In the matter of Roger S. Campbell et al v. Commissioner, TC Memo 2011-42 was issued.
There were a couple of concerns with substantiation in this case, but the most important one was a question of hobby loss related to Amway operations. I recall attending some Amway presentations, and it struck me as surprising that people could actually lose money on something that appeared to be such a wonderful deal.
In their Amway activity, petitioners did not behave themselves in a professional manner. Despite the fact that they maintained a separate bank account for the activity and kept records for certain parts of it, the petitioners never used the records as an analytical tool to improve profitability in the business. She testified that she did not know if the Amway operation was lucrative in any given year until she completed petitioners' tax return for that year, which did not occur until nearly two years later for two of the taxable years in question. It is reasonable to infer that petitioners' record keeping was more concerned with substantiating deductions on a tax return than with determining the profitability of their Amway business operations.
We conclude that a significant portion of the costs of goods sold that respondent disallowed for 1998 and 1999 represents Amway purchases that petitioners withdrew from inventory for personal use or use in their other businesses, after taking into account all of the facts and circumstances, including especially the confusing state of petitioners' Amway records. Furthermore, petitioners' Amway activity was not handled in a businesslike manner as evidenced by the mixing of Amway merchandise with other merchandise and the ensuing considerable discrepancies in stated costs of good sold. Additionally, petitioners claimed personal expenditures as business expenses as a result of the decision.
Despite the fact that the petitioners have past entrepreneurial expertise and have both run other businesses at the same time, they had no prior experience with running a direct marketing distributorship until they were recruited to become Amway distributors in 2007. Petitioners received guidance only from their upline distributors and other interested Amway individuals, individuals who had a direct financial interest in increasing petitioners' sales volume at the expense of petitioners' profitability, and who did not consult petitioners' financial advisors.
Accordingly, petitioners have failed to establish that they engaged in their Amway business with the intent of producing a profit, as required under the law. The deductions they can make as a result of their Amway business are therefore restricted under Section 183.
Every time you gave a presentation, it was always about you recruiting people who in turn recruited other people, etc. It always seemed like someone somewhere had to be selling a ridiculous amount of soap in order for the system to function properly.
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