Lopez vs. CIR, (5th Cir. 2004)
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* Pursua nt to 5 TH C IR . R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5 TH C IR . R. 47.5.4. United States Court of Appeals Fifth Circuit FILED December 3, 2004 Charles R. Fulbruge III Clerk IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
No. 04-60171 JORGE N. LOPEZ; VIVIAN LOPEZ, Petitioners - Appellants, versus COMMISSIONER OF INTERNAL REVENUE, Respondent - Appellee. Appeal from the Decision of the United States Tax Court No. 8612-01 Before KING, Chief Judge, JOLLY and DENNIS, Circuit Judges.
PER CURIAM: * Jorge N. Lopez and Vivian Lopez appeal, pro se , the United States Tax Court§ 7491(a); that the tax court erred in holding that the Lopezes did not have a profit motive sufficient to make their Amway activities a trade or business under Internal Revenue Code § 162(a); and that the tax court erred in calculating the amount of the deficiencies, a point that the Commissioner concedes. We find no error in the tax court§ 7491(a), and that the burden of proof properly remained on the Lopezes. Neither do we find error in the tax courtÂ’s holding that the LopezesÂ’ Am way activities were not conducted for profit.
Finally, in accord with the CommissionerÂ’s concession that an error was made in computing the amount of the deficiencies, we must remand to the tax court for recalculation of the those deficiencies. Otherwise, we affirm the tax courtÂ’s decision.
I In 1998 and 1999, the Lopezes were distributors for Amway, a marketer of various personal and household products. Amway distributors purchase these products either for personal consumption or for resale to customers or downline di stributors.
For most distributors, gross income from Amway activities is based on a combination of retail sales and performance bonuses. I n their own Amwa y activities, which began in 1996, the Lopezes sold products at cost to both their downline distributors and the ir customers, which practice eliminated retail sales as a source of gross income. They chose instead to focus their efforts on developing a network of down line distributors to generate performance bonuses . 1 Relying on Amway brochures, the Lopezes concluded that they would need to achieve and maintain a monthly point value of 4,000 for their Amway activities to be profitable.
In 1998 and 1999, the Lopezes§ 7491(a), which shifts the burden of proof to the Commissioner in some cases. The tax court ultimately was not persuaded that the LopezesÂ’ primary motive for conducting their Amway activities was for income or profit. It found that the conduct of their Amway activity “virtually precluded any possibility of realizing a profit.” The LopezesÂ’ lack of a business plan for recouping losses and achieving profitable levels of activity indicated t he absence of a profit motive. In the face of four consecutive years of losses, the Lopezes still did not change their approach to increase the likelihood of earning a profit. The tax court further found that the Lopezes did not conduct market research to help them assess the potential profitability of their activities. It also noted that, although the Lopezes h ad no prior business experience, they accep ted the advice of upline distributors rather than seeking advice from unbiased, independent business sources. The fact that the LopezesÂ’ livelihood did not depend on the profitability of their Amway activities also weighed against a finding of a profit motive. Finally, the court concluded that the Lopezes spent much of their Amway-related time socializing with the family and friends they had recruited as downline distributors. Finding that the Lopezes did n ot meet their burden of proof as to their profit motive, the tax cou rt sustained the CommissionerÂ’s assessment of liability for the deficiency.
The tax court also accepted the Commissioner§ 7491(a). That statute provides for shifting the burden of proof when the taxpa yers have, i nter alia , § 7491(a)(2)(B).
The tax court r efused to shift the burden of proof after finding that the Lopezes did not cooperate with the CommissionerÂ’s requests for a pretrial meeting and for information about documents to be used at trial. The Lopezes argue that their failure to cooperate fully was a good faith mistake because they thought that, for a small tax case, they were not required to meet with opposing attorneys in order to prepare for trial. They also claim to have been under the mistaken impression that, because theirs was a small tax case, they were not required to provide the Commissioner with the documents they intended to introduce into evidence before trial. The record, however, demonstrates that the Lopezes had ample notice of the requirement for m eeting with the CommissionerÂ’s attorneys before trial, and for providing documents to be introduced into evidence to the opposition at least fifteen days before trial. We thus find no reversible error in the tax courtÂ’s conclusion that the LopezesÂ’ lack of cooperation with the Commissioner precluded shift ing the burden of proof to the Commissioner.
B After determining that the burden of proof properly remained with the Lopezes, the tax court held that the Lopezes§ 162 of the Internal Revenue Code (§ 162(a).
26 IRC 162 allows deductions of ordinary and necessary expenses if those expenses are incurred in the operation of a trade or business. Section 162(a) further notes that to be engaged in a trade or business a taxpayer § 183(a). Courts inquiring into whether a profit motive exists usually consider nine non-exclusive factors i n the Treasury Regulations.
These factors are: 1)the extent to which the taxpayer carries out the activity in a businesslike manner; 2) the expertise of the taxpayer or his advisors; 3) the ti me and effort expended by the taxpayer in carrying on the activity ; 4) the expectation that assets used in the activity may appreciate in value; 5) the success of the taxpayer in other similar or dissimilar activities; 6) the taxpayerÂ’s history of income or los ses attributable to the activity; 7) the amount of occasional profits, if any, which are earned; 8) the taxpayerÂ’s financial status; and 9) any elements of personal pleasure or recreation in the activity. Treas.
Reg. § 1.183-2(b)(1)-(9). Courts give greater weight to these objective factors than to the taxpayer§ 1.183-2(b)(1)-(9). Although the record shows that the tax court was not compelled by the facts to find that the Lopezes lacked a profit motive, the Lopezes§ 162.
C The Lopezes further argue that the tax court incorrectly calculated their gross income for the relevant years by failing to subtract the cost of goods sold from their total inco me. 2 The Commissioner concedes that this calculation was incorrect.
Accordingly, we will VACATE the calculation of the tax due for the years 1998 and 1999.
IV In sum, we AFFIRM t he tax court§ 7491(a). We AFFIRM the tax courtÂ’s holding that the Lopezes lacked a profit motive in their Amway activities. We VACATE the tax courtÂ’s calculation of the LopezesÂ’ gross income and REMAND this case to the tax court for the limited purpose of recomputing the LopezesÂ’ federal income tax deficiencies. AFFIRMED in part, VACATED in part and REMANDED.
1 The tax court noted that the Lopezes recruit ed downline distributors largely from among their family and friends
2 The Lopezes also argued in their brief that they w ere entitled to deductions for charitable contributions. This argument is precluded by the fact that their total itemized deductions were less than the standard deduction in 1998 and 1999. Therefore, they are not entitled to any additional deduction for their charitable contributions
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