                  T.C. Summary Opinion 2005-187



                     UNITED STATES TAX COURT



              LANG HER AND KA MOUA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 636-04S.               Filed December 27, 2005.



     Lang Her and Ka Moua, pro se.

     George W. Bezold and Mark J. Miller, for respondent.



     POWELL, Special Trial Judge:    This case was heard pursuant

to the provisions of section 74631 of the Internal Revenue Code

in effect at the time the petition was filed.   The decision to be




     1
          Unless otherwise 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.
                               - 2 -

entered is not reviewable by any other court, and this opinion

should not be cited as authority.

     Respondent determined deficiencies of $10,696 and $9,657 in

petitioners’ 2000 and 2001 Federal income taxes, respectively.

After concessions by the parties,2 the issue is whether

petitioners are entitled to deduct certain business expenses on

Schedule C, Profit or Loss From Business, for an activity

participated in by petitioner Lang Her (petitioner) for the years

in issue.   At the time the petition was filed petitioners resided

in Brown Deer, Wisconsin.

                            Background

     In 1995, Michael C. Cooper (Mr. Cooper) founded and

incorporated a multilevel marketing company called Renaissance,

The Tax People, Inc.3 (Renaissance) in the State of Nevada, which

was operated out of Topeka, Kansas.    At its core, Renaissance was

a pyramid scheme.4   Its only product, the “Tax Advantage System”


     2
          In a stipulation of settled issues, respondent conceded
that petitioners are entitled to a Schedule C expense for
supplies of $1,330 for the 2001 taxable year. In a stipulation
of facts, petitioners conceded that they are not entitled to a
dependency exemption deduction for petitioner Lang Her’s father
for either the 2000 or 2001 taxable year.
     3
          Also known as RTTP; TheTaxPeople.net; Advantage
International Marketing; AIM; and Renaissance Designer Gallery
Products, Inc.
     4
          A pyramid scheme is an investment program designed such
that early investors are paid off with money paid into the
program by later investors to encourage yet more and bigger
                                                   (continued...)
                               - 3 -

or “The Tax Relief System”, was a fraudulent “home-based”

business package designed to sell tax deductions of personal

expenses through misleading representations regarding tax return

preparation, tax advice, and alleged audit protection.   Those who

purchased this product were called Independent Marketing

Associates (IMA).   IMAs earned commissions by recruiting others

to join Renaissance.

     Renaissance was an illegal pyramid scheme and in 2001 was

permanently enjoined from conducting business and selling its

product.   Mr. Cooper and other Renaissance leaders currently face

Federal criminal charges including conspiracy to defraud the

Internal Revenue Service, assisting in the preparation of false

tax returns, mail fraud, wire fraud, and money laundering, all

stemming from their involvement in Renaissance.   Petitioner does

not dispute these facts.

     Petitioner operated his own insurance business as a sole

proprietor, and petitioner Ka Moua worked as a secretary for a

healthcare corporation.5   Petitioner became involved with

Renaissance as an IMA in 1999, and continued his relationship



     4
      (...continued)
investments. The plan will succeed until the amount of money
going out of the program to payoff early investors exceeds the
amount of funds coming into the program from later investors, at
which time the entire program will collapse.
     5
          Petitioner Ka Moua was not involved with the
Renaissance activity.
                               - 4 -

with Renaissance in 2000 and 2001.     His involvement in

Renaissance ended sometime in November 2001.

     During his first year with Renaissance, petitioner drove his

personal automobile to St. Paul, Minnesota, twice a month for

training.   By the second year, he traveled to Minnesota once a

month.   As he began to recruit new members, petitioner had

meetings once every 2 weeks in his home.6    The meetings were held

in the basement of petitioners’ home which was furnished with a

conference table, a telephone, a computer, and a freestanding

chart board.   The basement was not used by petitioners for

anything other than Renaissance meetings.

     On Schedules C petitioners claimed deductions for business

expenses totaling $79,676 and $54,182 for 2000 and 2001,

respectively, for petitioner’s insurance business activity.     No

Schedule C for either year was filed for expenses relating to the

Renaissance activities, rather the expenses for Renaissance were

commingled with the insurance business expenses.     Both returns

were prepared by a tax return preparer referred to petitioners by

Renaissance.




     6
          Petitioner claims to have had approximately 33 of his
own Renaissance recruits.
                                 - 5 -

     Respondent determined that various expenses were not

substantiated, were not shown to be ordinary and necessary to

petitioner’s business, or were personal in nature and therefore

not deductible.

                              Discussion

     Section 162 allows a deduction for all ordinary and

necessary expenses incurred in carrying on a trade or business if

the taxpayer maintains records or other proof sufficient to

substantiate the expenses.7    Secs. 162(a), 6001; sec. 1.6001-

1(a), Income Tax Regs.   To be engaged in a trade or business the

taxpayer must be involved in the activity with continuity and

regularity and the taxpayer's primary purpose for engaging in the

activity must be for income or profit.     Sec. 162; see

Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); Antonides v.

Commissioner, 893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C.

686 (1988).

     Renaissance has been found to be an illegal pyramid scheme

that offered no product or service other than the dissemination

of fraudulent tax advice.     The parties have stipulated the

deductions claimed with regard to the Renaissance activity;

however, respondent contends that the Renaissance activity was

not a trade or business.


     7
          Sec. 7491(a), concerning burden of proof, is not
applicable here because petitioners have not satisfied the
substantiation requirements. Sec. 7491(a)(2)(A).
                              - 6 -

     It is dubious at best to say that petitioner’s participation

in this pyramid scheme was conducted with the continuity and

regularity of a trade or business, and that the claimed expenses

were ordinary and necessary for the production of income.     His

Renaissance activities did not go beyond attending a meeting once

a month and holding a meeting once every 2 weeks at his home.

There is nothing in the record that provides a connection between

the deductions claimed and a trade or business.

     But, even if the Renaissance activity was a trade or

business, petitioners face other problems.   First, many of

petitioner’s claimed business expenses included family medical

bills, clothing, and home mortgage interest.8   “It is a

fundamental policy of Federal income tax law that a taxpayer

should not be entitled to a deduction for ‘personal’ expenses,

such as the ordinary expenses of everyday living.”   Dobra v.

Commissioner, 111 T.C. 339, 348 (1998); see sec. 262(a).      The

introductory materials of Renaissance’s The Tax Relief System

blatantly state that the taxpayer can convert “former ordinary

home expenses into substantial business tax deductions

immediately.”9


     8
          Deductions for home mortgage interest were allowed as
itemized deductions on Schedule A, Itemized Deductions.
     9
          In Rev. Rul. 2004-32, 2004-12 I.R.B. 621, the Internal
Revenue Service addressed home-based business schemes similar to
Renaissance:
                                                   (continued...)
                               - 7 -

     Second, we note that irrespective whether the Renaissance

activity was a trade or business, the disallowed travel and car

expenses were not substantiated as required by sections 274(d)

and 280F(d)(4) applicable to so-called listed property including

passenger automobiles.   See sec. 1.274-5T, Temporary Income Tax

Regs., 50 Fed. Reg. 46037 (Nov. 6, 1985).   Petitioner’s travel

and car expenses were related to the use of his personal

automobile.   Petitioner has no records pertaining to the use of

his automobile for the Renaissance activity.

     Third, with respect to the disallowed expenses relating to

the insurance business activity, petitioner lacked substantiation



     9
      (...continued)

          Taxpayers participating in home-based business
     schemes invariably do not have a bona fide home-based
     business and are not using any portion of their
     residences exclusively and regularly for a work-related
     use. These schemes will not convert otherwise
     nondeductible personal, living or family expenses into
     legitimate deductions. Moreover, detailed
     recordkeeping cannot create a permissible deduction
     unless the expenses at issue are legitimate business
     expenses. Although deductions must be substantiated in
     order to be allowable, a taxpayer also must establish
     entitlement to the deduction, e.g., that the claimed
     expenses were ordinary and necessary for the production
     of income in a trade or business.

     Revenue rulings do not have the force of law and are merely
statements of the Commissioner’s litigating and administrative
position. Dixon v. United States, 381 U.S. 68, 73 (1965).
They are not binding on courts, see, e.g., Stubbs, Overbeck &
Associates v. United States, 445 F.2d 1142, 1146-1147 (5th Cir.
1971), but may be helpful and persuasive, Twin Oaks Cmty., Inc.
v. Commissioner, 87 T.C. 1233, 1252 (1986).
                               - 8 -

and had difficulty explaining how various items appearing on the

Schedules C were incurred.   For example, on the 2000 and 2001 tax

returns petitioner deducted $12,864 and $6,000, respectively, for

wages, but he had no evidence to substantiate these expenses.      Of

the total disallowed expenses relating to the insurance business

activity, the parties stipulated that petitioner was entitled to

a deduction of $1,330 for supplies for 2001.    With the exception

of the agreed item, respondent’s disallowance of the claimed

expenses on both the 2000 and 2001 Schedule C is sustained.

     Furthermore, generally no deductions are allowed with

respect to the use of a dwelling unit which is used by the

taxpayer as a residence.   Sec. 280A(a).   A taxpayer may be

excepted from this general rule if a portion of the dwelling unit

is exclusively used on a regular basis “as the principal place of

business for any trade or business of the taxpayer”.    Sec.

280A(c)(1)(A).

     Even assuming that petitioner’s Renaissance activities were

those of a trade or business and that petitioner’s basement was

used as the principal place of business, expenses incurred for

incidental or occasional use of a home office are not deductible.

See, e.g., Cally v. Commissioner, T.C. Memo. 1983-203; Roth v.

Commissioner, T.C. Memo. 1981-699.     Petitioners’ basement was

allegedly used for meetings only once every 2 weeks during the

second year of petitioner’s involvement with Renaissance.      From
                              - 9 -

this record, it does not appear that petitioner devoted

substantial time and energy to any business activity that

involved the regular use of his basement.    Petitioners have not

established that the exception to section 280A(a) applies, and

respondent’s disallowance of the deductions for utilities and

other expenses claimed for the home office is sustained.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                      under Rule 155.
