                        T.C. Memo. 1997-60



                      UNITED STATES TAX COURT



 BRYAN J. BRENNAN and KATHRYN J. BRENNAN,a.k.a. KATHRYN J. LAW,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No 24167-95.                 February 3, 1997.



     W. Curtis Elliott, Jr., for petitioners.

     David A. Winsten, for respondent.



                        MEMORANDUM OPINION


     FAY, Judge:   This case is before the Court on petitioners'

motion for award of reasonable litigation costs pursuant to

section 74301 and Rules 230 through 232, filed June 10, 1996.

     1
      All 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, unless otherwise
                                                   (continued...)
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Petitioners resided in Aloha, Oregon, at the time their petition

was filed.

Background

     Petitioner Bryan Brennan became an Amway distributor in

1987.    Amway produces various household products that it sells

through direct marketing efforts of distributors such as peti-

tioner.    Distributors purchase products and receive bonuses from

Amway, based on the volume of Amway products sold by them.

Distributors also recruit other people to be Amway distributors

(downstream distributors).    Amway distributors earn additional

bonuses from Amway, based on the sales volume of the products

sold by their downstream distributors.

     By a statutory notice of deficiency dated September 1, 1995,

respondent determined deficiencies in petitioners' Federal income

taxes of $7,442 for the taxable year 1992 and $16,900 for the

taxable year 1993.     Respondent disallowed deductions related to

petitioners' Schedule C Amway distributorship because respondent

determined that the Amway distributorship was not a business

operated for profit.    In the alternative, respondent determined

that petitioners had failed to substantiate a few of their

Schedule C business deductions.

     Petitioners filed a petition in this Court on November 20,

1995.    By order dated January 16, 1996, the case was calendared

     1
      (...continued)
indicated.
                               - 3 -

for trial in Spokane, Washington, during the trial session

beginning on June 10, 1996.

     Prior to trial, on March 22, 1996, petitioners filed a

motion for partial summary judgment as to whether the requisite

profit motive existed in the operation of their Amway business.

In conjunction with the motion for partial summary judgment,

petitioners provided additional information to respondent

relating to their Amway business.

     On June 10, 1996, the parties filed a stipulation of settle-

ment.   The stipulation of settlement reflects deficiencies of

$269 and $294 for the taxable years 1992 and 1993, respectively.

On June 10, 1996, petitioners filed a motion for award of

reasonable litigation costs.

Discussion

     In order to be awarded litigation costs, petitioners must

show that: (1) They exhausted all administrative remedies; (2)

they met the net worth requirement of section 7430(c)(4)(A)(iii);

(3) they have substantially prevailed with respect to the amount

in controversy or the most significant issue presented; and

(4) the position of respondent was "not substantially justified".

Sec. 7430.

     Respondent concedes that petitioners satisfy conditions

(1) through (3), leaving for decision the issue of substantial

justification for respondent's position.   Petitioners' motion for

award of reasonable litigation costs was filed prior to the
                                - 4 -

enactment of the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.

701, 110 Stat. 1452, 1463 (1996).   They bear the burden of

proving that respondent's position in the proceedings was not

substantially justified.   Sec. 7430(c)(4)(A)(i); Rule 232(e).

     A position is "substantially justified" when it is

"justified to a degree that could satisfy a reasonable person."

Pierce v. Underwood, 487 U.S. 552, 565 (1988).    It is not enough

that a position simply has enough merit to avoid sanctions for

frivolousness; it must have a "reasonable basis both in law and

fact".    Id.

     Whether the position of the United States in this proceeding

was substantially justified depends on whether respondent's

positions and actions were reasonable in light of the facts of

the case and the applicable legal precedents.    Sher v. Commis-

sioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.

1988).    The inquiry must be based on the facts reasonably avail-

able to respondent when the position was maintained.    Coastal

Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 689

(1990).    The fact that respondent did not prevail in the under-

lying litigation does not require a determination that the

position of the Internal Revenue Service was unreasonable, Broad

Ave. Laundry & Tailoring v. United States, 693 F.2d 1387, 1391-

1392 (Fed. Cir. 1982); however, it remains a factor to be con-

sidered.    Heasley v. Commissioner, 967 F.2d 116, 120 (5th Cir.

1992), affg. in part and revg. in part and remanding T.C. Memo.
                                - 5 -

1991-189; Estate of Perry v. Commissioner, 931 F.2d 1044, 1046

(5th Cir. 1991).

       Respondent's position in this case was that petitioners did

not engage in their Amway activities for profit under section

183.    In the analysis of a case under section 183, the determina-

tion of whether the requisite profit objective exists depends

upon all the surrounding facts and circumstances.    Golanty v.

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

647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax Regs.

In making this determination, more weight is accorded to objec-

tive facts than to the taxpayer's statement of intent.    Siegel v.

Commissioner, 78 T.C. 659, 699 (1982); Dreicer v. Commissioner,

78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983).    Section 1.183-2(b), Income Tax Regs., sets

forth a nonexclusive list of nine factors normally considered in

determining the existence of the requisite profit objective.      The

factors are:    (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers;

(3) the time and effort expended by the taxpayer in carrying on

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

activity may appreciate in value; (5) the success of the taxpayer

in carrying on other similar or dissimilar activities; (6) the

taxpayer's history of income or losses with respect to the

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

were earned; (8) the financial status of the taxpayer; and
                                 - 6 -

(9) the presence of elements of personal pleasure or recreation.

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

factors, is controlling.    Golanty v. Commissioner, supra at 426;

Dunn v. Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578

(2d Cir. 1980).

     Respondent has successfully litigated the section 183 "for

profit" issue in other cases involving Amway distributorships.

Specifically, previous cases demonstrate that there are signifi-

cant elements of personal pleasure attached to the activities of

an Amway distributorship.   See Rubin v. Commissioner, T.C. Memo.

1989-290.   Further, an Amway distributorship presents taxpayers

with opportunities to generate business deductions for essen-

tially personal expenditures.    See Elliott v. Commissioner, 90

T.C. 960 (1988), affd. without published opinion 899 F.2d 18 (9th

Cir. 1990); Poast v. Commissioner, T.C. Memo. 1994-399.      With

this in mind, we consider the facts of the case herein.

     Ordinarily, respondent initially takes a litigating position

on the date she files her answer to the petition.      Huffman v.

Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part

and revg. in part on other grounds and remanding T.C. Memo.

1991-144.   Therefore, we begin by reviewing the facts reasonably

available to respondent on December 22, 1995, the date she filed

her answer to the petition, in order to evaluate the reasonable-

ness of respondent's position.     Id.   Petitioners had suffered

yearly losses from 1987 to 1994, which, as a general trend, grew
                                 - 7 -

as time progressed.    In 1992 and 1993, however, petitioners

earned substantial amounts of income from sources other than

Amway.   Additionally, petitioners did not provide respondent with

either a business plan or profit projections2.   Finally, as noted

above, many activities associated with an Amway distributorship

have been found to contain significant elements of personal

pleasure and benefit.    Based upon prior cases and the facts

available to her in this case, respondent reasonably took the

position in the answer that petitioners did not operate their

Amway distributorship with the objective of making a profit.

     As respondent pursued her investigation, she learned more

facts concerning petitioners' Amway operation.    In response to

discovery requests, petitioners provided respondent with docu-

ments substantiating their expenditures.    Through affidavits

given by petitioners, respondent learned that petitioners were

receiving extensive guidance from a more experienced Amway

distributor.   Perhaps most significantly, in March 1996, respon-

dent learned that petitioners reported a small profit from the

activity for 1995.    Upon learning this information, respondent

reviewed her earlier position.    Settlement negotiations were


     2
      Respondent attached a one-page document to her notice of
objection to petitioners' motion for award of reasonable liti-
gation costs filed July 10, 1996. Petitioners had provided this
document to the revenue agent. Petitioners claim that the docu-
ment represents the profit projections of their Amway business.
We agree with respondent's characterization of the document as
indecipherable.
                                - 8 -

commenced in April 1996, and respondent conceded the for profit

issue in May 1996.

     Respondent is entitled to a reasonable period of time in

which to review documentation and modify her position.       Sokol v.

Commissioner, 92 T.C. 760, 765 n.10 (1989); Harrison v.

Commissioner, 854 F.2d 263 (7th Cir. 1988), affg. T.C. Memo.

1987-52.    In Harrison v. Commissioner, supra, the Court held that

respondent's concession, some 6 months after she filed her

answer, was reasonable.    In this instance, respondent conceded

the section 183 issue 5 months after she filed her answer and

within 2 months after the information described above was brought

to respondent's attention.    This concession falls within the

boundaries of a reasonable period of time.

     We conclude that respondent's position had a reasonable

basis in both law and fact.    Pierce v. Underwood, 487 U.S. 552

(1988).    Accordingly, we hold that respondent's position was

substantially justified and that petitioner is not entitled to

litigation costs under section 7430.      Petitioners' motion will

therefore be denied.

                                             An appropriate order and

                                        decision will be entered.
