                         T.C. Memo. 1999-397



                     UNITED STATES TAX COURT



                 MICHAEL A. OGDEN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          MICHAEL A. AND COLLEEN OGDEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 5084-98, 5085-98.      Filed December 7, 1999.

     Kenneth K. Bezozo and Richard D. Anigian, for petitioners.

     Stephen W. Brower, for respondent.


                         MEMORANDUM OPINION

     PAJAK, Special Trial Judge:     Respondent determined

deficiencies and accuracy-related penalties in petitioners'

Federal income tax in the following amounts:

     Michael A. Ogden:

                                           Accuracy-related Penalty
          Year             Deficiency           sec. 6662(a)

          1993             $3,791               $758
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     Michael A. Ogden and Colleen R. Ogden:

                                           Accuracy-related Penalty
            Year            Deficiency          sec. 6662(a)

            1994            $5,533              $1,107
            1995            $6,131              $1,226

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue.

     In the notices of deficiency, respondent disallowed

petitioners' deductions for Schedule C expenses incurred in

connection with their Amway distributorship on the grounds that

petitioners did not engage in their Amway activity for the

purpose of making a profit.    The only two issues for this Court

to decide are:     (1) Whether petitioners were not engaged in their

Amway activity for profit within the meaning of section 183 and

(2) whether petitioners are liable for the section 6662 accuracy-

related penalties for negligence.

     Some of the facts in this case have been stipulated and are

so found.    For convenience and clarity, the findings of fact and

opinion are combined.    Petitioners resided in Pearland, Texas, at

the time they filed their petitions.

     In 1992, petitioner Michael Ogden (Mr. Ogden) became a

distributor for Amway.    In 1993, petitioner Colleen Ogden (Mrs.

Ogden), while single, joined Mr. Ogden as a distributor.    Mr. and

Mrs. Ogden were married in 1994.     Their daughter, Casie Nicole,

was born in September 1995.
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     Amway is a supplier of various household products that are

sold by distributors through direct marketing.   Distributors

purchase the products for personal use, as well as for resale to

customers and downline distributors.    Distributors are encouraged

to recruit others to become downline distributors.   The Amway

system is based on an upline-downline system whereby a

distributor's direct and indirect sales are rewarded with

bonuses.   In addition to a percentage of his own sales volume, an

Amway distributor may earn income by recruiting others to join

Amway as distributors.    The original Amway distributor is called

an "upline" distributor in relation to his new recruit, the

"downline" distributor.   The upline distributor receives a

percentage of the sales achieved by the downline distributors in

his "chain of distribution" even though the upliner does not

participate in their sales.   If a downline distributor recruits

another individual to be his downline distributor, the upline

distributor takes a percentage of the sales of both downline

distributors, even though the upliner has nothing to do with the

activities of the new downline distributor.   Thus, to maximize

Amway-related income, the distributor sells the Amway products

and tries to enlist others as downline distributors.

     Amway does not have a quota for sales, its products do not

have to be sold above cost, and its distributors are not required

to sponsor downline distributors.   An Amway brochure, The Amway
                                - 4 -


Business Review, states that the potential for earning income

increases as the number of distributors in a sponsor's group

grows and as sales increase.    Distributors devote as little or as

much of their time to Amway activities as they desire.    The eight

page Amway Business Review in large blocks on four of its pages

highlights the fact that "The Average Monthly Gross Income for

'Active' Distributors was $88."

     Mr. Ogden obtained a Certificate of Operation under Assumed

Name for Ogden Enterprises.    Mr. Ogden claims that Ogden

Enterprises is engaged in the business of selling Amway products.

On line B of Schedule C of each return for the years in issue for

Ogden Enterprises, under "principal business code", Mr. Ogden and

then Mr. and Mrs. Ogden listed "3012", which number represents

"Selling door to door, by telephone or party plan, or from mobile

unit".   On their Federal income tax returns for the years in

issue, Mr. Ogden and Mrs. Ogden did not disclose that either of

them or Ogden Enterprises was engaged in an Amway activity.     On

all three of these returns, line A of Schedule C, "Principal

business or profession, including product or service", contained

the words "PRODUCT DISTRIBUTION."

     Mr. Ogden testified that 10 to 15 percent of the sales were

to non-distributor end-users who were not trying to build an

Amway distributorship.   Petitioners have focused their efforts on

recruiting downliners in this multilevel marketing process.

Because of their efforts, Mr. Ogden personally sponsored 17
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downline distributors.   In addition, many of his downliners had

their own downliners.

     Mr. Ogden or petitioners reported gross income of $1,082,

$2,041, and $5,290 in 1993, 1994, and 1995, respectively.       The

principal categories of deductions claimed on the Schedule C for

1993, 1994, and 1995 are set forth below.   Mr. Ogden or

petitioners claimed deductions for car and truck expenses of

$9,613, $11,488, and $12,130, respectively.   They also claimed

deductions for travel, meals, and entertainment of $4,931,

$4,153, and $2,242, respectively.   Mr. Ogden or petitioners

deducted total expenses on the Schedules C of $21,322, $21,693

and $24,982 during 1993, 1994, and 1995, respectively.     As

stated, respondent determined that these deductions should be

disallowed because petitioners did not have the requisite profit

objective under section 183.

     Section 183(a) disallows any deductions attributable to

activities not engaged in for profit except as provided under

section 183(b).   Taxpayers need not have a reasonable expectation

of profit.   However, the facts and circumstances must demonstrate

that they entered into the activity, or continued the activity,

with the actual and honest objective of making a profit.        Taube

v. Commissioner, 88 T.C. 464, 478 (1987); 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 motive to make a profit must be analyzed by
                               - 6 -


looking at all the surrounding objective facts.   Dreicer v.

Commissioner, supra at 645.   These facts are given greater weight

than petitioners' mere statement of intent.   Dreicer v.

Commissioner, supra.

     Section 1.183-2(b), Income Tax Regs., provides a

nonexclusive list of relevant factors which should be considered

in determining whether the taxpayer has 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

advisers; (3) 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) any elements indicating personal pleasure or recreation.

Sec. 1.183-2(b), Income Tax Regs.   These factors are not

applicable or appropriate in every case.   Abramson v.

Commissioner, 86 T.C. 360, 371 (1986).

     In determining whether petitioners were engaged in the Amway

distributorship with the requisite intent to make a profit, all

of the facts and circumstances of their situation must be taken

into account.   Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);
                                - 7 -


sec. 1.183-2(a) and (b), Income Tax Regs.     No single factor is

controlling, nor is the existence of a majority of factors

favoring or disfavoring a profit objective necessarily

controlling.    Hendricks v. Commissioner, 32 F.3d 94, 98 (4th Cir.

1994), affg. T.C. Memo. 1993-396; sec. 1.183-2(b), Income Tax

Regs.

     The parties stipulated that the following documents were

made available to respondent:

     A Franklin Planner detailing (i) all the times the Ogdens
     showed the Amway Sales and Marketing Plan, the travel
     related thereto and expenses associated therewith; (ii)
     records of phone calls relating to Petitioners' Amway
     enterprise; (iii) meetings with "upline" and "downline"
     sponsors and prospects; and (iv) extensive notes taken at
     Amway meetings and functions; detailed records of all Amway
     products ordered through the Ogden's Amway organization; all
     receipts for meals, travel, training and seminars, and other
     expenses related thereto; detailed business telephone and
     voicemail charges; detailed cellular phone charges;
     commercial bank account records for Ogden Enterprises;
     detailed long distance phone records; detailed pager
     expenses for 1995; and detailed postage expenses records.


     We found it difficult to analyze or date some of the

documents placed in evidence because many of them were

photocopies of handwritten papers.      Petitioners did not maintain

a budget in an attempt to reduce costs.     We were not impressed

with their handwritten, scribbled so-called projections.

     Petitioners apparently followed the generalized business

plan published by Amway.   Petitioners tried different marketing

techniques, such as fliers and telemarketing, to increase their

retail sales.   Although petitioners' gross income from Amway
                                 - 8 -


increased annually, the claimed deductions were more than

sufficient to offset the gross income.

     We next consider the expertise of the petitioners or their

advisers.   Sec. 1.183-2(b)(2), Income Tax Regs.   Mr. Ogden

managed several employees and a $300,000 budget in his own full-

time work as a civil engineer.    In 3 years, he doubled his

original staff of 8 employees.    Mrs. Ogden has a bachelor’s

degree in business administration and previously had retail

experience managing stores for Eckerd Drugs and Reebok.    Some of

her past duties included hiring and training employees, inventory

control, payroll, merchandising, and sales analysis.    In 1993,

Mrs. Ogden received a certification in paralegal studies.      She

was certified as a child advocate by a family court.

     Before choosing Amway, Mr. Ogden investigated various

franchises.   He spoke to his father, Amway distributors, and his

C.P.A. about the details of an Amway distributorship.    We

question the value of the C.P.A.'s advice.    We believe Amway

distributors may be biased when discussing Amway because they

have a natural desire to advance the organization and/or obtain

income from a downliner.

     Another factor to consider is the time and effort expended

by petitioners in carrying on the Amway distributorship.      Sec.

1.183-2(b)(3), Income Tax Regs.    Petitioners alleged that they

worked evenings, lunch, and weekends in connection with their

Amway activities.   Mr. Ogden claimed he worked on Amway
                                - 9 -


activities an average of 25 hours per week, while Mrs. Ogden

alleged she worked between 10-15 hours per week.    It is difficult

to believe Mr. Ogden worked 25 hours per week while he traveled

to and maintained a full-time job with significant and expanding

responsibilities.    We are not required to accept the self-serving

testimony of either petitioner as gospel.    Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).

     Mrs. Ogden claimed she spent 2 hours one day a week waiting

for telephone orders on what she characterized as a weekly call-

in sheet.   The weekly call-in sheet for her five personal

downliners is revealing in that it listed only 50 miscellaneous

household products.   Most of the items on the list were for one

item.   A sample of these items are: One crisp rice, 13 ounces;

one marinara pasta sauce, 25 ounces; one meatless ravioli, 9

ounces; one trash bags, 13 gallons; and one bar soap, 3.25

ounces.   According to Mrs. Ogden's testimony, several days after

she prepared the call-in sheet, she drove to her upline

distributor to pick up those products at 11:00 p.m. and did not

get home until 2 or 3 a.m.   Mrs. Ogden claimed that it could

"take anywhere from an hour to an hour-and-a-half just to check-

off all the products and make sure everything is there and put it

in -pack it in your car- and then drive home, another 45

minutes."   The following day, downliners came to her house from

6:30 a.m. to 8:30 a.m. to pick up their products.   Her testimony

lacks credibility.
                               - 10 -


     The parties stipulated that petitioners' records indicate

that they drove more than 30,000 miles per year in connection

with their Amway activities.    The parties stipulated that

petitioners' records indicate that they have shown the Amway

plan, for about 2 hours per showing, approximately 137 times in

1993, approximately 200 times in 1994, and approximately 104

times in 1995, to recruit potential Amway distributors.    The

Court was not persuaded that these records were accurate.      We

agree with respondent that petitioners spent most of their time

recruiting downline distributors rather than selling products.

     The expectation that assets used in the Amway

distributorship may appreciate in value is not relevant.      Sec.

1.183-2(b)(4), Income Tax Regs.    The success of petitioners in

carrying out other similar or dissimilar activities has been

addressed.    Sec. 1.183-2(b)(5), Income Tax Regs.

     Petitioners' history of income or losses with respect to the

Amway distributorship is revealing.     Sec. 1.183-2(b)(6), Income

Tax Regs.    Most of petitioners' gross income comes from the

bonuses provided by Amway.    As noted, petitioners did not list

Amway on the Federal Income Tax returns.    In fact, petitioners'

C.P.A. and petitioners failed to list their gross sales and their

cost of goods sold on their Federal returns, contrary to the

format of the Schedules C.    Mr. Ogden testified that he did not

know why the gross sales were omitted from the 1993, 1994, and

1995 returns and that he did not learn of this omission until 3
                                 - 11 -


weeks before trial.      If petitioners had accurate books and

records and reviewed the returns before signing them under

penalties of perjury, he, and then he and his wife, would have

had to discover such gross omissions.

     The parties stipulated that petitioners realized gross sales

income of $43,575 in 1993, $66,276 in 1994, and $76,526 in 1995.

Although Mr. Ogden and then petitioners did not report these

gross sales on their      returns, they did report them to Amway for

bonus purposes.      After reducing the gross sales income by the

cost of the goods sold, the gross income of Mr. Ogden and then

petitioners was $1,082 in 1993, $2,041 in 1994, and $5,290 in

1995.     The net losses of Mr. Ogden and then petitioners were

$20,250 in 1993, $19,652 in 1994, and $19,692 in 1995.

     A series of losses during the initial stage of an activity

is not necessarily an indication that petitioners are not engaged

in the activity for profit.      Sec. 1.183-2(b)(6), Income Tax Regs.

However, if such losses continue beyond the period in which it is

customary for an activity to become profitable, then the losses,

if they are unexplainable, may be indicative of a lack of intent

to profit.     Id.   A series of years in which net income was

realized would be strong evidence that the activity is for

profit.     Id.   Petitioners had no such years in which net income

was realized.

        When we consider the financial status of the taxpayer,

section 1.183-2(b)(8), Income Tax Regs, we find that petitioners'
                               - 12 -


main source of income was from their employment as an engineer

and a paralegal.   The relevant income was $31,381 in 1993,

$64,642 in 1994, and $64,462 in 1995.   Mr. Ogden and then

petitioners obviously benefited from the significant deductions

they took as a result of the losses from their Amway activities.

These losses amounted to about 64 percent of income in 1993 and

about 30 percent of income in 1994 and 1995.

     Another element is the personal pleasure or recreation

involved in the activity.   Sec. 1.183-2(b)(9), Income Tax Regs.

Petitioners testified that they purchased $1,800 to $2,400 worth

of products per year for their personal use.   Thus, they

purchased a substantial amount of household goods at a discount.

Cf. Theisen v. Commissioner, T.C. Memo. 1997-539.    They claim

their travel is usually limited to day trips that consist of

meetings or showing the Amway plan, often at the house of new

recruits.    Petitioners assert they find no pleasure in this type

of travel.   They also stated that to reduce expenses they shared

a hotel room for a particular function in 1993 with 15 other

people.

     Upon review of the entire record, we believe Mr. Ogden and

then Mr. and Mrs. Ogden did not have an actual and honest

objective of making a profit in the Amway activity during the

years in issue.    It was obvious that Mr. Ogden's Amway endeavors

were a substantial economic loss and tax loss for 1993.     The

large volume of losses, which he used to offset about 64 percent
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of his income from other sources on his return for 1993, would

have put an ordinary prudent taxpayer on notice that this

activity was unlikely to produce a profit.

     The Ogdens carefully avoided any reference to Amway on the

Schedules C.   For instance, in 1993, Mr. Ogden neglected to

report gross sales of $43,575 and cost of goods sold of $42,493

resulting in gross income of $1,082.    He reported the gross

income of $1,082 and a net loss of $20,250, after deducting

$21,332 in expenses.    It appears clear that Mr. Ogden should have

realized that his golden opportunity was not golden and that he

would not make a profit.    Mr. Ogden and then his wife continued

to suffer substantial losses for at least the next 4 years after

1993.   We find that petitioners' involvement with Amway enabled

petitioners to purchase household goods at cost and to take

substantial deductions to offset their wage income, not to make a

profit.   We sustain respondent's determination as to the

deficiencies for all 3 years in issue.

     Section 6662(a) provides for an accuracy-related penalty in

the amount of 20 percent of the portion of an underpayment of tax

attributable to, among other things, negligence or disregard of

rules or regulations.   Sec. 6662(a) and (b)(1).    Negligence is

defined to include any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue laws.       Sec.

6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.     Moreover,

negligence is the failure to exercise due care or the failure to
                                - 14 -


do what a reasonable and prudent person would do under the

circumstances.     Neely v. Commissioner, 85 T.C. 934, 947 (1985).

Disregard is defined to include any careless, reckless, or

intentional disregard of rules or regulations.    Sec. 6662(c);

sec. 1.6662-3(b)(2), Income Tax Regs.

     Upon review of the facts and circumstances of this case, we

find that petitioners are well-educated individuals with

professional backgrounds.    They entered into an Amway endeavor

even though the Amway Business Review highlighted the fact that

the average gross income for active distributors was $88.

Petitioners consistently hid the fact that their losses were from

an Amway entity.    They continued this endeavor even though the

result was years of substantial tax losses and years of

substantial tax deductions.    We were not satisfied with their

purported record keeping or their testimony.    We do not believe

the aforesaid actions are the actions of reasonable and prudent

persons.   We sustain the section 6662(a) accuracy-related

penalties for all 3 years in question.



                                      Decisions will be entered for

                                 respondent.
