                  T.C. Summary Opinion 2004-103



                     UNITED STATES TAX COURT



          RANDALL B. AND KAY F. OLLETT, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7096-03S.             Filed July 28, 2004.


     Randall B. and Kay F. Ollett, pro sese.

     Jason W. Anderson, for respondent.



     WOLFE, Special Trial Judge:   This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.   Unless otherwise indicated,

all 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.    The

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

this opinion should not be cited as authority.
                               - 2 -

     Respondent determined deficiencies in petitioners’ Federal

income taxes in the amount of $6,178 for 1999 and $7,940 for

2000.   The issue for decision is whether petitioners engaged in

their Amway/Quixtar activity during 1999 and 2000 with the

objective of making a profit within the meaning of section 183.

                            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.    When they filed their

petition, petitioners resided in St. Charles, Illinois.

     Petitioners filed joint Federal income tax returns for 1999

and 2000.   At all relevant times, petitioner Randall Ollett

(petitioner) was employed as a computer data security manager by

the American Medical Association in Chicago, Illinois.    He

typically worked at this employment between 45 and 50 hours each

week and spent an additional 12 to 20 hours each week commuting

to and from work.   Petitioner Kay Ollett (Mrs. Ollett) worked

approximately 30 hours each week as a preschool teacher at

Evangelical Covenant Church.   Petitioners reported combined wages

of $96,389 in 1999 and $98,949 in 2000.

     Petitioner graduated from Princeton University with a

bachelor of science degree in electrical engineering, and he has

a master’s degree in business administration from Lamar
                               - 3 -

University in Beaumont, Texas, now part of the University of

Texas.

     In October 1996, petitioners began to operate an Amway

distributorship under the name of Ollett Enterprises.   Amway is a

supplier of household and personal use products sold by direct

marketing.   Petitioners were recruited into Amway by their so-

called upline sponsors, David and Carole Marzke.1   In the Amway

pyramidal sales structure, petitioners and the Marzkes are

ultimately members of the large network established by Bill

Florence (the Florence organization).

     Neither of the petitioners had any sales experience prior to

joining Amway.   Petitioners did not write a business plan or

establish a budget and did not consult with any business advisers

other than their Amway uplines concerning techniques for making

their distributorship profitable.

     Around late 1999 or early 2000, Amway changed its name to

Alticor Inc., and petitioners became an “independent business

owner” (IBO) of Quixtar, a wholly owned subsidiary of Alticor.

Amway’s restructuring had no significant impact on the Federal



     1
        “Upline” and “downline” refer to a distributor’s position
within the Amway network. Distributors are generally recruited
into Amway by a sponsoring distributor. The sponsoring
distributor is considered the “upline” distributor and his
recruits are “downline”. As downline distributors recruit
additional distributors, those recruits also become members of
the original sponsor’s downline network.
                               - 4 -

tax consequences of petitioners’ activity.2   For simplicity and

consistency, we generally refer to petitioners as an Amway

distributorship rather than as a Quixtar IBO.

     An Amway distributor earns income by selling products and

recruiting new downline distributors.   Under Amway’s compensation

system, a distributor earns a “performance bonus” based not only

on the sales volume generated by the distributor himself but also

on the sales volume generated by the distributor’s downline

network.3   Generally, distributors earning large performance

bonuses have developed a large and broad network of downline

distributors.

     Petitioners focused their efforts upon building their

downline network rather than developing a customer base and

     2
        According to petitioners, the primary change that
resulted from Amway’s restructuring was that Quixtar expanded the
range of items available for sale to customers to include many
commonly used household and personal products not manufactured by
Amway, and its Internet-based sales system eliminated the need
for petitioners and other distributors to warehouse products.
Petitioners’ compensation did not change, as they received credit
for any products ordered online through their distributor number
just as they previously had received credit for items ordered
through them or their downline distributors.
     3
        To calculate the performance bonus, Amway uses a
“performance bonus schedule” based upon a distributor’s “business
value” (BV) and “point value” (PV). BV is a dollar amount
assigned to each product. BV is used for the calculation of
monthly and annual bonuses. PV is a unit amount assigned to each
product. PV determines the distributor’s performance bonus
bracket. If the PV is high, because of high unit sales by the
distributor and his downlines, that distributor will receive a
correspondingly high performance bonus in the form of a high
percentage of his BV.
                               - 5 -

selling products.   Petitioners spent approximately 15 to 20 hours

weekly “prospecting, contacting, and showing the plan, and

attending local meetings”.   In 1999-2000, petitioners had

approximately 5 downline distributors.    Petitioners believed the

key to succeeding in Amway was “to meet [people] * * * and get

them into this business” and that “the profit comes when you have

enough people, when you’ve registered enough people”.

     Mrs. Ollett testified that she would prepare sample baskets

and regularly spoke with customers and prospects about ordering

Amway products, but petitioners admit that approximately 70-75

percent of their sales were from products purchased by them for

their own personal use.   The Olletts purchased most of their

ordinary household products through their distributorship,

including soap, shampoo, deodorant, dish-washing liquid,

detergent, facial products, food items such as health food bars

and energy drinks, a water treatment system, and clothing such as

men’s socks, slacks, and sport shirts.4

     Between 1996 and 2000 petitioners reported the following

losses from their Amway distributorship on Schedule C, Profit or




     4
        As Mrs. Ollett put it: “I’m not going to give
Wal-Mart -- make Ms. Wal-Mart wealthy when I can buy it from
myself. It’s my store. I wouldn’t buy it from anywhere else.”
                                - 6 -

Loss From Business:

   Year         Gross Income   Total Expenses           Net Losses
   1996              $10          ($1,625)               ($1,615)
   1997              357          (13,177)               (12,820)
   1998              625          (17,504)               (16,879)
   1999            1,450          (17,384)               (15,934)
   2000            3,235          (23,001)               (19,766)
     Total         5,677          (72,691)               (67,014)

The parties also stipulated that petitioners reported continuing

losses from their Amway distributorship on their tax returns for

2001 and 2002.

     For the years in issue petitioners’ expenses from their

Amway activity were as follows:

                                   1999         2000

Expenses
   Advertising                     $514          $290
   Car and truck expenses         6,618         8,504
   Depreciation expenses             55           351
   Office expenses                1,609         1,102
   Supplies                           0         4,408
   Travel                         2,878         2,831
   Meals/entertainment              817         1,111
   Utilities                      1,322         3,598
   Other Expenses
     Books and training aids       3,571        96
     Professional membership           0       710
   Total                          17,384    23,001

     A substantial portion of petitioners’ Amway expenses was

incurred in their traveling to various locations throughout the

country to attend meetings and seminars hosted by the Florence

organization.    Petitioner generally described these meetings as

training functions that petitioners attended to learn techniques

for building a successful network from instruction by his upline
                                - 7 -

distributors.    Since Mrs. Ollett does not like to fly,

petitioners purchased a used 1992 Cadillac Deville in 1999 for

about $6,000 and drove to these functions.    Petitioners generally

deducted car expenses, hotel and meal expenses, and the cost of

tickets to attend the events.    The attendees at these conferences

fluctuated but generally included many of the same people.

     In 1999, petitioners attended the following seminars and

conferences sponsored by the Florence organization:    Dream

Weekend in Birmingham, Alabama, from December 31, 1998, to

January 3, 1999; Florence Spring Leadership conference in

Chattanooga, Tennessee, from March 12-14; Weekend of the Diamonds

in Charlotte, North Carolina, from May 21-23; Florence Family

Reunion in Tampa City, Florida, from July 2-4; a training on

cosmetics sponsored by Florence Enterprises from July 30 to

August 1 in Columbia, South Carolina; a free enterprise

celebration in St. Louis, Missouri, from September 3-5; and

Florence Fall Leadership conference in Knoxville, Tennessee, from

November 19-21.

     In addition, petitioners claimed travel-related expenses in

1999 for several out-of-town trips purportedly made to “show the

plan” to prospective recruits, but which had significant personal

motivations.    Petitioners did not recruit any downlines during

any of these out-of-town trips.
                               - 8 -

     Petitioners continued their allegedly business-related

travel in 2000.   During 2000 they traveled to Atlanta, Georgia,

from January 14-16; Knoxville, Tennessee, from March 3-5;

Greensboro, North Carolina, from May 5-7; a Renaissance hotel at

an unspecified location from June 30 through July 2; Columbia,

South Carolina, from July 22-23; and Atlanta from November 4-5.

     In addition to the travel-related expenses, petitioners also

had expenses of $3,571 in 1999 and $710 in 2000 for professional

books and other materials that were part of Amway’s “training

program”.   These books were recommended by petitioners’ upline

network and may be described as general self-motivation books.

Petitioners also purchased various audio tapes that included

stories told by other Amway distributors of how they built

successful networks.

     As noted above, petitioners’ revenue from the Amway activity

for the years in issue was minimal, and even that amount was

attributable in part to petitioners’ purchases of household goods

for their own personal use.   When asked about how they intended

to turn their losses into profits, Mr. Ollett responded:    “The

only way I can solve it is to talk to more people.   And there, in

essence, is the challenge that I have, which is finding those

people”.
                               - 9 -

                             Discussion

     In general, a taxpayer bears the burden of proving his

entitlement to a business expense deduction.     Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933); Burrus v. Commissioner,

T.C. Memo. 2003-285.   Section 7491(a) provides that the burden of

proof shifts to respondent under certain specified conditions.

Petitioners have not established that the burden of proof has

shifted, and in any event the resolution of this case does not

depend upon the burden of proof.

     The deductibility of a taxpayer’s expenses attributable to

an income-producing activity depends upon whether that activity

was engaged in for profit.   See secs. 162, 183, 212.    Section 162

provides that a taxpayer who is carrying on a trade or business

may deduct ordinary and necessary expenses incurred in connection

with the operation of the business.     Section 212 provides a

deduction for expenses paid or incurred in connection with an

activity engaged in for the production or collection of income,

or for the management, conservation, or maintenance of property

held for the production of income.     Section 183 specifically

precludes deductions for activities “not engaged in for profit”

except to the extent of the gross income derived from such

activities.   Sec. 183(a) and (b)(2).

     For a taxpayer’s expenses in an activity to be deductible

under section 162 or section 212, and not subject to the
                               - 10 -

limitations of section 183, the taxpayer must show that he

engaged in the activity with an actual and honest objective of

making a profit.   Keanini v. Commissioner, 94 T.C. 41, 46 (1990);

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

opinion 702 F.2d 1205 (D.C. Cir. 1983); Lopez v. Commissioner,

T.C. Memo. 2003-142.   Although a reasonable expectation of a

profit is not required, the taxpayer’s profit objective must be

“actual and honest”.   Dreicer v. Commissioner, supra at 645; sec.

1.183-2(a), Income Tax Regs.   Whether a taxpayer has an actual

and honest profit objective is a question of fact to be resolved

from all the relevant facts and circumstances.    Keanini v.

Commissioner, supra at 46; Lopez v. Commissioner, supra; sec.

1.183-2(a), Income Tax Regs.   Greater weight is given to

objective facts than to a taxpayer’s statement of intent.

Keanini v. Commissioner, supra at 46; Dreicer v. Commissioner,

supra at 645; sec. 1.183-2(a), Income Tax Regs.   As stated

earlier, the taxpayer bears the burden of establishing the

requisite profit objective.    Rule 142(a); Keanini v.

Commissioner, supra at 46; Lopez v. Commissioner, supra.

     Regulations promulgated under section 183 provide the

following nonexclusive list of factors which normally should be

considered in determining whether an activity was engaged in for

profit:   (1) The manner in which the taxpayer carried on the

activity; (2) the expertise of the taxpayer or his advisers; (3)
                               - 11 -

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that the 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 are

earned; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation.    Sec. 1.183-2(b),

Income Tax Regs.

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

the factors, is controlling, but rather it is an evaluation of

all the facts and circumstances in the case, taken as a whole,

that is determinative.   Golanty v. Commissioner, 72 T.C. 411,

426-27 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981); sec. 1.183-2(b), Income Tax Regs.

     After careful consideration of all facts and circumstances

presented in this case, we conclude that petitioners did not have

an actual and honest objective of making a profit from their

Amway distributorship.

     Petitioners did not have any sales experience prior to

becoming Amway distributors.   Petitioners relied exclusively on

their upline distributors, who stood to benefit from petitioners’

participation, for advice and training.   They did not seek

independent business advice at the beginning of their Amway
                               - 12 -

activity to assess their potential for success, and they did not

seek independent business advice for turning around years of

operating losses.    Petitioners’ failure to seek independent

business advice strongly suggests that petitioners did not carry

on the Amway distributorship in a businesslike manner.

     Petitioners did not write a business plan, and, although

they kept track of expenses, they never established a budget.

Petitioner testified not only that they did not set up a budget,

but that by 1999 they had decided they were going to spend

“whatever it took to go to those meetings”.    Petitioners did keep

receipts and detailed records, but apparently more for

substantiation purposes than as a tool for analyzing and

improving their business.    See Lopez v. Commissioner, supra; Hart

v. Commissioner, T.C. Memo. 1995-55.

     Petitioners’ Amway activity resulted in a substantial and

sustained pattern of losses.    Between 1996 and 2000, the activity

produced very little income, and most of petitioners’ sales were

for their own use.    Yet petitioners continued to incur

significant expenses, largely for automobile costs and other

travel-related expenses for attending out-of-town seminars.

Losses incurred in the initial stages of a business may be

expected, but losses that continue without explanation beyond

that period typically required for an activity to become

profitable may indicate the lack of a profit objective.    See
                               - 13 -

Golanty v. Commissioner, supra at 427; Nissley v. Commissioner,

T.C. Memo. 2000-178.   Seemingly, petitioners’ only plan to

reverse the years of losses always was based on the premise that

their people and sales skills would improve and that they would

be able to persuade other downline distributors to join their

network.

     Petitioners maintained their respective employments during

the years in issue.    Petitioners worked approximately 87 to 100

hours per week at their respective jobs, and spent only 15 to 20

hours per week on Amway.   From their employment, petitioners

reported wages of $96,389 in 1999 and $98,949 in 2000.

Petitioners were able to use the losses from their Amway activity

to offset income earned from their employment.

     We believe petitioners received enjoyment from the Amway

activity, and we cannot overlook the personal and social aspects

of their trips for which they claimed significant travel

expenses.   They regularly used Amway activities as a device to

deduct personal expenses as business expenses.   For example, on

two occasions, around March 26 and August 22, 1999, petitioners

drove to Champaign, Illinois, where their daughter was attending

the University of Illinois.   On the August 22 trip, petitioner

drove his daughter to school for the start of the fall semester.

He explained:   “The fact that I was going to use my business car

to transport [personal] effects down there meant I made sure that
                               - 14 -

I would have somebody to show the plan to”.   During the

Thanksgiving holiday, from November 25-28, 1999, petitioners

drove to Chattanooga, Tennessee, where petitioner’s parents live.

Again, petitioner stated:   “Because I used my business car, I

made sure that I prospected and tried to--made contacts with

people in Chattanooga”.   Petitioners did not recruit any downline

distributors on these trips, and there is no evidence that they

sold any Amway products on these trips.   They simply made a few

perfunctory calls on unresponsive individuals and claimed

deductions for the personal trip.

     At the Amway conferences, petitioners repeatedly met with

many of the same people from the Florence organization, and many

of those trips occurred during holiday weekends such as the New

Year and the Fourth of July.   Petitioners testified that the

purpose of the Amway conferences was training, but they did not

explain why they felt it was necessary to attend so many training

seminars during their third and fourth years into their Amway

activity.

     Petitioners repeatedly used their Amway activity as an

attempt to mask obviously personal expenses as deductible

business expenses.   In effect they attempted to live a deductible

lifestyle.   The conferences at times of the year associated with

vacation and recreation are consistent with this same mindset.

Most importantly, petitioners reported no significant revenue
                             - 15 -

from their Amway activity and no reason for them to believe they

ever were going to have significant revenue from this activity.

     Petitioner testified that he joined Amway with a profit

motive, and he may have had that subjective intent initially.

However, as previously stated, more weight must be given to

objective facts indicating a profit objective than to

petitioners’ subjective intent.   Because of the manner in which

petitioners carried on their Amway activity, the lack of revenue,

and the size and persistence of the continuing losses, we hold

that petitioners’ Amway activity during the years in issue was

not carried on for profit within the meaning of section 183, and

petitioners are not permitted to deduct their losses from that

activity.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                          Decision will be entered

                                    for respondent.
