This link was shared by a recent site visitor, and I thought it was both fascinating and hilarious. Because I did not share the complete URL, there is additional information. Take a look at it.
http://riles52.blogspot.com/2011/06/selling-soap-as-hobby-amway-ibos-in-tax.htm
Selling Soap as a Hobby - Amway Independent Business Owners in Tax Court
In the matter of Roger S. Campbell et al v. Commissioner, TC Memo 2011-42 was issued.
Response's knowledge of the Amway distributorship business, as well as this Court's, is extensive.
Commissioner v. Friscia Construction, Inc. and others (TC Memo 2000-192), 2000-192
One of my group posts includes a reference to the Campbell case. It included someone whose Amway activities were deemed a hobby by the Tax Court, which resulted in their being denied deductions for losses. It was this piece of the post that was picked up and posted on a blog by a person going by the name of Joecool under the heading "Do IBOs have a clue about business?" I discovered that there are a number of blogs dedicated to pointing out the negative aspects of the Amway experience, such as Married To An Ambot by Anna Banana, which is as follows:
Another advantage of Amway for some people is that it may allow them to deduct as business costs items such as automobiles, a portion of their home, or entertainment that they would have spent regardless of whether they were affiliated with the company. That is most likely the component of Amway that the Internal Revenue Service is most interested in. Joecool wrote a piece about how some independent business owners (IBOs) consider their income tax refunds (which are created by Amway losses shielding other revenue) to be profits.
The following excerpt from the Internal Revenue Manual for examiners who are conducting information requests struck me as the most fascinating thing I discovered while conducting my search:
Amway Corporation is located at.4.4.3.39.
[This page was last updated on December 10, 2007]
(1) Pursuant to 26 USC 7603, Amway Corporation has waived the necessity for personal service and will accept summonses delivered in person or by mail or overnight delivery to Amway Corporation, 7575 E. Fulton, Ada, MI 49355, Attn: Director, Legal Division. Amway Mutual Fund, Inc., 7575 E. Fulton, Ada, MI 49355 is in charge of administering the non-cash portion of the profit sharing bonus for direct distributors who meet additional qualification requirements. A separate summons is required for this account.
Now that I am subject to the AICPA Statements of Standards on Tax Practice, I am prohibited from providing clients with counsel based on my perception of the audit selection process of a taxing body, among other things. I wouldn't do it in any case since I believe that the majority of people who provide this type of advice are speculating. Even if you happen to be one of my clients, I'm writing to you in the capacity of a reader when I offer the following advice:
You are not permitted to tug on Superman's cape.
It is not acceptable to spit into the wind.
You are not permitted to remove the mask of the old Lone Ranger.
Furthermore, you do not claim any Schedule C losses as a result of a business agreement with a corporation that IRS inspectors are familiar with.
I discovered 23 stories of IBOs who went to court and won their case against the IRS. (There were a handful of appeals, but I only counted them once.) They were all, for the most part, defeated. There are basically three ways in which you can be disallowed deductions in these types of situations. The first step is to provide evidence. You didn't provide any evidence. The second point to mention is that the charges are not truly common and required business expenses. When it comes to automobiles and the use of one's house for business purposes, the lines between the two can get muddled. The next point to mention is that there isn't much of a business there. Even a Vietnamese couple whose "business" consisted in playing slot machines while adhering to the rules of Feng Shui was successful in their battle with the Internal Revenue Service. Amway Independent Business Owners (IBOs) who take against the Internal Revenue Service on the Section 183 "hobby loss" issue virtually always lose.
One of the most frequently encountered motifs is that IBOs seek guidance from their "uplines" in the majority of cases, who are, of course, not disinterested. They also don't appear to be putting up any effort to keep their expenses under control. I'm going to give you a brief sample from each of the instances and then make a few brief observations on a few of them.
LOPEZ v. COMM., 94 AFTR 2d 2004-7075 (Citation omitted).
In the case of Jorge N. Lopez et al v. Commissioner (TC Memo 2003-142),
The Tax Court correctly determined that an engineer and his wife were not entitled to a business deduction for expenses incurred in connection with their Amway products distribution activity because they did not engage in activity for profit: although taxpayers provided evidence of a profit motive, this was insufficient to override evidence presented by the government, which included their failure to maintain businesslike records, their failure to maintain businesslike records and their failure to maintain businesslike records.
The Lopezes' own Amway activities, which began in 1996, consisted of selling products at cost to both their downline distributors and their clients, effectively eliminating retail sales as a source of gross profit. Instead, they decided to concentrate their efforts on creating a network of downline distributors in order to gain performance bonuses. Based on Amway pamphlets, the Lopezes came to the conclusion that they would need to reach and maintain a monthly point value of 4,000 in order for their Amway efforts to be financially successful. When it came to point value in 1998 and 1999, no month saw the Lopezes' point value reach 372 points.
Only upline distributors could provide them with counsel on their Amway business, and when they received unsolicited advice from their accountant, they threw the advice away. During the time period under consideration, Mr. Lopez worked full-time as a petroleum engineer, and Mrs. Lopez stayed at home to care for their children.
Finally, the Lopezes were unable to satisfy the tax court that their principal motivation for conducting their Amway activities was to generate money or profit. It determined that the way in which they conducted their Amway business "essentially eliminated any potential of generating a profit." The absence of a business plan for recouping losses and establishing lucrative levels of activity on the part of the Lopezes suggested a lack of a profit motive on their part. Despite four consecutive years of losses, the Lopezes did not alter their business strategy in order to boost the likelihood of making a profit. The Lopezes, according to the tax court, also failed to perform market research that would have assisted them in determining the potential profitability of their activities. Furthermore, it was noted that, despite the fact that the Lopezes had no prior business expertise, they chose to follow the advise of upline distributors rather than obtaining assistance from unbiased, independent business sources.
Because Mr. and Mrs. Lopez filed an appeal, they were dealt a double blow.
OGDEN v. COMM., 87 AFTR 2d 2001-1299, is a case that was decided in the Australian Federal Tribunal.
Mr. Michael A. Ogden and others v. the Commissioner, TC Memo 1999-397
It is not necessary to show evidence of profit to determine whether or not a profit motivation exists, contrary to the Ogdens' assertion. see page 876 of the same document (no single tax regulation factor, nor the existence of a majority of factors, is determinative of whether a profit motive exists). When taken together, the evidence in the record supports the conclusion that the Ogdens continued their Amway activity for tax deductions, personal enjoyment, and to offset their wages if the evidence is to be believed. Although the application for reconsideration was denied, the Tax Court did not misuse its discretion in doing so.
Amway does not have a sales quota, its items do not have to be sold beyond cost, and its distributors are not needed to sponsor downline distributors in order to earn a commission. According to an Amway booklet, The Amway Business Review, the opportunity for earning cash improves as the number of distributors in a sponsor's group grows as well as as sales grow. Depending on their preferences, Amway distributors can dedicate as little or as much time as they want to their business. The Amway Business Review, which is eight pages long and contains large blocks of text on four of its pages, trumpets the fact that "the average monthly gross income for "active" distributors was $88."
Our assumption is that Amway distributors are likely to be biassed when discussing the organisation since they have a natural motivation to grow the organisation and/or receive cash from a downliner.
ELLIOTT v. COMMISSIONER, 90th Circuit Court of Appeals, 1996.
Deductions for business expenditures and depreciation incurred in connection with Amway distributorship were disallowed. Duties were carried out in an unprofessional manner, taxpayers retained full-time jobs, and no separation was established between Amway activities and personal social activities, according to the report. In addition, the Internal Revenue Service (IRS) appropriately levied penalties for failure to file on time and for negligence or willful disregard of requirements.
Another indicator of the unprofessional manner in which petitioners ran their Amway business was the blurred line that separated commercial activities from personal and recreational activities [pp. 973]. Only a few of the petitioners' claims were supported by evidence that their Amway work required them to do anything other than maintain a busy social life. Despite the fact that they occasionally attended seminars, the majority of their time was spent hosting parties and bringing people out to dinner. However, while there is no necessity that profit-oriented employment be onerous and unpleasant, the data offered by petitioners does not reveal any action motivated only by a desire to make profit. On the contrary, the data demonstrates that petitioners made only minor adjustments to their ordinary social lives, kept only rudimentary records of their activities, and claimed tax deductions for practically everything they owned or did as a result of their actions. On the basis of the evidence presented, we conclude that petitioners' acts were motivated by a desire to avoid paying taxes rather than a desire to earn money.
In the matter of Roger S. Campbell et al v. Commissioner, TC Memo 2011-42 was issued.
Distributorship and direct marketing activities are examples of activities that are not for profit yet have a profit motive. In the case of pro se married real estate and construction business operators who claimed expenses in connection with Amway distributorship activity that they engaged in without a profit purpose, Code Sec. 183 deduction limits applied. This was demonstrated by facts such as the fact that taxpayers commingled expenses, had no idea whether or not they were making a profit for any given year until they filed their tax return for the following year, did not keep complete records, and otherwise did not conduct business in a professional manner. Taxpayers' lack of prior expertise in this type of business, their failure to obtain independent guidance, and their utilisation of activity losses to offset their real estate losses were all significant indicators.
0 comments: