Can an Amway distributorship ever be taxed as a legitimate business? It must be possible, but I’ve yet to see one win in Tax Court. A case decided this week illustrates common tax problems seen with “downline” folks involved in Amway and other multi-level marketing ventures.
A doctor and his wife got involved with Amway, an MLM operation that sells household, nutritional and cosmetic products. In addition to the medical practice income, they reported Amway results on a Schedule C. We can guess from the results how they attracted IRS notice:
The Tax Court case involved their 2009 tax year. Here are the expenses that went into their 2009 loss:
For some reason the IRS questioned the need for $25,000 in vehicle and travel expenses to sell stuff out of their home. The tax law’s Section 183 “hobby loss” rules prohibit deductions in excess of income if the business isn’t conducted for profit. The courts have developed a set of factors to evaluate in determining a taxpayer’s intent. Tax Court Judge Guy went down the list, including:
Manner in Which Petitioners Carried On the Amway Activity
Although petitioners kept records of their Amway expenses, they did not use those records to analyze their business performance or to prepare profit projections, a break-even analysis, or a formal budget. Despite several years of activity during which they realized cumulative net losses of $192,427, petitioners failed to make any meaningful change in their strategy or tactics in an effort to increase the likelihood of earning a profit. On this record, it is a fair inference that petitioners used their records only to compute the amounts of losses attributable to the Amway activity when preparing their tax returns. Considering all the facts and circumstances, we conclude that petitioners did not conduct the Amway activity in a businesslike manner.
Petitioners’ History of Income or Loss
At the time of trial petitioners had never reported an annual profit in respect of the Amway activity. To the contrary, they reported cumulative net losses of $192,427 from 2005 through 2011. The modest gross receipts that petitioners derived from the activity have been eclipsed by the substantial expenses they incurred over the years. Although petitioners testified that they believe the Amway activity will eventually generate profits, we cannot discern on this record any definitive trend to the upside for petitioners, and there certainly is no indication that they are on their way to the level of profitability that would allow them to recoup the substantial cumulative losses they have incurred to date. In sum, petitioners’ history of consistent and substantial losses is indicative of a lack of profit objective.
I avoid multi-level marketing clients because their “profit” so often comes from putting personal expenses on Schedule C. It sure seems that way here.
The Tax Court declined to impose penalties, citing taxpayer maintenance of good records and reliance on a CPA to prepare their returns. Considering that the Tax Court has upheld penalties for taxpayers who are more sympathetic than a doctor deducting his car, it’s somewhat surprising. It shows that even if you can’t show a profit motive, using good records and a preparer can at least help avoid penalties.
For a recent taxpayer victory on a hobby loss case, see Peter Reilly’s Horse Breeder/Lawyer Wins In Tax Court. Was It Worth It?
Special favors for special friends. Senate sends governor a bill containing tax break for Knoxville Speedway. (O. Kay Henderson). Iowa’s long-time sprint-car track gets a special deal to keep sales tax it collects, like the NASCAR track in Iowa. Meanwhile, everybody else competing for Iowa entertainment dollars has to remit to the state the sales taxes they are required to collect. Sweet deal, when you have the pull.
Four days after the head of the Internal Revenue Service denied the agency was targeting conservative social welfare organizations applying for tax exempt status, Rep. Bruce Braley signed a letter urging a probe into the political activities of social welfare organizations.
Braley was one of 30 Democratic members of Congress who signed the letter, dated March 26, 2012, to IRS Commissioner Douglas Shulman urging him to investigate whether “any groups qualifying as social welfare organizations under section 501(c)(4) of the federal tax code are improperly engaged in political campaign activity.”
It’s funny how so many folks who urged the IRS to get all political on their opponents now deny it did any such thing. Mr. Braley takes a different approach:
In May 2013, Braley called the IRS targeting of conservative groups “shameful,” saying “there is no place for politics at the IRS.”
Shame on you for doing what I told you to do!
Keith Fogg, Collection of Restitution Payments by the IRS (Procedurally Taxing)
Jason Dinesen, Is it Okay for Clients to Text a Professional Service Provider? Not if they don’t have your cell phone number!
Jack Townsend, Crossing the Line in Tax Planning:
I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case… Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the [first-time homebuyer] credit, but the facts outside the paperwork showed that they did not qualify.
You see a lot of that with refundable credits.
Andrew Lundeen, How High Investment Taxes Contribute to Inequality. (Tax Policy Blog)
William Perez, Tax Reform Act of 2014, Part 6, Retirement Plans
Cara Griffith, Solving the ‘Problem’ of Remote Sales (Tax Analysts Blog). “All things being equal, I would rather enforce the use tax than needlessly broaden the sales and use tax nexus standard.”
Tax Justice Blog, Missouri Lawmakers Relentless in Quest for Tax Cuts for the Wealthy. In Iowa, we prefer to do favors for the well-connected, rich or poor.
TaxProf, The IRS Scandal, Day 350. Includes a link to Bruce Braley Urged IRS to Target Groups Before IRS Targeting Scandal Emerged.
KSDK.com: Man swallows 12 gold bars to evade taxes. Sometimes you can actually feel sorry for the tax collector.
Career Corner. Judge: Talking dirty not reason enough to lose job (Des Moines Register)
Tags: TaxProf, tax court, Kay Bell, William Perez, O Kay Henderson, Bruce Braley, Paul Neiffer, Jack Townsend, Peter Reilly, Amway, Jason Dinesen, Andrew Lundeen, Cara Griffith, Judge Guy, Career Corner, Iowa Watchdog, Keith Fogg.