                         T.C. Memo. 2007-154



                       UNITED STATES TAX COURT



         WILLIAM C. AND DOROTHY M. SMITH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12065-05.              Filed June 14, 2007.



     John P. Konvalinka and Richard G. Pearce, Jr., for

petitioners.

     Travis T. Vance III and Monica D. Armstrong, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:    Respondent determined deficiencies in

petitioners’ Federal income taxes of $8,779, $9,835, and $15,498

and penalties pursuant to section 6662(a) of $1,755.80, $1,967,
                                 - 2 -

and $3,099.60 for the years 2000, 2001, and 2002, respectively.1

The issues presently before the Court for decision are:

     1.     Whether petitioner Dorothy M. Smith’s direct marketing

activities were conducted with an actual and honest intent to

profit.     We hold that they were not;

     2.     whether petitioners are liable for penalties pursuant to

section 6662(a) and (b)(1).     We hold they are not.

                           FINDINGS OF FACT

         Some of the facts have been stipulated, and the stipulation

of facts and the accompanying exhibits are incorporated by this

reference.     Dr. William C. Smith and his wife Dorothy M. Smith

resided in Rossville, Georgia, at the time their joint petition

was filed with this Court.

         Dr. Smith is a medical doctor and was engaged in the

practice of medicine during the years at issue.      Mrs. Smith

graduated from college with training as an accountant.      Later

Mrs. Smith became a registered nurse and worked as a nurse from

1981 to 1995.     During this period, Mrs. Smith also worked as an

administrator with a home health agency.      At the end of this

period, Mrs. Smith was earning approximately $75,000 a year.




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code, as in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 3 -

     During 1996, Mrs. Smith began selling for direct marketing

companies.    During 1998 and 1999, Mrs. Smith was involved with

selling spray vitamins.    On Schedules C, Profit or Loss From

Business, of their joint Federal income tax returns for 1998 and

1999, petitioners reported losses of $34,049 and $47,493,

respectively, related to Mrs. Smith’s direct marketing

activities.

     During 2000, 2001, and 2002, Mrs. Smith stopped selling

spray vitamins and instead became involved in four other direct

marketing companies:    (1) Espial U.S.A., Ltd. (Espial), (2)

Renaissance The Tax People, Inc. (Renaissance), (3) Cyberwize.com

(Cyberwize), and (4) 24/7 Internet Marketing.    The products that

Mrs. Smith marketed from Espial included energy supplements,

power-oxygenated water, and skin-care products.    The products

marketed for Cyberwize included nutritional supplements and a

travel product.    The products marketed for 24/7 Internet

Marketing included marketing materials to help recruit other

individuals interested in direct marketing opportunities as well

as candy and other food products.

     The products Mrs. Smith marketed for Renaissance were part

of what Renaissance called its “Tax Relief System”.    Customers

could purchase the system, which consisted of various written and

audio materials designed to generate Federal income tax

deductions, for $300.    Mrs. Smith purchased what Renaissance
                                 - 4 -

called the “Founders Pack”, which included four Tax Relief

Systems that could then be resold.       Among the benefits claimed in

the Tax Relief System materials were:      (1) A guaranteed minimum

of $5,000 in Federal tax deductions, (2) that participation in

the system was itself evidence of operating a business for

profit, and (3) that opening a home-based business would allow

taxpayers to enjoy double deductions by claiming both the

standard deduction as well as itemized deductions claimed on

Schedule C.     In addition to the written materials, customers

could purchase Renaissance’s monthly tax service with costs

ranging from $10 a month to the platinum service, which Mrs.

Smith purchased, for $100 a month.

         As a distributor in a direct marketing operation, an

individual commits to purchasing or selling a certain amount of

the product each month.     The individual then earns commissions on

the products he or she is able to sell.      The individual also

enjoys a discount on products purchased for personal use.       In

addition to the commissions based on his or her sales, a

distributor can earn income by recruiting other individuals to

sell the product.     The original distributor then becomes the

“upline” distributor and the recruit, the “downline”

distributor.2    The upline distributor then receives additional



     2
      These operations are also sometimes referred to as
multilevel marketing companies.
                                 - 5 -

commissions based on the products that his or her downline

distributors are able to sell.    If a downline distributor then

recruits additional individuals to sell, the original upline

distributor receives commissions on sales by both downline

distributors.   The additional commissions received by the upline

distributor are not, however, determined by the profitability of

the downline distributors, only by their sales.

     Mrs. Smith was recruited in this fashion to become a

downline distributor for Susan Walsh, first for Espial in 1999,

and in subsequent years for Renaissance and Cyberwize.    The

record does not reflect who introduced Mrs. Smith to 24/7

Internet Marketing.   Ms. Walsh provided Mrs. Smith with product

training and sales organization training and advised her on how

to teach and train other potential downline distributors.

     With the exception of Cyberwize, Mrs. Smith created nominal

business plans for each of the companies for which she marketed.

These plans included vague goals about the number of customers

Mrs. Smith would attract and the sales that she would achieve.

For instance, Mrs. Smith’s Espial business plan is an undated,

one-page document which states:    “I will build a sales force and

retail products to derive income that will exceed employment in

the corporate arena, and I will have become a highly visible

sales organization known as a leader in sales, sponsorship, team

support, and residual income.”    With respect to her market, Mrs.
                                - 6 -

Smith’s plan states:   “My target customer market includes those

who would like to own their own home-based business.    The ideal

customer is one who can benefit from the products or [sic] I am

marketing.”    Mrs. Smith’s plans did not reflect any analysis of

the market she sought to operate in, any potential competitors,

her startup costs, the time required to recoup those startup

costs, or the time and potential to achieve profitability.    With

each of these plans, it seems Mrs. Smith altered existing

materials provided by the companies.    Mrs. Smith prepared no

written business plan for Cyberwize.

     Petitioners engaged their accountant, Cheryl Clark, to

assist in the preparation of their income tax returns.    Ms. Clark

is a certified public accountant (C.P.A.) licensed in the State

of Georgia.    Mrs. Smith provided Ms. Clark with summaries of the

expenses and income with respect to her direct marketing

activities which Ms. Clark then used to prepare petitioners’

income tax returns, including the losses reported on petitioners’

Schedules C.   The information Mrs. Smith provided was entirely in

summary form, and Ms. Clark was not asked to and did not attempt

to verify the amounts Mrs. Smith provided her.

     In addition to preparing petitioners’ returns, Ms. Clark

provided Mrs. Smith with tax advice for her business.    Ms. Clark

advised Mrs. Smith on how best to maintain the business records

for her business.   When Mrs. Smith was contemplating becoming a
                                - 7 -

distributor for Renaissance, she engaged Ms. Clark to review her

Renaissance business plan as well as other materials provided by

Renaissance.    This review was confined to the merits and legality

of the tax strategies sold as part of the Renaissance tax

package.   After reviewing the documents Mrs. Smith provided, Ms.

Clark advised that the tax strategies promoted by the product

were legal.    Ms. Clark also purchased the Tax Relief System for

herself and briefly became a distributor for Renaissance.     Ms.

Clark testified that she ceased selling for Renaissance because

it was taking too much time and because Renaissance was shut down

by Kansas State authorities.

     Ms. Clark did not provide any business advice to Mrs. Smith

apart from her tax advice.    Aside from the vague business plan

provided to Ms. Clark with respect to Renaissance, Ms. Clark did

not review any of Mrs. Smith’s other business plans.    Further,

Ms. Clark did not prepare or review any financial statements or

budgets with respect to any of Mrs. Smith’s marketing activities.

As Ms. Clark testified, her advice was largely confined to tax

advice.

     Mrs. Smith also sought advice from her upline distributor,

Ms. Walsh.    Ms. Walsh’s counsel focused primarily on sales and

product training.    Ms. Walsh did not review any financial

statements with Mrs. Smith, nor did she discuss how Mrs. Smith

might stem the losses she was experiencing or how long it might
                               - 8 -

take to recoup the losses.   Instead, Ms. Walsh testified that her

advice focused on the future and was directed at how to sell the

products and how to recruit others and teach them to sell the

products.   Ms. Walsh’s advice assumed that sales equal profits

without any apparent consideration of the costs associated with

realizing such sales.

      Mrs. Smith testified that she devoted 60 to 80 hours per

week to her marketing activities.   We find Mrs. Smith’s testimony

unconvincing.   Mrs. Smith testified that a typical day consisted

of:

      First of all, I plan my day the night before, and then
      I would get up, review the plan, and I would be ––
      actually go through, review the plan, the contacts that
      I needed to make, what I need to do for that day, and
      that usually began somewhere between seven and eight
      o’clock. Then I, after reviewing what my plan was for
      the day, I would then begin to make phone calls and
      confirm appointments and follow through with things
      that I had planned out the night before.

           Then once I made those phone calls, I then would
      go travel to call on either customers or businesses in
      order to market the product or return calls to those
      who had responded to advertising, that type thing.
      Then in the evenings, a lot of times I would
      participate in conference calls regarding the business
      as well, and then that evening, of course, I’d plan my
      work for the following day.

We do not believe that these activities amount to 60 to 80 hours

per week of work time, and there is little documentary evidence,

such as logs and calendars, to substantiate Mrs. Smith’s

testimony in this respect.
                                - 9 -

     The time Mrs. Smith did spend with these direct marketing

activities was devoted primarily to recruiting additional

downline distributors as opposed to selling the actual products

themselves.    To recruit additional distributors, Mrs. Smith

placed advertisements in the classified sections of local and

regional newspapers about joining her marketing organization.

For instance, one advertisement under the heading, “Network

Marketers” states:    “The top trainer in the industry seeks 5 key

people in the Nashville area. $25,000/mo. FREE car.”    Mrs. Smith

would then spend time responding to phone calls inquiring about

these advertisements as well as traveling to and meeting with

these potential downline distributors.    Mrs. Smith would also

prepare periodic goal sheets, with stated numbers of the sales

she hoped to make, and review similar goal sheets prepared by her

downline distributors.    Finally, Mrs. Smith would meet with other

distributors during conferences and seminars.

     It is not clear how many downline distributors resulted from

these recruitment efforts by Mrs. Smith.    Many of her downline

distributors did, however, come from among Mrs. Smith’s family

and friends.    For instance, one of the first members of Mrs.

Smith’s Renaissance team was her husband, Dr. Smith.3   Another



     3
      Mrs. Smith offered no explanation of what benefit
petitioners might have received from Dr. Smith’s purchasing the
Tax Relief System when Mrs. Smith had already purchased the
system and the platinum level of service.
                               - 10 -

member of Mrs. Smith’s Renaissance team was her friend Walt

Holcomb.   Mrs. Smith lent Mr. Holcomb $12,000 in the same year

that he purchased the Tax Relief System.

     Overall, Mrs. Smith’s direct marketing activities have

proved unsuccessful.   On the Schedules C of their joint Federal

income tax returns for 2000, 2001, and 2002, petitioners reported

gross receipts of $19,869, $16,014, and $46,587, respectively,

related to Mrs. Smith’s direct marketing activities.     For the

same years, petitioners reported total losses of $26,856,

$34,155, and $17,256, respectively.     These losses included the

reported use of 40.48 percent of their residence for regular and

exclusive business activity.   The 2002 loss included wages

totaling $14,060 paid to petitioners’ two sons.

     In subsequent years, petitioners’ gross receipts from the

activities rose to $54,793 in 2003 before falling to $18,294 in

2004 and $17,947 in 2005.   In 2003, petitioners reported that

Mrs. Smith’s activities broke even.     In 2004, petitioners

discontinued claiming deductions for the business use of their

residence, car and truck expenses, and supplies and reported a

profit of $758.   In 2005, petitioners also stopped claiming a

deduction for wages paid to their sons and reported a profit of

$7,354.    Mrs. Smith testified that these expenses could no longer

be justified as deductions because the nature of Mrs. Smith’s
                              - 11 -

activities had changed such that she was now primarily using the

Internet to conduct her activities.

                              OPINION

A.   Section 183 Generally

     Section 183 restricts taxpayers from deducting losses from

an activity that is not “engaged in for profit”.   Sec. 183(a).

An activity is engaged in for profit if the taxpayer entertained

an actual and honest profit objective in engaging in the

activity.   Surloff v. Commissioner, 81 T.C. 210, 233 (1983);

Dreicer v. Commissioner, 78 T.C. 642, 645, (1982), affd. without

opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-2(a), Income

Tax Regs.   The taxpayer’s expectation of profit must be in good

faith.   Allen v. Commissioner, 72 T.C. 28, 33 (1979) (citing

section 1.183-2(a), Income Tax Regs.).

     In deciding whether Mrs. Smith operated her direct marketing

activities for profit, we consider the following nine factors:

(1) The manner in which she carried on the activity; (2) her

expertise or that of her advisers; (3) the time and effort she

expended in carrying on the activity; (4) the expectation that

the assets she used in the activity may appreciate in value; (5)

her success in carrying on other similar or dissimilar

activities; (6) her history of income or loss with respect to the

activity; (7) the amount of occasional profits, if any, which she

earned; (8) her financial status; and (9) whether elements of
                                - 12 -

personal pleasure or recreation are involved.    See sec.

1.183-2(b)(1) through (9), Income Tax Regs.

     No single factor, nor even the existence of a majority of

factors favoring or disfavoring the existence of a profit

objective, is controlling.     Brannen v. Commissioner, 722 F.2d

695, 704 (11th Cir. 1984), affg. 78 T.C. 471 (1982); sec.

1.183-2(b), Income Tax Regs.    Rather, the relevant facts and

circumstances of the case are determinative.    See Golanty v.

Commissioner, 72 T.C. 411, 426 (1979), affd. without published

opinion 647 F.2d 170 (9th Cir. 1981).    On the basis of the facts

and circumstances, we hold that Mrs. Smith was not engaged in her

direct marketing activities for profit within the meaning of

section 183.4

     1.   Manner in Which the Taxpayer Carried On the Activity

     Maintaining complete and accurate books and records,

conducting an activity in a manner substantially similar to that

of comparable businesses which are profitable, and making changes

in operations to adopt new techniques or abandon unprofitable

methods suggest that a taxpayer conducted an activity for profit.

Engdahl v. Commissioner, 72 T.C. 659, 666-667 (1979); sec. 1.183-

2(b)(1), Income Tax Regs.


     4
      We note that petitioners did not argue to shift the burden
of proof under sec. 7491(a). Regardless, the outcome of this
case is determined on the preponderance of the evidence after
trial and is unaffected by sec. 7491(a). See Estate of Bongard
v. Commissioner, 124 T.C. 95, 111 (2005).
                               - 13 -

     Mrs. Smith argues that she maintained records consistent

with a business operated for profit, including business plans,

commission reports from the companies whose products she sold,

and 30-day and 90-day sales goal reports, as well as detailed

records of her expenses.    Further, Mrs. Smith maintains that when

the products from one company proved unprofitable, she switched

her distribution efforts to other companies which were more

profitable.

     Respondent, on the other hand, maintains that Mrs. Smith did

not operate in a businesslike manner because the records lack any

indicia of analysis of the market, the potential for profit, or

how to alter the business to make it successful.    Respondent

argues that the records petitioners did maintain were consistent

with someone seeking to substantiate their expenses for tax

purposes and not with the goal of making a profit.

     Mrs. Smith cites Dworshak v. Commissioner, T.C. Memo. 2004-

249, in support of her contention that she was operating her

business for profit.    The taxpayer in Dworshak, like Mrs. Smith,

was a distributor for a direct marketing company and maintained

records of his activities.    Mrs. Smith argues that the records

she maintained were even more detailed than those of the taxpayer

in Dworshak.    While Mrs. Smith may be correct that she maintained

more records than the taxpayer in Dworshak, ultimately she misses

the point.    As we have stated previously:
                              - 14 -

    the keeping of books and records may represent nothing
    more than a conscious attention to detail. In this
    case, there has been no showing that books and records
    were kept for the purpose of cutting expenses,
    increasing profits, and evaluating the overall
    performance of the operation. * * *

Golanty v. Commissioner, supra at 430.

     Thus, we found significant in Dworshak not simply that the

taxpayer maintained records, but that the taxpayer used those

records as a tool to analyze how to make his direct marketing

business profitable.   For example, the taxpayer in Dworshak

devised a system to keep track of the success rates of his

solicitation activities.   As a result, during the first year and

a half of his operation, the taxpayer knew that about 2 percent

of people to whom he mailed solicitation materials purchased

products from him.   When those statistics demonstrated that the

success rate for his direct mail solicitations dropped below 0.5

percent, the taxpayer concluded that it would be more effective

to use telephone and in-person solicitations.   There is nothing

in the record before us that suggests any similar use or analysis

of the records Mrs. Smith maintained.

     Mrs. Smith’s testimony that she switched companies for which

she distributed when she concluded that other companies would be

more profitable is unconvincing and not supported by the record.

There is nothing to suggest any analysis by Mrs. Smith of why she

thought Espial and Renaissance were not profitable and why

switching to Cyberwize and 24/7 Internet Marketing would prove
                                - 15 -

more profitable.     Indeed the record presented at trial suggests,

at least with respect to Renaissance, that Mrs. Smith ceased

selling for the company because it was shut down by the Kansas

State authorities.

     The business plans and goal sheets that Mrs. Smith prepared

do not support a conclusion that she was operating her direct

marketing activities with the actual and honest goal of making a

profit.     These business plans were largely prepackaged by the

company for which she was selling and were full of vague and

unsupported puffery concerning the amount of sales she hoped to

make.     These purported business plans and goal sheets lacked any

analysis of how these vague goals might be achieved, what startup

costs were involved, how long it would take to recoup those

startup costs, what type of market there was for the products she

was selling, or other types of analysis one might expect to find

in a genuine business plan.     While Mrs. Smith testified that she

did these types of analysis, there is nothing to substantiate her

self-serving testimony.     See Tokarski v. Commissioner, 87 T.C.

74, 77 (1986) (noting the Court is not required to accept a

taxpayer’s self-serving testimony in the absence of corroborating

evidence).

        In short, we find that the manner in which Mrs. Smith

conducted her direct marketing activities, including the

maintenance of records without any underlying analysis of how to
                              - 16 -

make the activities profitable, more indicative of someone

preparing for IRS examination than someone with the actual and

honest objective of making a profit.   Accordingly, we find this

factor to favor respondent.

     2.   The Expertise of the Taxpayer or the Taxpayer’s Advisers

     Efforts to gain experience, a willingness to follow expert

advice, and preparation for an activity by extensive study of its

practices may indicate that a taxpayer has a profit objective.

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

obtain expertise in the economics of an activity indicates that

he or she lacks a profit objective.    Burger v. Commissioner, 809

F.2d 355, 359 (7th Cir. 1987), affg. T.C. Memo. 1985-523; Golanty

v. Commissioner, 72 T.C. at 432.

     Mrs. Smith maintains that before deciding to sell for a

company she would meet with representatives of the company,

sample its products, and tour its facilities.   Mrs. Smith also

maintains that she contacted the Better Business Bureau and the

Direct Selling Association and that as a result of this

preparation she decided not to sell for certain companies.    Mrs.

Smith further argues that she sought and followed business advice

from her upline distributor, Ms. Walsh, as well as her

accountant, Ms. Clark.

     We find that Mrs. Smith’s preparation for her direct

marketing activities is not suggestive of someone trying to make
                                - 17 -

a profit.   Mrs. Smith had no experience operating a direct

marketing business at the time she was recruited by her upline

distributor, Ms. Walsh.   Despite this lack of experience, Mrs.

Smith has principally relied only on advice she has received from

Ms. Walsh and other insiders.    While Ms. Walsh had experience as

a distributor for direct marketing companies, as Mrs. Smith’s

upline distributor Ms. Walsh did not need to concern herself with

Mrs. Smith’s profitability so long as Mrs. Smith was able to sell

products or recruit others to sell products.   See, e.g., Poast v.

Commissioner, T.C. Memo. 1994-399 (“for the most part,

petitioners’ advisers were not experts as much as they were

upliners with a financial stake in petitioners’ retail and

downline sales”).   Ms. Walsh did not review any financial

statements or budgets with Mrs. Smith.   Thus, we took Ms. Walsh

at her word when she testified that she was not so much concerned

about the past––or Mrs. Smith’s previous losses––as she was Mrs.

Smith’s ability to sell and recruit others.

     Mrs. Smith testified that she also sought business advice

from her accountant.   However Mrs. Smith was contradicted by Ms.

Clark herself, who testified that her advice to Mrs. Smith was

largely confined to matters related to the preparation of Mrs.

Smith’s tax returns.   Ms. Clark did not review any financial

statements or budgets for Mrs. Smith, and there is nothing in the

record to suggest that Ms. Clark had any experience or expertise
                              - 18 -

with running a profitable direct marketing business that might

assist Mrs. Smith in the operation of her activities.

     In sum, we are not convinced that Mrs. Smith sought any

counsel from disinterested third parties on how she might make

her direct marketing activities profitable.   Nor are we convinced

that Mrs. Smith tried to educate herself in any meaningful way on

the economics of operating a direct marketing business or to

overcome her lack of experience and expertise.   This factor

favors respondent.

     3.   The Time and Effort Expended by the Taxpayer

     The fact that a taxpayer devotes much of her personal time

and effort to carrying on an activity may indicate an objective

to derive a profit, particularly if the activity does not have

substantial personal or recreational aspects.    Sec. 1.183-

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

     Mrs. Smith testified that she spent between 60 and 80 hours

each week working on her direct marketing activities.

Respondent, on the other hand, argues that the time Mrs. Smith

devoted to her marketing activities should be discounted because

much of the time was pleasurable, included socializing with

friends, and had the added benefit of allowing petitioners to

claim business expense deductions for many of their personal

expenses.
                              - 19 -

     There is evidence that Mrs. Smith devoted a fair amount of

personal time to these activities.     For instance, Mrs. Smith

introduced the message logs of phone calls she received in

response to advertisements she placed in various newspapers.

Mrs. Smith spent time responding to these telephone inquiries,

including identifying leads that seemed promising and scheduling

meetings with these leads.   We do not believe that Mrs. Smith

found considerable pleasure in responding to these telephone

inquiries.

     The problem is that while Mrs. Smith spent a fair amount of

time working on her direct marketing activities, we find her

testimony that she devoted 60 to 80 hours per week to these

activities lacking in credibility.     When asked at trial to

describe a typical day, she testified in vague terms about

planning, making phone calls, and traveling to meet customers.

We are unconvinced that these activities amount to 60 to 80 hours

of work a week.

     Thus, while we find that Mrs. Smith devoted significant time

to her direct marketing activities, any positive inference to be

drawn from this factor is tempered by Mrs. Smith’s lack of

credibility with respect to the number of hours she devoted.

Nevertheless, we find this factor to favor petitioners.
                                - 20 -

     4.    The Expectation That Assets Would Appreciate in Value

     The expectation that assets used in the activity will

eventually appreciate over time may indicate a profit motive.

Sec. 1.183-2(b)(4), Income Tax Regs.      No appreciating assets were

devoted to Mrs. Smith’s activities.      This factor is neutral.

     5.     The Taxpayer’s Success in Carrying On Other Activities

     The fact that a taxpayer previously operated similar

activities profitably may show that the taxpayer has a profit

objective.     Sec. 1.183-2(b)(5), Income Tax Regs.   Far from

success, in the 2 years preceding the years at issue Mrs. Smith’s

direct marketing activities resulted in losses of $34,049 for

1998 and $47,493 for 1999.     This factor favors respondent.

     6.     The Taxpayer’s History of Income and Loss

     A history of substantial losses may indicate that the

taxpayer did not conduct the activity for profit.       Golanty v.

Commissioner, 72 T.C. at 427; sec. 1.183-2(b)(6), Income Tax

Regs.     Losses sustained in the initial stage of an activity,

however, do not necessarily indicate that an activity was not

conducted for profit.     Engdahl v. Commissioner, 72 T.C. at 669.

Of course, a series of years where net income is realized would

be strong evidence that an activity is engaged in for profit.

Sec. 1.183-2(b)(6), Income Tax Regs.

     In the years at issue, 2000, 2001, and 2002, Mrs. Smith

recorded losses of $26,856, $34,155, and $17,256 respectively.
                              - 21 -

These losses are on top of the losses of $34,049 and $47,493 for

1998 and 1999.   In total, from 1998 to 2002, Mrs. Smith reported

losses from her direct marketing activities of $159,809.

     Mrs. Smith maintains that while she sustained losses during

the years at issue, these losses should be considered startup

losses because of the unforeseen circumstances that necessitated

finding new companies to sell for.     Mrs. Smith further asserts

that her business broke even in 2003 and returned profits in both

2004 and 2005.

     We are not persuaded that Mrs. Smith’s history of losses

should be discounted as startup losses because she had to switch

companies for which she sold because of unforeseen circumstances.

First, the unforeseen circumstance with respect to Mrs. Smith’s

ceasing to sell for Renaissance was Renaissance’s having been

shut down by the Kansas State authorities.     Further, we find that

characterizing these losses as being startup in nature is not

supported by the record.   Mrs. Smith moved from company to

company without any apparent analysis of the costs associated

with selling for a new company or how long it might take to

recoup those costs.   In short, we find these losses were

operating losses.

     Nor are we persuaded by Mrs. Smith’s assertion that her

business is now profitable.   While Mrs. Smith reported on her

Schedules C that she broke even in 2003 and had small profits for
                                - 22 -

both 2004 and 2005, these numbers are misleading.      Beginning in

2004, Mrs. Smith stopped claiming deductions for car and truck

expenses, office expenses, and the business use of      petitioners’

home.     In 2005, Mrs. Smith stopped claiming a deduction for wages

paid to petitioners’ sons.     Had Mrs. Smith included these

expenses, as she had in the years at issue, her direct marketing

activities would have reported a loss.

     Mrs. Smith explained that these expenses could no longer be

claimed on her return because the nature of her business had

changed in that she had become more focused on using the Internet

to carry on her business.     If anything, however, the fact that

Mrs. Smith’s activities were focused on using the Internet

suggests that she was using her home to conduct her business more

than ever.

     This factor favors respondent.

     7.     The Amount of Occasional Profits, If Any

        The amount of any occasional profits the taxpayer earned

from the activity may show that the taxpayer had a profit

objective.     Sec. 1.183-2(b)(7), Income Tax Regs.    Mrs. Smith did

not earn a profit in any of the years at issue or in prior years

in which she was engaged in her direct marketing activities.

While she maintains that they are now profitable, as discussed

above, we find her characterization of profits to be

unpersuasive.     This factor favors respondent.
                              - 23 -

     8.   The Financial Status of the Taxpayer

     The receipt of a substantial amount of income from sources

other than the activity at issue, especially if the losses from

the activity generate large tax benefits, may indicate that the

taxpayer does not intend to conduct the activity for profit.

Sec. 1.183-2(b)(8), Income Tax Regs.   Petitioners reported

adjusted gross income of $153,351, $150,228, and $179,837 in tax

years 2000, 2001, and 2002, respectively.   Petitioners offset the

losses of $26,856, $34,155, and $17,256 for tax years 2000, 2001,

and 2002, respectively, resulting from Mrs. Smith’s direct

marketing activities against petitioners’ income to create

substantial tax savings.   This factor favors respondent.

     9.   Whether Elements of Personal Recreation Are Involved

     The presence of personal motives in carrying on an activity

may indicate that the activity is not engaged in for profit,

especially where there are recreational elements involved.    Sec.

1.183-2(b)(9), Income Tax Regs.

     Respondent argues that because Mrs. Smith focused her

activities on developing a downline distributor network, as

opposed to trying to sell products herself, the activities

involved primarily personal and recreational elements such as

dining out, meeting friends, and socializing.    Respondent further

argues that Mrs. Smith enjoyed personal benefits of being able to
                                 - 24 -

purchase products at a discount as well as claiming business

expense deductions for personal expenses.

     We find this factor to be neutral.     In part, Mrs. Smith

enjoyed personal or recreational benefits by engaging in this

activity.    The record suggests that some of her downline

distributors were her friends long before their business

involvement with Mrs. Smith.     In one case, Mrs. Smith even lent

$12,000 to a friend in the same year he became a downline

distributor for Renaissance.     Further, many of Mrs. Smith’s

activities included elements of personal recreation, including

traveling to different cities and enjoying meals with friends.

Finally, Mrs. Smith enjoyed the benefit of being able to claim

business expense deductions for personal expenses such as her car

and home.

     There were, however, elements of these marketing activities

which seem to lack any indication of personal recreation,

including placing advertisements in newspapers to recruit

downline distributors and responding to the resulting phone calls

inquiring about these opportunities.      Thus, we find this factor

to be neutral.

     10.    Conclusion

     On balance, we find that Mrs. Smith was not engaged in her

direct marketing activities with an actual and honest objective

of making a profit.      We do not lose sight of the fact that one of
                               - 25 -

the four companies that Mrs. Smith distributed for during the

years at issue sold a purported product that was nothing more

than a tax strategy to convert personal expenses into business

expense deductions with a home-based business.   We are convinced

that this is precisely what Mrs. Smith was trying to do with her

direct marketing activities.

     In conducting these activities, Mrs. Smith failed to employ

elementary business practices that one would expect of

individuals pursuing an activity with a profit objective.    She

bounced from company to company without any apparent thought or

analysis of why the new company might help her stop losing money.

She spent freely without any evident plan on how she would recoup

those expenses.   And while diligent in maintaining records, in

the face of these year-after-year losses, there is no evidence

that Mrs. Smith used those records to analyze the merits of her

business: How she might stem her losses; what selling techniques

were most successful at achieving sales and at what cost; and how

and when she would break even.   She did none of the analysis that

one would expect someone operating a business for profit to have

undertaken.

     Finally, the record reflects that Mrs. Smith had been

involved in direct marketing activities for 5 years by the end of

the years at issue and had not yet made a profit in any of those

years, let alone begun to recoup the losses that she had
                               - 26 -

sustained.   See Bessenyey v. Commissioner, 45 T.C. 261, 274

(1965) (“the goal must be to realize a profit on the entire

operation, which presupposes not only future net earnings but

also sufficient net earnings to recoup the losses which have

meanwhile been sustained in the intervening years.”), affd. 379

F.2d 252 (2d Cir. 1967).   While Mrs. Smith asserts that her

business is now profitable, she no longer chooses to include the

expenses that she once considered a part of her business.

     In the light of the foregoing, we hold that Mrs. Smith did

not have the requisite objective of making a profit with her

direct marketing activities.   Thus, petitioners are not entitled

to deduct their losses from Mrs. Smith’s activities for the years

in issue.    However, pursuant to the provisions of section 183(b),

petitioners are entitled to deduct expenses to the extent of

gross income from the activities.

B.   Accuracy-Related Penalty Under Section 6662

     Respondent also seeks to impose an accuracy-related penalty

under section 6662(a) and (b)(1) against petitioners because they

failed to exercise due care and disregarded the Internal Revenue

Code when they claimed personal expenses as business expense

deductions through a home-based business.

     Section 6662 imposes an accuracy-related penalty equal to 20

percent of the portion of an underpayment attributable to, inter

alia, negligence or disregard of rules or regulations.   Sec.
                              - 27 -

6662(b)(1).   The accuracy-related penalty will not be applied to

any portion of an underpayment with respect to which the taxpayer

acted with reasonable cause and in good faith.    Sec. 6664(c)(1).

A good-faith, reasonable reliance on the advice of an

independent, competent professional as to the tax treatment of an

item may meet this requirement.    United States v. Boyle, 469 U.S.

241 (1985); sec. 1.6664-4(b), Income Tax Regs.    Whether a

taxpayer relies on professional advice and whether such reliance

is reasonable hinge on the facts and circumstances of the case

and the law that applies to those facts and circumstances.    Sec.

1.6664-4(c)(1), Income Tax Regs.

     The record persuades us that petitioners relied in good

faith upon the tax advice given by Ms. Clark, petitioners’

accountant, when she prepared petitioners’ tax returns.    Ms.

Clark is a C.P.A. licensed in the State of Georgia.    Ms. Clark

was aware of Mrs. Smith’s history of losses.   Further, while

after careful consideration, we conclude that Mrs. Smith was not

engaged in her direct marketing activities for profit, we do

recognize that there are indicia of someone operating a business

for profit, including the time spent on the activities and Mrs.

Smith’s out-of-pocket expenses for advertising.    Finally, when

Mrs. Smith sought advice on the strategies promoted by

Renaissance and implemented them in her business, Ms. Clark

advised Mrs. Smith that they were legal.   While we find this
                             - 28 -

advice was in error, we note that Ms. Clark had no prior

relationship with Renaissance.    On the facts of this case, we

find Mrs. Smith’s reliance on Ms. Clark was reasonable.

Accordingly, we decline to sustain respondent’s determination as

to the accuracy-related penalties.

     To reflect the foregoing,

                                      Decision will be entered for

                                 respondent as to the deficiencies

                                 and for petitioners as to the

                                 accuracy-related penalties.
