 with

their daily personal and Amway engagements.   These calendars have

handwritten entries indicating cities, hotels, and other items

such as “STP” (show the plan--a marketing of their business

plan), but it is not always clear which entries are related to

the Amway activity.   Petitioners maintained daily and monthly

logs of “Business Expenses”, charts of their miles traveled,

parking, tolls, fares, meals, lodging, and other expenses (e.g.,

tickets) from January 1996 through December 1997.   In the

“Business Purpose - Where, Why, Who, etc.” column in these

charts, petitioners wrote various cities, words, and

abbreviations (e.g., “Ft. Lauderdale STP”, “Gainsville Seminar”,
                                - 5 -

and “Tax Meeting”).    Petitioners also produced an “Office

Expense” chart listing monthly totals for their office expenses

such as home mortgage, electricity, telephone, heat, property

taxes, termite treatment, child care, computer program, and

C.P.A. fees for 1996.

     In 1997, petitioners had approximately 30 downline

distributors in their distribution chain.      Petitioners realized

in 1996 that their activity was not as profitable as they had

hoped, and petitioners alleged that they changed their marketing

approach--that is, how they approached the activity and how they

contacted people.   They ended their Amway activity sometime in

the year 2000.

     Petitioners filed their 1996 and 1997 Federal income tax

returns as married filing jointly.      They reported gross income

from wages in the amount of $66,966 in 1996 and $68,399 in 1997.

Petitioners reported income and claimed expenses on Schedules C,

Profit or Loss From Business, with respect to their Amway

activity as follows:
                              - 6 -

                                      1996              1997

Income
  Gross receipts                     $555               $924
  Cost of Goods sold                1,248                681
  Gross income (loss)                (693)               243

Expenses
  Advertising                          25                –--
  Car & truck                       4,398              6,918
  Depreciation                      1,732              1,074
  Legal & professional services       435                395
  Office expense                      143                109
  Repairs & maintenance               131                ---
  Taxes & licenses                    ---                  7
  Travel                            1,683                ---
  Meals & entertainment                76                209
  Other (unspecified)               3,681              6,437
  Total expenses                   12,304             15,149

Net income (loss)                 (12,997)           (14,906)

     The assets for which petitioners took a depreciation

deduction in 1996 are as follows: A “satellite”, a computer, a

computer upgrade, a computer hard drive, a telephone system,

software, a 1991 Ford, and a 1988 BMW.       Petitioners did not

provide a list of the assets for which depreciation was claimed

in 1997.

     Petitioners reported gross income (loss) and net losses for

the 5-year period during which they participated in the Amway

activity as follows:
                                        - 7 -
                  1995        1996        1997       1998        1999       Total
                                           1
Gross income       $250       ($693)        $243     $1,266        $443      $1,509
(loss)

Net loss        ($13,770)   ($12,997)   ($14,906)   ($11,049)   ($8,437)   ($61,159)

            Petitioners stipulated a gross loss in 1997 in
            1

     the amount of $248, but reported gross income in the
     amount of $243 on their 1997 return. The discrepancy
     has not been explained.

     Respondent disallowed the claimed Schedule C expense

deductions relating to the Amway activity because the activity

was not engaged in for profit and because petitioners failed to

substantiate the claimed expenses.               Petitioners assert that they

operated the Amway activity as a business with the intent to earn

a profit.

Discussion

     Deductions are a matter of legislative grace.                   INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).1

     Section 162 allows a deduction for all of the ordinary and

necessary expenses that are paid or incurred during the taxable

year in carrying on a trade or business.                Sec. 162(a).

Alternatively, section 212 allows a deduction for all of the

ordinary and necessary expenses paid or incurred during the



     1
        The examination commenced after July 22, 1998;
accordingly, we considered the applicability of sec. 7491.
Petitioners did not assert, nor did they present evidence, that
they complied with the requirements of sec. 7491(a)(2)(A) and (B)
to substantiate items, maintain required records, and fully
cooperate with respondent’s reasonable requests. Accordingly,
the burden of proof remains with petitioners.
                               - 8 -

taxable year in the production or collection of income.    Sec.

212(1).   Section 167 allows a depreciation deduction for property

used in a trade or business or held for the production of income

if the expenses were incurred with a legitimate for-profit

activity.   Sec. 167(a); Hulter v. Commissioner, 91 T.C. 371, 392

(1988).

     Under section 183(a), no deductions attributable to the

Amway activity are allowable unless the activity is engaged in

for profit, except as provided in section 183(b).    Sec. 183(a);

Elliott v. Commissioner, 90 T.C. at 960; Dreicer v. Commissioner,

78 T.C. 642, 643 (1982), affd. without published opinion 702 F.2d

1205 (D.C. Cir. 1983).   Petitioners must have entered into or

continued the Amway activity with the actual, honest, and bona

fide objective of making a profit.     Filios v. Commissioner, 224

F.3d 16 (1st Cir. 2000), affg. T.C. Memo. 1999-92; Hulter v.

Commissioner, supra at 392-393; Beck v. Commissioner, 85 T.C.

557, 569 (1985); Dreicer v. Commissioner, supra at 645; sec.

1.183-2(a), Income Tax Regs.

     An activity that is “not engaged in for profit” means any

activity other than one with respect to which deductions are

allowable for the taxable year under section 162 or section

212(1) or 212(2).   Sec. 183(c); sec. 1.183-2(a), Income Tax Regs.

     The following nonexclusive factors are relevant in

determining whether an activity is engaged in for profit: The
                               - 9 -

manner in which the taxpayer carries on the activity; the

expertise of the taxpayer or his advisers; the time and effort

expended by the taxpayer in carrying on the activity; the

expectation that assets used in the activity may appreciate in

value; the success of the taxpayer in carrying on other similar

or dissimilar activities; the taxpayer’s history of income or

losses with respect to the activity; the amount of occasional

profits, if any, which are earned; the financial status of the

taxpayer; and elements of personal pleasure or recreation.

Sec. 1.183-2(b), Income Tax Regs.   No single factor is

controlling.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981).

Whether a taxpayer’s activity has been engaged in for profit is

determined by taking into account all of the facts and

circumstances of the case.   Sec. 1.183-2(a), Income Tax Regs.

     Petitioners performed a number of functions which have the

superficial indicia of an activity operated for profit.   For

example, petitioners testified that they prepared a business plan

with the assistance of their C.P.A., and the stated plan was to

build a network of downline distributors to generate business

volume and ultimately to receive “points” or commissions from

Amway.   Petitioners produced a copy of their written goals

(different from their business plan), a one page handwritten

document.   Petitioners also maintained and produced a log of
                              - 10 -

“Business Expenses” incurred in 1996 and 1997, and a chart of

“Office Expense” from 1996.   They maintained and produced monthly

calendars reflecting both Amway-related entries and personal

entries for both 1996 and 1997.   Also, Ms. Ingram claimed that

they opened a bank account for their Amway activity.

     Nevertheless, we conclude that petitioners’ overall approach

to their activity was not businesslike.    See sec. 1.183-2(b)(1),

Income Tax Regs.   The records that petitioners produced do not

reflect details concerning their Amway activity, such as products

sold, clients, or downline distributors.   In addition, the goals

do not provide any indication of how petitioners planned to

achieve the points and commissions, or how to find the customers.

     Despite being given ample opportunity to produce relevant

business records, petitioners failed to do so, and they failed to

offer an explanation for their absence.    For example, petitioners

failed to produce a copy of their business plan and bank records.

Petitioners produced an “Office Expense” chart for 1996, but not

for 1997, and did not offer any supporting bills or proof of

payment of any of the expenses.   Petitioners did not retain paper

copies of the quarterly, semiannual, and annual reports of income

and expenses that they purportedly kept.   Petitioner explained

that when their computer upgrade crashed, they lost all reports.

We are skeptical that all data that went into the reports was

irretrievably lost.   Petitioners’ inability to produce the
                              - 11 -

underlying income and expense data, reports, and other business

records and their failure to reconstruct the income and expense

reports indicate a disregard of businesslike activity and profit.

Id.

      Petitioners asserted that they changed the way they did

business (i.e., marketing) in 1996, but petitioners have offered

no factual support for this assertion.   Continuing to operate

such an unprofitable activity, even after a change in strategy

that was unsuccessful, indicates a lack of profit objective.

Filios v. Commissioner, 224 F.3d at 24; sec. 1.183-2(b)(1),

Income Tax Regs.

      Petitioner testified that “if products don’t move, profit

doesn’t move”; yet petitioners failed to provide any indication

of how they attempted to sell the Amway products.    Petitioners

did not present any facts or business records concerning sales of

products to customers such as customer lists or distribution

order forms.   Rather, petitioners’ goals list and testimony

indicate that they focused on establishing a downline chain of

distributors more than they focused on selling products.

Moreover, petitioners claimed that they had approximately 30

downline distributors, but they neither produced a list of these

downline distributors nor had any of them testify.    We are not

convinced that petitioners focused on selling Amway products and

that they focused on earning a profit.
                                - 12 -

     Petitioners asserted that they went to the library and

researched Amway on their own, and that they reviewed various

Amway materials before beginning their participation in the Amway

activity.   There is nothing in the record to support petitioners’

assertions.    Moreover, the record does not reflect any indication

that the C.P.A. with whom they consulted had expertise in

marketing consumer products.    We are not convinced that

petitioners conducted any meaningful independent research

concerning their Amway activity or that they sought to educate

themselves to overcome their lack of experience and expertise.

Sec. 1.183-2(b)(2), Income Tax Regs.

     Petitioners each claimed to have spent approximately 10

hours a week pursuing Amway activities, though petitioner

occasionally spent additional time attending seminars on

weekends.   Both petitioners held full-time jobs during the years

in issue.   In addition, Ms. Ingram experienced health-related

problems during the years in issue that prevented her from

spending time in pursuit of the Amway activity.    We conclude that

petitioners did not devote significant time to the Amway

activity.     Elliott v. Commissioner, 90 T.C. at 972; sec. 1.183-

2(b)(3), Income Tax Regs.

     Ms. Ingram testified that petitioners became involved in

Amway because they thought that it would be an asset that could

be sold, which would be valuable for estate planning.
                                - 13 -

Petitioners produced only two items, two Amway bulletins, one

entitled “Bulletin No. 3 Distributorship Inheritance” and one

entitled “Bulletin No. 3A Trust”, in support of their position.

We find that the Amway activity was not an appreciable asset, and

we are also not convinced that petitioners believed that it was

such an asset.   Sec. 1.183-2(b)(4), Income Tax Regs.

     Petitioners’ gross income from the sale of Amway products

never exceeded their expenses.    Petitioners reported total gross

income over a 5-year period of $1,509.   The $61,159 of Schedule C

expenses claimed during the 5 years of their participation in the

activity virtually guaranteed that petitioners would not earn a

profit.   Elliott v. Commissioner, supra at 972; sec. 1.183-

2(b)(6) and (7), Income Tax Regs.    Petitioner’s partial

explanation for their losses, that their downline distributors

“weren’t very motivated” in selling the Amway products, fails to

explain adequately the reason for the continuing losses over a

period of years.

     Considering the record in its entirety, we are satisfied

that petitioners did not have the actual, honest, and bona fide

objective of making a profit.    It appears that they became Amway

distributors simply to deduct expenses for items of a personal

nature.   The claimed Schedule C deductions relating to the Amway

activity are allowed only to the extent of the gross income
                              - 14 -

derived from the activity.2   Sec. 183(b)(2); Elliott v.

Commissioner, supra at 973.

     As the result of our holding above, it is unnecessary for us

to address substantiation issues under section 274.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.




     2
        We are uncertain whether the notice of deficiency allowed
deductions to the extent of the reported gross income. In order
to take them into account we shall enter a decision under Rule
155.
