Peter J. Reilly has written an excellent blog piece.
http://blogs.forbes.com/peterjreilly/2011/07/26/drag-racing-and-amway-fun-not-profit/
Somebody has to be purchasing soap somewhere, right?
There was also an Amway case to contend with. Amway is a large firm that sells a wide range of household products to the general public. Originally, soap was the primary product. Their argument is that their product is more expensive because it is more concentrated, but because it is more concentrated, you don't have to use as much. One of the company's most well-known features is its "multi-level" marketing approach. An Amway distributor will not try to sell you soap if he invites you to his house for a get-together to discuss a specific topic. He will be interested in recruiting you to be a distributor. He will be less concerned with you selling the soap (I'm using the term as a shorthand for the broad variety of Amway household items). He will be more concerned with you selling yourself. He will concentrate on the opportunity you have to recruit other people who will become members of your "downline" and become your customers. They are also a part of his downline, even if they are one step distant from him. In Amway lingo, you are referred to as a "Independent Business Owner." Somewhere in your upline (the chain of command above you), there will be someone who has earned Diamond rank, which is the ultimate aim for you. Afterwards, all you have to do is sit back and watch the money pour in.
Another site took up on my brief mention of the Amway case and ran with it. This showed to me that there is a small segment of the blogosphere dedicated to criticising the Amway system, which I had previously overlooked. My favourite is Married to an Ambot, which is written by a woman who is sharing her experience of being married to a "Amway cult follower" in her storey. I was compelled to conduct a thorough investigation on how Amway Independent Business Owners (IBOs) have fared in “hobby loss” situations. I discovered 23 incidents that dated back as far as 1986. (There were some appeals, but I only counted the original case). It is not a large amount, yet it is sufficient for a Tax Court judge to make the following observation:
The Amway distributorship system is well-known to both the respondent (the Internal Revenue Service) and this Court.
A simple overview of what the detractors have to say about Amway is that it is a business where only a small number of people make money. It is possible that those who do so will exaggerate their earnings in order to impress and drive their "downline." There are characteristics of cult-like behaviour in the interaction between the upline and the downline. The majority of the "soap" is purchased by the IBOs themselves. When it comes to making a lot of money in the upline, those who do so primarily via the sale of "tools" (motivational tapes and other such items) to the downline. I'm not sure if this is completely accurate or not, but the Amway hobby loss instances tend to support this theory. They were on the verge of losing it all. Maybe the most common refrain heard from participants was that IBOs never seemed to make an effort to keep spending under control and that they only sought counsel from their uplines – who, of course, were not going to give unbiased advice. I was able to take a rather obvious conclusion from the information presented.
If you want to develop a modest home business in order to be able to deduct a large amount of money that you would have spent otherwise, don't go through with it. Of course, I didn't have to look into the cases in order to tell you that. According to my analysis of the situations, if you are not going to follow that sound advise and are planning to start a business in order to deduct a large number of personal expenses, becoming an Amway Independent Business Owner is the last thing you should consider doing.
Conclusion
For me, the most comical aspect of hobby loss cases is that the Tax Court comes off as a decent managing partner who is instilling some corporate discipline within a public accounting company. The majority of us enjoy our jobs, enjoy our clients, and enjoy our coworkers; we just need someone to remind us to keep the money pouring in the door.
For the sake of completeness, these are the factors:
(1) The manner in which the taxpayer conducts his or her business operation.
(2) the taxpayer's knowledge and experience in carrying out the activity;
The time and effort spent by the taxpayer in carrying out the activity are included in this calculation.
(4) the anticipation that the value of the assets utilised in the activity would increase over time;
In addition, the taxpayer's success in other similar or dissimilar activities is taken into consideration.
(2006) the taxpayer's prior history of earning or incurring losses in connection with the activity;
In addition, any occasional profits gained by the taxpayer are deducted from his or her income.
(8) the financial condition of the taxpayer; and,
(9) components that provide personal enjoyment or recreation
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