                  T.C. Summary Opinion 2008-12



                     UNITED STATES TAX COURT



                  ROBERT A. EDER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24370-05S.             Filed February 6, 2008.



     Robert A. Eder, pro se.

     Angela J. Kennedy, for respondent.



     THORNTON, 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.1   Pursuant to section

7463(b), the decision to be entered is not reviewable by any



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the year at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 2 -

other court, and this opinion shall not be treated as precedent

for any other case.

     Respondent determined a $3,172 deficiency in petitioner’s

2002 Federal income tax.   The issue for decision is whether

during 2002 petitioner engaged in his Reliv International

marketing activity for profit within the meaning of section 183.

                            Background

     The parties have stipulated many facts, which are so found.

When he petitioned the Court, petitioner resided in Indiana.

     Petitioner is single, having divorced in 1994.    He holds a

master’s degree in civil engineering.    In 1991, he began working

as an engineer at Abbott Laboratories (Abbott).   During 2002, he

worked for Abbott 9 hours a day, 5 days a week, receiving wages

of $85,064.84.

     In 1997, while employed at Abbott, petitioner met a couple

at his gymnasium.   They convinced him to become an independent

distributor for Reliv International (Reliv), a network marketing

company that sells health care products.   Petitioner had no

previous experience in network marketing or retail sales.

     According to petitioner, he can make a profit on sales of

Reliv products, which he orders directly from Reliv.   He regards

any profits from direct sales, however, as incidental to the

supposedly more lucrative goal of “sponsoring” other people in
                                - 3 -

the Reliv marketing program, which he says would enable him to

earn commissions on their Reliv sales.

     As it happens, since he became involved in Reliv marketing

in 1997, petitioner’s only customers have been family members.

Likewise, the only two people he has sponsored as Reliv

distributors have been family members--his son and his brother,

both of whom became distributors to take advantage of the

distributor’s discounts on Reliv products.    The son did not last

long in the business; he quit in 1999, the same year he started.

     During 1998, petitioner advertised Reliv in a weekly paper

called Pennysaver.    He discontinued this advertising in 1999.

Since then, he has not advertised in any newspaper.    Similarly,

during 1998 petitioner posted bulletin board flyers in

laundromats and grocery stores but likewise discontinued this

practice in 1999.    Although Reliv sponsors Web sites for its

distributors, petitioner has never had a Web site for his Reliv

activity.

     Petitioner commuted 80 miles, one-way, to his job at Abbott.

On certain days, he would stop at commuter train stations or

shopping malls along his commuting route and place “drop cards”

on car windshields.    These cards proclaimed “The Opportunity of a

Lifetime” and gave his phone number but generally did not mention

the Reliv name.   Petitioner has never received any response to

any of these drop cards.
                               - 4 -

     In 2000, petitioner began sending out direct mail

information, promoting Reliv products and the opportunity to

become “healthy & rich”.   Some of these direct mail materials

indicated that petitioner had been using Reliv products for many

months and that they had reduced his symptoms of various chronic

illnesses and contributed to his “overall feeling of good

health.”

     Using an Internet database at his local public library,

petitioner secured names and addresses of women in the northwest

Indiana area to whom he would send the direct mail information.

Each week, petitioner selected names and addresses of about 48

women to whom he would mail postcards.   Petitioner would follow

up the first postcard with a second and a third and then attempt

to telephone some of these women.   Each month, he would talk to

several of them on the telephone for 15 or 20 minutes, making his

Reliv pitch.   On rare occasions, petitioner would meet with one

of these women at the local library to give them Reliv materials.

As far as the record reveals, none of these contacts ever

resulted in petitioner’s making any Reliv sales or sponsoring any

Reliv distributors.

      On Tuesday evenings and Saturday mornings, petitioner

attended Reliv meetings approximately 10 miles from his home.

During 2002, petitioner attended national Reliv conferences in

Reno, Nevada, and St. Louis, Missouri.
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     In 1998, petitioner prepared a “Reliv Cold Marketing

Budget”, listing anticipated expenditures but showing no

projected receipts or profits.    He reused this “budget” for each

succeeding year.    For 2002, this “budget” showed total expenses

of $11,145 but no receipts or profits.    Until preparing for this

trial, petitioner had never prepared a business plan for his

Reliv activity, nor had he calculated a break-even point showing

how much future profit he would need to recoup his past losses.

Petitioner maintained no organized record-keeping system.

     On Schedules C, Profit or Loss From Business, of Forms 1040,

U.S. Individual Income Tax Return, for taxable years 1997 through

2005, petitioner reported net losses from his Reliv marketing

activity as follows:

     Tax            Gross         Operating        Net
     Year           Income         Expenses       Losses

     1997           $233.00      ($2,925.00)    ($2,692.00)
     1998            688.00       (9,431.00)     (8,743.00)
     1999            376.08       (9,350.11)     (8,974.03)
     2000            732.02       (8,833.54)     (8,101.52)
     2001          1,003.13       (9,967.82)     (8,964.69)
     2002          1,123.68      (12,894.71)    (11,771.03)
     2003          1,221.16      (11,629.79)    (10,408.63)
     2004          1,633.18      (11,834.31)    (10,201.13)
     2005          1,616.02       (1,616.02)         --

     In the notice of deficiency, with respect to petitioner’s

2002 taxable year, respondent determined that petitioner was not

engaged in the Reliv activity for profit and that consequently he
                               - 6 -

was entitled to claim itemized deductions for operating expenses

only to the extent of the $1,124 of reported gross income.2

                            Discussion

     Under section 183(b)(2), if an individual engages in an

activity not for profit, deductions relating thereto are

allowable only to the extent gross income derived from the

activity exceeds deductions that would be allowable under section

183(b)(1) without regard to whether the activity constitutes a

for-profit activity.   See Allen v. Commissioner, 72 T.C. 28, 32-

33 (1979).

     The taxpayer generally bears the burden of establishing that

his or her activities were engaged in for profit.   Rule 142(a).3

The relevant question is whether the taxpayer had a “good faith

expectation of profit”.   Burger v. Commissioner, 809 F.2d 355,


     2
       The $12,894.71 of expenses claimed on petitioner’s 2002
Schedule C bears little similarity to the expenses listed on his
2002 “budget”. For instance, the largest claimed expense on his
2002 Schedule C was $6,144.41 for car and truck expenses; by
contrast, his 2002 “budget” lists $2,300 for “transportation” and
“travel” expenses including tolls, parking, and meals. The
largest single item on his 2002 “budget” was for $3,000 to
“Purchase product”. By contrast, on his Schedule C, petitioner
reported no purchases or inventory.
     3
       In certain cases, the burden of proof shall be on the
Commissioner if, in any court proceeding, the taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the liability of the taxpayer for any tax imposed by
subtit. A or B of the Code. Sec. 7491(a)(1). Because we decide
this case on the preponderance of the evidence, rather than by
reference to the placement of the burden of proof, we do not
decide whether petitioner has met the requirements under sec.
7491 to shift the burden of proof to respondent.
                                - 7 -

358 (7th Cir. 1987), affg. T.C. Memo. 1985-523; see Dreicer v.

Commissioner, 78 T.C. 642, 645 (1982), affd. without opinion 702

F.2d 1205 (D.C. Cir. 1983).   The taxpayer’s expectation, however,

need not be reasonable.    Burger v. Commissioner, supra at 358;

Golanty v. Commissioner, 72 T.C. 411, 425 (1979), affd. without

published opinion 647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(a),

Income Tax Regs.   Whether the taxpayer has the requisite profit

objective is a question of fact, to be resolved on the basis of

all relevant circumstances, with greater weight being given to

objective factors than to mere statements of intent.      Dreicer v.

Commissioner, supra; Golanty v. Commissioner, supra at 426.

     The regulations under section 183 provide a nonexclusive

list of factors to be considered in determining whether an

activity is engaged in for profit.      The factors include:   (1) The

manner in which the taxpayer carries on the activity; (2) the

expertise of the taxpayer or his or her advisers; (3) the time

and effort the taxpayer expended in carrying on the activity;

(4) the expectation that assets used in the activity may

appreciate in value; (5) the taxpayer’s success in carrying on

other activities; (6) the taxpayer’s history of income or loss

with respect to the activity; (7) the amount of occasional

profits, if any, which are earned; (8) the taxpayer’s financial

status; and (9) whether elements of personal pleasure or

recreation are involved.   Sec. 1.183-2(b), Income Tax Regs.; see
                               - 8 -

Golanty v. Commissioner, supra at 426.    No single factor, nor the

existence of even a majority of the factors, is controlling, but

rather an evaluation of all the facts and circumstances is

necessary.   Golanty v. Commissioner, supra at 426-427.

1.   Manner in Which Petitioner Carried On His Reliv Activity

     Petitioner has stipulated that he had not prepared a

business plan for his Reliv activity before preparing for this

trial.   He prepared no formal budget, contemporaneous profit

projections, or break-even analyses.4    He maintained no organized

record-keeping system that might have enabled him periodically to

evaluate his profitability (or more accurately, the extent of his

nonprofitability).   To the contrary, the manner in which

petitioner carried on his Reliv activity strongly suggests that

he was not primarily concerned about realizing a profit.    This

conclusion is buttressed by petitioner’s stipulation that he

“will not stop his Reliv activities until he runs out of money to

finance the activity.”




     4
       At trial, petitioner presented a purported plan for
recouping his past losses. That plan appears premised in part on
an assumption that at some indefinite point petitioner will be
earning commissions on sales by at least 120 Reliv distributors
that he will have sponsored. At trial, petitioner conceded that
this projection lacked any “concrete justification”. When we
consider that over his nearly 10-year involvement with the Reliv
activity, petitioner’s only sponsorees have been his brother and
his son (who quickly quit the activity), a financial plan
predicated on a projection of 120 sponsorships appears wildly
optimistic.
                                 - 9 -

     We conclude that petitioner did not operate his Reliv

activity in a businesslike manner.       This factor weighs heavily in

respondent’s favor.

2.   Expertise of Petitioner

     Before becoming involved with Reliv, petitioner had no sales

or network marketing experience.    He read some books and

consulted with other persons involved with Reliv, whom he

concedes were not experts, but there is no evidence that he

sought the expertise of qualified, disinterested third parties.

This factor favors respondent.

3.   Time and Effort Expended in Carrying On the Activity

     Time and effort expended in carrying on an activity may be

indicative of a profit objective, particularly in the absence of

substantial personal or recreational elements associated with the

activity.   Sec. 1.183-2(b)(3), Income Tax Regs.     A taxpayer’s

withdrawal from another occupation to devote most of his energies

to the activity may evidence a profit objective.       Id.   Petitioner

spends several hours each week on his Reliv activity.        As

discussed elsewhere in this opinion, we are not convinced that

there are no personal elements in this activity, especially

considering that all of his customers have been family members.

Moreover, petitioner pursued his Reliv activity while continuing

to work full time at Abbott, 5 days a week.      This factor favors

respondent.
                              - 10 -

4.   Expectation That Assets May Appreciate in Value

     Petitioner does not contend and the record does not suggest

that there are any assets involved with petitioner’s Reliv

activity that may appreciate in value.   We view this factor as

neutral.

5.   Success in Carrying On Similar Activities

     Insofar as the record reveals, petitioner has engaged in no

other activities similar to his Reliv activity, by which we might

evaluate his success in those other activities.   We view this

factor as neutral.

6.   History of Income or Losses

     Petitioner has never realized a profit from his years of

Reliv activity.   Rather, for the year at issue and the preceding

5 years, petitioner’s claimed operating expenses for his Reliv

activity exceeded his revenues therefrom by factors ranging from

about 10 to 24.   Petitioner suggests that these losses are due to

his Reliv activity’s being in a startup phase; he suggests that

it is in the nature of the Reliv business to experience a

dramatic profit spike at some point.   Petitioner offered no

concrete information, however, to convince us that his

expectation of a future revenue spike is more than wishful

thinking.   This factor favors respondent.
                               - 11 -

7.   Amount of Occasional Profits, If Any

     Petitioner has never generated any profit from his Reliv

activity.    Petitioner contends that he will begin to realize

substantial profits only upon sponsoring other Reliv

distributors.    Over some 10 years, however, he has sponsored only

his brother and (fleetingly) his son, with minimal effect on

profitability.    This factor favors respondent.

8.   Taxpayer’s Financial Status

     Substantial income from sources other than the activity may

indicate lack of a profit objective, particularly if:    (1) Losses

from the activity generate substantial tax benefits, and (2)

personal or recreational elements are involved.    Sec. 1.183-

2(b)(8), Income Tax Regs.

     For the year at issue and all prior years, petitioner earned

substantial income from his full-time employment as an engineer

at Abbott.   For 2002, petitioner sought to offset a portion of

this wage income with a claimed net loss from his Reliv activity.

The claimed net loss is attributable in significant part to

claimed travel expenses which, if allowed, would effectively

permit petitioner to deduct a portion of his otherwise

nondeductible commuting expenses by the expedient of placing drop

cards along his commuting route.    His persistence in placing

these drop cards without ever receiving a single response to them
                               - 12 -

is indicative of a lack of profit objective.   This factor favors

respondent.

9.   Elements of Personal Pleasure or Recreation

     Personal or recreational aspects of an activity may indicate

that the activity was not conducted with a profit objective.

McKeever v. Commissioner, T.C. Memo. 2000-288; sec. 1.183-

2(b)(9), Income Tax Regs.   The mere fact that a taxpayer derives

pleasure from an activity, however, does not show a lack of a

profit objective if the activity is, in fact, conducted for

profit as evidenced by other factors.   Sec. 1.183-2(b)(9), Income

Tax Regs.; see also Jackson v. Commissioner, 59 T.C. 312, 317

(1972).

     As previously discussed, we believe there were some personal

or recreational aspects to petitioner’s Reliv activity, such as

attending weekly meetings and contacting family members.   In

addition, as a Reliv distributor, petitioner presumably would

enjoy a discount for Reliv products, similar to the discount that

motivated his brother and his son to become involved as Reliv

distributors.   The record indicates that petitioner was a long-

time user of Reliv products.   It would appear that the ability to

purchase Reliv products at a discount was a significant personal

benefit to petitioner.   This factor favors respondent.
                               - 13 -

Conclusion

     On the basis of all the evidence, we conclude that during

2002 petitioner did not engage in the Reliv activity with a good

faith expectation of profit.   Accordingly,


                                         Decision will be entered

                                    for respondent.
