Unpublished Disposition, 899 F.2d 18 (9th Cir. 1990)

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US Court of Appeals for the Ninth Circuit - 899 F.2d 18 (9th Cir. 1990)

Thomas O. ELLIOTT and Carol J. Elliott, Petitioners-Appellants,v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 88-7332.

United States Court of Appeals, Ninth Circuit.

Submitted March 16, 1990.* Decided March 21, 1990.

Before JAMES R. BROWNING, ALARCON and POOLE, Circuit Judges.


MEMORANDUM** 

Thomas and Carol Elliott appeal from a Tax Court decision upholding the Commissioner of Internal Revenue's (CIR) disallowance of certain deductions for expenses, depreciation, and investment tax credits claimed by the Elliotts on their 1981 joint federal income tax return. The Tax Court's decision was based on its determination that the Elliotts' activities as independent distributors for the Amway Corporation (Amway) were not "engaged in for profit" within the meaning of section 183(a) of the Internal Revenue Code (Code), 26 U.S.C. § 183(a) (1988). We have jurisdiction pursuant to 26 U.S.C. § 7482 and affirm.

The Tax Court's determination of whether a transaction or activity is "engaged in for profit ... cannot be reversed unless clearly erroneous." Baxter v. Commissioner, 816 F.2d 493, 495-96 (9th Cir. 1987) (citation omitted). Moreover, the taxpayer bears the burden of proving that the CIR's determination was incorrect. Id. at 495.

The principal issue is whether the Tax Court erred in finding that the Elliotts entered into the Amway program (a grassroots marketing scheme in which independent distributors sell products at informal gatherings and attempt to recruit sub-distributors) without a profit motive apart from the expected tax benefits. An activity is "engaged in for profit" if it was undertaken in "good faith with the dominant hope and intent of realizing a profit...." Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th Cir. 1986) (quotation omitted); see also Skeen v. Commissioner, 864 F.2d 93, 94 (9th Cir. 1989) ("the basic and dominant motive behind the taxpayer's activity must be to make a profit or income ...") (quotation omitted).

While the proper focus of inquiry is the taxpayer's subjective intent, the Tax Court may use objective indicia to determine that intent. Skeen, 864 F.2d at 94; see also Treas.Reg. Sec. 1.183-2(a) (" [i]n determining whether an activity is engaged in for profit, greater weight is given to objective facts than to the taxpayer's mere statement of his intent"). Relevant objective factors include: (1) the taxpayer's history of income and losses with respect to the activity; (2) the time and effort expended by the taxpayer in carrying on the activity, particularly if the activity does not have substantial personal or recreational aspects, or if the taxpayer withdraws from another occupation to devote more time and energies to the activity; and (3) whether the taxpayer carries on the activity in a businesslike manner and maintains complete and accurate books and records. Treas.Reg. Sec. 1.183-2(b) (section 183-2(b) contains a nonexclusive list of nine objective factors used to determine whether an activity is engaged in for profit); see Independent, 781 F.2d at 726-27 (citing Treasury Regulation section 1.183-2(b)'s objective factors).

Here, the Tax Court found that records kept by the Elliotts of their Amway activities were "cursory and sloppy" consisting of "a few notes" in a diary "or a single word notation on a bill or invoice." Such unbusinesslike recordkeeping made it impossible to tell "who their customers were, where and when they met with them, what products they had sold them and which methods had been successful." The absence of detailed records also prevented the Tax Court from determining which products were actually sold and which products were consumed by the Elliotts, or to substantiate the Elliotts' claimed deductions for their automobile, out-of-town trips, and home entertainment expenses.

Moreover, the Tax Court found that only a "thin line" divided the Elliotts' Amway activities from their personal and recreational activities and that both taxpayers were fully employed in other occupations during the 1981 tax year. The Tax Court also noted that the Elliotts' Amway activities had generated income of only $562 during the 1981 tax year, and that the Elliotts had enlisted only one sub-distributor who had generated few sales.

Given these facts and the extensive deductions claimed by the Elliotts, the Tax Court's determination that the Elliotts' Amway activities were not engaged in for profit was not clearly erroneous.1 

AFFIRMED.

 *

The panel unanimously finds this case suitable for disposition without oral argument. Fed. R. App. P. 34(a); 9th Cir.R. 34-4

 **

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

On appeal, the Elliotts do not contend that the Tax Court erred in upholding the additions to tax imposed by the CIR pursuant to sections 6651(a), and 6653(a) (1) & (2) of the Code. 26 U.S.C. §§ 6651(a), 6653(a) (1) & (2) (1988). Even if we were to review the appropriateness of these additions to tax, we would affirm the Tax Court's decision. See Skeen, 864 F.2d at 96 (a penalty assessed under Sec. 6653(a) for "negligence or disregard of rules or regulations" is affirmed unless the taxpayer proves "he did what a reasonably prudent person would do in the same circumstances") (citation omitted); Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988) (the "Commissioner's decision to impose negligence penalties is presumptively correct," and this court will "uphold the Tax Court's affirmance of a penalty unless clearly erroneous") (citation omitted)

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