s corporation: 2013

25 Şubat 2013 Pazartesi

You're fired!

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Energized with their newfound enthusiasm for class warfare (you can always tell an amateur), the Republican candidates were making much of Romney's "gaffe" yesterday in which, speaking of the supposed need for more competition in health insurance, he displayed his solidarity with the working classes by saying, "I like being able to fire people who provide services to me."

You know something really strange is going on when Ron Paul is out there denouncing capitalists who take money from the middle class to enrich themselves.

But what left me marveling was not Romney's cluelessly echoing the very charges against his performance at Bain Capital, but rather his obliviousness to the fact that any firing that goes on in the health insurance business is done by the insurance companies, not consumers. After all, everyone wants to fire their health insurance company, usually while listening to the same Kenny G number for the 132nd time on hold waiting to have someone in Bombay swear they have no record of their claim. That's hardly the point when the insurers hold all the cards.

About a century ago the human race woke up to the fact that insurance is not a business like selling fruitcakes, notions, or drygoods. For one thing, the consumer is buying a pig in a very large poke when he takes out a life or casualty or other policy, paying up front for a benefit he may see only much later if at all. It's a situation absolutely made to order for those who dream of Ponzi schemes. For another, there is a huge disparity in information on the part of buyers and sellers: insurance companies employ rafts of actuaries to figure out how to make a profit; consumers simply have little basis for knowing what a fair price is. Thus in the late 19th and early 20th century, every state began tightly regulating insurers to make sure they did not flim-flam the customers, that they were held to standards of performance, and that they maintained adequate capital reserves to pay off claims that came due.

Any sentient mortal who has ever dealt with a health insurance company, or even more, who has had to buy his own heath insurance as a self-employed person, knows how ludicrous Romney's fairy tale about competition and consumer choice is in this distinctly un-free-market. The whole raison d'etre of the federal health care law was, lest we forget, that the free market has been an utter failure when insurers could turn you down for any reason or no reason; could reject you for having a preexisting condition; could raise your premiums by breathtaking amounts once they had you signed up; could drop you for getting sick; could drag out processing your claims for months or years; could arbitrarily choose not to cover certain needed procedures or conditions.

Buying a health policy outside of a group is more like applying tor a commission as a nuclear sub commander than hiring a guy to rake your leaves: comparison shopping has been virtually impossible; you have had to submit one application at a time, just to find out what whether you could get coverage and what the real price would actually be. And the companies (still) are masters of muddying the waters with extraordinarily complex pseudo-choices that simply obscure how much you're actually going to end up paying in the end and which make any true comparison shopping impossible, with endless variations on deductibles, co-pays, co-insurance, and optional coverage. (But they all have VERY nice colorful photographs on their web sites and brochures depicting attractive people being healthy.)

Even on an individual consumer level, even those who can afford health coverage don't have a prayer in this game.

But of course, the far greater market failure in health insurance is that insurers, left to their own devices and free competition, find that the way to maximize profits is simple: only sell policies to people who don't get sick.

This does not work very well as a system of improving the nation's health, containing health care costs, or encouraging preventive care.

The '60s made us do it

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Paul Krugman's column today—noting that Charles Murray's new much ballyhooed book on the social divide is merely the latest example of a venerable conservative tactic to attribute all problems in American society to vague, unspecified things that Liberals Did in the Sixties—reminds me of my favorite anecdote from my days at the late and not-too-lamented weekly newsmagazine U.S. News & World Report.
One of the regular columnists for U.S. News at my time there was a superannuated softball buddy of demi-billionaire owner Mortimer B. Zuckerman's named John Leo.

Leo had been a fairly prominent New York Times reporter eons previous but by the '90s devoted his declining years to cranking out column after column for Snooze, every one of which was almost identical; they always began by decrying the decay of American values (generally defined as those upheld by the Catholic Church, particularly its implaccable opposition to abortion) and ended by concluding that this was all a direct and ineluctable consequence of "liberal permissiveness" of the 1960s.

A friend of mine on the magazine staff had the dubious honor of editing these columns. This editor frequently went to gym at the hotel next door where he had a membership and had a nodding acquaintance with another gym member, a lawyer at one of the nearby (and as I recall fairly old-fashioned) law firms.

One day my colleague was wearing his U.S. News T-shirt at the gym, which prompted his nodding acquaintance to speak up.

"Do you work at U.S. News?" he asked.

My colleague admitted the truth of the accusation.

"Really—do you know this guy John Leo?" he continued.

My colleague replied, "As as a matter of fact, I edit his column."

"Really," said the lawyer, growing more interested. "Could you give him a message for me?"

My colleague graciously said he would.

"I GET IT!" said the lawyer, and turned away.

I'm married to a US Citizen -- What Happens Next?

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Marriage is a wonderful thing -- but how does it effect immigration law? Legal status? LPR (legal permanent resident or lawful permanent resident) and work status (EAD -- employment authorization documentation)?

It is important to remember that immigration is roughly divided into to sections -- innies and outties. Alright, perhaps the simplistic description is misplaced here, but the concept is the same. Are you inside the country, or outside the country? If you are outside the country, the process is I129F, I130, K3 (spouse). If you are inside the country, the process is I130, I485, and if illegal, I601 (waiver/hardship -- tricky here, as there are proposed rules changes with the 601/601A).

What are all these "I" forms, and what do they do?

First, "I" stands for "Immigration" and designates a type of government form related to USCIS (United States Customs and Immigration Service). You will occasionally also see EOIR forms (Executive Office of Immigration Review -- that's the immigration court), and DHS (Department of Homeland Security) or DS (Department of State) forms. However, for today's discussion, we're only focusing on "I" forms.

The I130 is arguably the most important form of the "spousal" immigration group. It notifies USCIS that a US citizen or LPR (green-card holder)has a family member (in this case, his/her spouse) that is eligible for entry into the US. By itself, the I130 does nothing. However, without the document, nothing else can be done to convert a non-immigrant status to an immigrant (i.e. wants to stay permanently) status.

An I129F is filed to request that a foreign national, currently outside of the United States, be granted a "K" visa. K visas permit finances (K1), family members (K2), and spouses (K3) entry into the United States for a set duration (in the case of a K3, the amount of time is 2 years, and includes permission to file an I765 once in the country to permit work). An actual "K" visa is not a form. It is a stamp/processing placed inside the foreign national's passport indicate the type of entry permitted. The form required is the I129F (F = Fiance, however, it is used for K2/K3 visas, also) filed by the US citizen/LPR. Once approved by USCIS, it is forwarded to the consulate in the area where the fiance/family member/spouse resides, and the fiance/family member/spouse can then contact the consulate to setup and interview and background check. Once they complete the interview and background check, the family member/fiance/spouse's passport is stamped, and they may enter the US under the immigrant visa classification "K".

Next blog will discuss the "in country" (innies!) processing of family members/fiances/spouses.

Have an immigration law question? Ask us! This is something we do everyday. From simple phone discussions to complex immigration court litigation. We're here to help -- and your first call is always free.

Sean R. Hanover, Esq
HanoverLawPC.com
Contact UsVisit the Hanover Law firm at www.hanoverlawpc.com

Appeals Court Rejects Golfer's Suit

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A golfer who lost an eye sued after being struck by an errant shot. the New York State Court of Appeals says not yelling "fore" wasn't reckless act. The highest court in New York held: "Here, Kapoor's failure to warn of his intent to strike the ball did not amount to intentional or reckless conduct, and did not unreasonably increase the risks inherent in golf to which Anand consented. Rather, the manner in which Anand was injured -- being hit without warning by a "shanked" shot while one searches for one's own ball -- reflects a commonly appreciated risk of golf"

To read the entire opinion (it is very short) click on: Azad Anand, et al., Appellants, v. Anoop Kapoor.

The bottom-line for the Court was that there are certain inherent risks when one chooses to participate in a sporting activity and by that participation consents to these risks. Absent a finding of reckless or intentional conduct on the part of the defendant there can be no liability.

Sometimes bad things happen to good people and there is no one to blame.

New York Mechanic's Lien

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This is a quickreference guide for common questions that come up regarding mechanic's liens inNew York. For specific inquiries please feel free to contact one of the attorneys in our offices.

1. Who Can File A Mechanic's Lien?

In general, anyone performing labor or furnishing materials for the improvementof real property may file a mechanic's lien when the labor or materials wererequested by the owner or its agent. It should go without saying that the liencan only be filed if money is owed. Some typical lienors are contractors,subcontractors, suppliers, architects, engineers and in some cases constructionmanagers.

2. How Long Do I Have To File A Lien?

A lien filed against a residential single family private dwelling must be filedwithin four months of the last performance of labor or furnishment ofmaterials. A lien filed against any other private property must be filed withineight months after the completion of the contract, or the final performance ofthe work, or the final furnishing of the materials.

3. How Long Does My Mechanic's Lien Last?

The lien is valid for one year. After that you must take steps to extend thelien. If not extended or foreclosed upon, the lien will expire by operation oflaw.

4. How Do I Foreclose on a Mechanic's Lien?

Foreclosing on a mechanic's lien is a fairly complicated process that involvesfiling a formal lawsuit. There are specific people that must be included in thelawsuit and other specific requirements that justify retaining an attorney tohandle the foreclosure.

5. What Do I Do If I Am Served With A Mechanic's Lien?

You have three options: 1) bond the lien; 2) commence legal proceedings todischarge the lien; or 3) do nothing (not recommend under most circumstances).For bonding the lien or attempting to discharge the lien through the courtsystems it is strongly recommended that you consult with an attorney.

6. What Happens If I File A Lien That Is Not Accurate?

This is really a two part problem. First of all, a lien that is defective onits face (meaning in the actual terms set forth in the lien) can be summarilydischarged and will not protect you. Second, filing an improper lien can exposeyou to liability, especially in the case of a "willfully exaggeratedlien" where you are subject to treble damages and attorneys’ fees beingawarded against you.

24 Şubat 2013 Pazar

You're fired!

The '60s made us do it

I'm married to a US Citizen -- What Happens Next?

Selling Soap as a Hobby - Amway IBO's in Tax Court

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Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42

The Amway distributorship system is well known to respondent and this Court
Friscia Construction, Inc., et al. v. Commissioner, TC Memo 2000-192

I included the Campbell case in one of my group posts. It concerned someone whose Amway activities were considered a hobby by the Tax Court denying them deductions for losses. That portion of the post was picked up by someone who calls himself Joecool and posted on his blog under the title "Do IBO's have a clue about business?". I found that there are quite a few blogs dedicated to pointing out the downside of the Amway experience including Married To An Ambot by Anna Banana :

My story of what its like to be married to an Amway cult follower. I expose the lies that our upline told and what happens at Amway meetings and functions. I leave the explanations of why Amway is a poor business opportunity or the tool scam to other bloggers. This blog mainly exists to curse out my former upline, aka the cult leaders, and to let everyone know what kind of idiots I had to put up with. Feel free to join in or live vicariously.

Come on Anna, stop holding back. Tell us how you really feel.

So I got motivated to look at what was in the database I prowl for my little tax jewels had on Amway. As the above quote from Friscia Construction indicates, there is quite a bit. "The Court" is the Tax Court. "Respondent" is the IRS (In all Tax Court cases the taxpayer is "The Petitioner" and IRS is "The Respondent"). Friscia Construction is unusual among the cases I found. It is about the IRS challenging the deductions of a profitable Amway distributor.

Although originally focused on soap, Amway sells a variety of household products through its multi-level marketing system. In case you have never been invited to an Amway presentation or, more likely, didn't go when you were invited, the emphasis is not so much on the products or even selling the products. It's about getting other people to sell the product, who in turn get other people and so on with you sitting at the top of your pyramid (only they make it real clear its not a pyramid).

Bloggers like Joecool and Anna Banana claim that there are very few people who make money at it. Those that do probably don't make as much as they claim, since those in the "upline" need to paint a glowing picture to motivate the "downline" IBO's (Independent Business Owners). Further, the bloggers claim that most of the soap and other stuff is actually bought by the IBO's themselves. Finally, the "upline Diamonds" make most of their money from selling "tools" (i.e. motivational tapes and the like) to the downline.

The other attraction of Amway to some people is that it might allow them to deduct as business expenses things like cars, part of their home or entertainment that they would have spent anyway. That's probably the aspect of Amway that the IRS finds most interesting. Joecool did a post on how some IBO's think of their income tax refunds (generated by Amway losses sheltering other income) as profit.

To me the most interesting thing that I found in my search is this excerpt from the Internal Revenue Manual for examiners who are doing information requests:

.4.4.3.39 — Amway Corporation
[Last Revised: 12-10-2007]
(1) Amway Corporation has waived the hand delivery requirements of 26 USC §7603 and will accept summonses by personal service, mail, or overnight service at Amway Corporation, 7575 E. Fulton, Ada, MI 49355, Attn.: Director, Legal Division. Direct distributors who further qualify for profit sharing bonuses receive the non-cash part of that bonus through a mutual fund account administered by Amway Mutual Fund, Inc., 7575 E. Fulton, Ada, MI 49355, which requires a separate summons

Now I am subject to the AICPA Statements of Standards on Tax Practice, which among other things forbids me from giving clients advice based on what I believe the audit selection process of a taxing authority is. I wouldn't do it anyway, because I think most people who give that type of advice are guessing. Even if you happen to be one of my clients, I'm speaking to you purely as a reader here when I give you this advice:

                                                You don't tug on Superman's cape
                                                You don't spit into the wind
                                                You don't pull the mask off that old Lone Ranger

And you don't take no Schedule C losses from an arrangement with a company that IRS examiners have on speed-dial.

I found 23 cases of IBO's who fought the IRS in Court. (A couple appealed, but I only counted them once)They pretty much all lost. In these type of cases there are really three ways you are denied deductions. The first is substantiation. You didn't prove it. Next is that the expenses are not really ordinary and necessary expenses of the business. When you are talking about cars and business use of the home, those two issues can get blurred together. The third is that there really isn't any business there. Taxpayers fight the IRS and win on that issue frequently even a Vietnamese couple whose "business" was playing slot machines using the principles of Feng Shui. Amway IBO's who take on the IRS on the Section 183 "hobby loss" issue almost always lose.

One of the most common themes is that IBO's seek advice generally only from their "uplines", who of course are not disinterested. They also do not seem to put any energy into trying to control their expenses. I'm going to give you a little snippet from each of the cases and comment a bit on some of them.

LOPEZ v. COMM., Cite as 94 AFTR 2d 2004-7075
Jorge N. Lopez, et ux. v. Commissioner , TC Memo 2003-142

Tax Court properly determined that engineer and wife weren't entitled to business deduction for expenses incurred in connection with their Amway products distribution activity because they didn't engage in activity for profit: although taxpayers showed proof of profit motive, such wasn't sufficient to override govt.'s evidence that included their failure to keep businesslike records, their failure to alter unprofitable methods, their non-dependence on activity income, and their use of activity to socialize with friends and family.

In their own Amway activities, which began in 1996, the Lopezes sold products at cost to both their downline distributors and their customers, which practice eliminated retail sales as a source of gross income. They chose instead to focus their efforts on developing a network of downline distributors to generate performance bonuses. 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' point value did not exceed 372 points in any month.

The only advice they sought for their Amway activities was from upline distributors, and when they received unsolicited advice from their accountant, they disregarded it. During the years in question, Mr. Lopez was employed full-time as a petroleum engineer, and Mrs. Lopez was a homemaker.

The tax court ultimately was not persuaded that the Lopezes' 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 Lopezes' lack of a business plan for recouping losses and achieving profitable levels of activity indicated the 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 had no prior business experience, they accepted the advice of upline distributors rather than seeking advice from unbiased, independent business sources.

Since the Mr and Mrs Lopez appealed, they got to lose twice.

OGDEN v. COMM., Cite as 87 AFTR 2d 2001-1299
Michael A. Ogden, et ux. v. Commissioner, TC Memo 1999-397
Contrary to the Ogdens' contention, evidence of profit is not determinative of whether a profit motive exists. See id. at 876 (no single tax regulation factor, nor the existence of a majority of factors, is determinative of whether a profit motive exists). There is overwhelming evidence in the record that, if believed, supports a conclusion that the Ogdens maintained their Amway activity for deductions, personal pleasure and to offset wages. The tax court did not abuse its discretion in denying the motion for reconsideration.

Amway does not have a quota for sales, its products do not have to be sold above cost, and its distributors are not required to sponsor downline distributors. An Amway brochure, The Amway Business Review, states that the potential for earning income increases as the number of distributors in a sponsor's group grows and as sales increase. Distributors devote as little or as much of their time to Amway activities as they desire. The eight page Amway Business Review in large blocks on four of its pages highlights the fact that “The Average Monthly Gross Income for “Active” Distributors was $88.”

We believe Amway distributors may be biased when discussing Amway because they have a natural desire to advance the organization and/or obtain income from a downliner.

ELLIOTT v. COMMISSIONER, 90 TC 960

Deductions denied for business expenses and depreciation connected with Amway distributorship. Activities were conducted in unbusinesslike manner, taxpayers maintained full-time jobs, and little distinction was made between Amway activities and personal social activities. Also, IRS properly imposed penalties for failure to timely file and negligent or intentional disregard of rules.

A further indication of the unbusinesslike fashion in which petitioners conducted their Amway activity was the thin line dividing business activities from personal and [pg. 973]recreational activities. Petitioners offered scant evidence that their Amway activity required them to do anything other than to maintain an active social life. Although they occasionally attended seminars, most of their activity involved giving parties and taking people out to restaurants. While there is no requirement that profit-oriented work be onerous and unpleasant, the evidence presented by petitioners does not indicate activity motivated by a profit objective. On the contrary, the evidence shows that petitioners made some small modifications in their routine social life, kept cursory notes about their activities, and claimed deductions for the cost of nearly everything they owned or did. On this record, we find as a fact that petitioners' activities were motivated by a desire to avoid tax rather than a desire to generate income.

Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42

Activities not for profit—profit objective—distributorship and direct marketing activities. Code Sec. 183 deduction limits applied to expenses pro se married real estate and construction business operators claimed in connection with Amway distributorship activity that they engaged in without requisite profit objective. Lack of profit objective was shown by facts that taxpayers commingled expenses, had no idea if they were making profit for any given year until they filed that year's return, didn't keep complete records, and otherwise didn't conduct activity in businesslike manner. It was also telling that taxpayers didn't have experience in this type of activity, didn't seek out independent advice, used activity losses to offset their real estate and construction business income, and stated that they would continue with activity regardless of whether it ever turned profit. Countervailing facts that they spent significant time on activity and increased gross receipts during years at issue weren't dispositive considering overall record.

Kenneth J. Nissley, et ux. v. Commissioner, TC Memo 2000-178

Activities not for profit—Amway distributorship. Husband and wife/CPAs didn't engage in Amway distributorship activity for profit: taxpayers incurred substantial losses for 8 consecutive years; and didn't conduct activity in business-like manner where they kept separate bank account and records to “guarantee” deductions

Kenneth C. Theisen, et ux. v. Commissioner, TC Memo 1997-539

Full-time IRS agent and travel agent-wife didn't operate Amway distributorship for profit, so weren't entitled to deductions from activity: taxpayers didn't conduct activity in business-like manner where they didn't have business plan, perform break-even analysis or have budget; admitted that benefits included ability to buy discounted products for personal use; testified that distributorship was for financial gain and personal purchases were more than purchases acquired for resale; reported losses for 5 consecutive years; couldn't explain how or when distributorship would become profitable or why auto and telephone expenses increased without corresponding revenue increase; kept income and expense ledger for substantiation purposes only; and intentionally excluded cost of motivational tapes from costs of goods sold to avoid disclosing negative gross income on returns

Generally, no. The way the plan is written is, you're taught to purchase things from yourself for yourself, and you get other people — say, Look. Just change your buying habits. Don't go to HEB. Don't go to Eckerd's. Don't go to Sam's. You get access to all these products. Change your buying habits. Buy things for yourself

Petitioner also conceded that petitioners' personal purchases were more than the purchases they acquired for resale to other customers or downline distributors. Specifically, petitioner admitted that in 1992 he bought $4,500 of products for personal use and $3,262 of products for other purposes. For 1993, he conceded he bought $10,729 of products for personal use and $4,991 of products for other purposes.

Bryan J. Brennan, et ux. v. Commissioner, TC Memo 1997-60

1. Litigation costs—substantial justification for IRS position—distributorship conducted for profit. Taxpayers were denied litigation costs with respect to underlying case challenging IRS's disallowance of their business deductions: IRS was substantially justified in its position that taxpayer didn't conduct household product distributorship with requisite profit objective under Code Sec. 183 . Taxpayers had losses for 7 consecutive years, yet earned substantial income from other sources for 2 of those years, and didn't provide IRS with business plan or profit projection; and similar distributorship-related activities had been found to contain elements of personal pleasure. Also, IRS's concession of the issue within 5 months of filing answer and 2 months of receiving additional information was reasonable.

This is a case of the taxpayer actually settling favorably with the IRS. They were, however, not able to recoup attorneys fees.

William B. Hart, et ux. v. Commissioner, TC Memo 1995-55

Taxpayers weren't entitled to deduct business loss related to Amway distributorship: taxpayers didn't engage in activity for profit. Expenses of distributorship activity related mainly to social functions: taxpayers attended seminars in Colorado and California, and monthly dinners with their “network”; taxpayer-husband took guest who was interested in finding out more about distributorship on fishing trip; and “supplies” expense included groceries bought while taxpayers were away delivering products or visiting clients. Court rejected argument that activity was conducted in businesslike manner because taxpayers kept records, sought expert counseling, and devoted time and effort to distributorship: they didn't utilize records in way to help them make profit; they didn't seek advice on how to cut back on expenses; many of expenses claimed had significant elements of personal pleasure; and due to distributorship's low receipts it appeared that taxpayers used their time spending money on entertainment rather than focusing on earning profit.

Negligence penalty was upheld: despite Tax Court's warning in prior case that taxpayers couldn't translate their Amway business into deduction for personal aspects of their lives, taxpayers again attempted to deduct clearly personal expenses in guise of distributorship activity, which they had failed to show was being operated for profit. But taxpayers weren't liable for penalty for filing late return: recent death of taxpayers' son was reasonable cause for delay in filing return; and there was no willful neglect.

Petitioners do not appear to have heeded our warning, and respondent was not as charitable this time. Again petitioners have attempted to deduct clearly personal expenses in the guise of an Amway activity that they failed to show was being operated for a profit. We sustain respondent on this issue.

Thomas P. Poast, TC Memo 1994-399

IRS proved that taxpayers, full-time automobile workers, lacked requisite profit objective in carrying on their Amway distributorship activity. Taxpayers failed to conduct activity in businesslike manner: taxpayers maintained incomplete sales records, used solely to help to substantiate claimed deductions; they failed to isolate business expenses from personal expenses; and taxpayers kept no realistic and reasonable budget despite incurring substantial net losses in all prior years. Further, taxpayers' claim that they sought expert counseling regarding business techniques was rejected: taxpayers abandoned "ineffective" techniques without performing cost/benefit analysis of techniques; and techniques received from "upliners" (who had financial stake in taxpayers' sales) were never seriously utilized. Also, much of the time taxpayers spent on Amway activity involved substantial pleasurable personal aspects.

Shortly before becoming involved with their Amway activity, petitioners attended a seminar conducted by an insurance agent, Donald Fletcher, who conducted similar seminars nationwide. Fletcher promoted his life insurance product, while suggesting to the participants of the seminars that the premiums be funded by tax savings generated by deducting largely personal expenses through a home based business like Amway. Fletcher offered to prepare participants' tax returns and provide representation in audits for a cost of $125.

We find not only that the techniques were not seriously utilized, but also that, for the most part, petitioners' advisers were not experts as much as they were upliners with a financial stake in petitioners' retail and downline sales. Neither petitioners nor their advisers appeared to be even vaguely interested in the importance of cutting back their expenses.

Gerald Eugene Swaffar, TC Memo 1992-180

IRS failed to prove that taxpayer's Amway activities weren't carried on for profit. Deductions for expenses related to Amway activities were allowed only to extent conceded by IRS: taxpayers failed to substantiate expenses in excess of that amount. Penalties for negligence and substantial understatement were imposed

At trial, respondent contended for the first time that petitioner's Amway activities were not engaged in with the requisite profit objective under section 183. Such new matter requires that the burden of proof be placed on respondent. See Rule 142(a). Respondent further contends that, assuming the Amway activity was entered into with a bona fide profit objective, petitioner has failed to establish that the above expenditures were incurred and were ordinary and necessary in carrying on a trade or business, pursuant to section 1.

An analysis of petitioner's Amway activities requires this Court to conclude, without analyzing in depth all nine factors, that respondent has not carried her burden of showing that petitioner did not engage in the Amway activity with an actual and honest objective to make a profit. We emphasize that we do not affirmatively conclude that petitioners had a profit objective, but only that respondent has failed to prove that petitioners lacked such an objective.

Sometimes it is better to be lucky than good. If in its deficiency notice the IRS asserts that you didn't have a profit motive, it is up to you to prove that you did. In this case, the IRS raised the issue later, which shifted the burden of proof. The IRS couldn't prove that they didn't have a profit motive.

Gerald W. Jordan, TC Memo 1991-50

Amway distributor was allowed to deduct expenses for travel, incentive prizes, and seminars: expenses were ordinary and necessary. Deductions were allowed in part for meal and car expenses, and were denied for gift expenses, because taxpayer didn't fully substantiate claims.

Another win for an IBO. Hooray. Too bad they didn't do a better job on substantiation.

Joseph M. Ransom, TC Memo 1990-381

Taxpayer wasn't engaged in Amway distribution activity with profit objective. Factors tending to indicate lack of profit motive were: absence of separate checking account; failure to cut costs or recruit new distributors; and substantial income from other sources (with attempted Amway deductions that would have almost eliminated tax he would otherwise owe on that income).

Peter S. Rubin, TC Memo 1989-290

Deductions attributable to Amway distributorship activities were disallowed to extent they exceeded gross income from those activities, which weren't engaged in for profit: taxpayers kept records in cursory and sloppy manner, and they engaged in distributorship activities to claim tax deductions for personal expenditures and to purchase Amway products at sizeable discounts for their own use.

Dewitt Talmadge Ferrell, Jr., TC Memo 1987-102

Losses claimed by airline pilot and housewife were limited where their business activities, involving selling of Amway products, sundials, and posters, weren't engaged in with profit objective, but rather were conducted primarily to generate tax deductions and credits for personal expenses. Revenues were of secondary importance to taxpayers who had no sales expertise and made no effort to obtain any, didn't maintain reliable records, and devoted little effort to sales. Burden of proof was on taxpayers since they didn't show that business ever reported profit before years in issue; Sec. 183(d) presumption didn't apply.

J.H. Schroeder, TC Memo 1986-583

As to the Amway distributorship fee, petitioner failed to show that he conducted his Amway affairs in connection with a trade or business or an activity engaged in for profit. Petitioner made no sales of Amway products and had no income from his Amway operations during 1981. He failed to possess the requisite profit objective, since he admittedly became a distributor solely for the purpose of being able to purchase items at discount prices by virtue of his status as a "dealer". See section 183.

Harry Mitchell Goldstein, TC Memo 1986-339

Taxpayers' Amway activities weren't trade or business and weren't engaged in for profit but were undertaken primarily to obtain tax deductions and credits; business expenses, investment credit, and child care credit denied. Taxpayers' (husband and wife) activities weren't carried on in businesslike manner, they both had full-time jobs, and they had very little success in obtaining other distributors or selling products. Taxpayers had become Amway distributors and claimed losses based on business deductions and credits.

Q. How many sales did you make in 1980?
A. Sales—1980—Probably not even $5 worth, because we did not get any new people coming in, you see. We just mostly went in for ourselves and then get the other people coming in with us.
Q. So it is your testimony that your total income from Amway in 1979 and 1980 was less than $5?
A. Yes.
Q. Are you still in the Amway business?
A. Yes. We like the products and you can't get them any other way.

John Alcala, TC Memo 1984-664

On this record, there arises the strong suspicion that petitioners became Amway distributors primarily for the purpose of providing themselves with Amway merchandise which they could not otherwise obtain, while, at the same time, providing themselves with considerable tax deductions. Compare Barcus v. Commissioner, T.C. Memo. 1973-138 We make no such finding herein, but we do hold that petitioners have failed to carry their necessary burden of proof to establish that they entered into a bona fide business enterprise with the intention and objective of making a profit. McCormick v. Commissioner, T.C. Memo. 1969-261

Randall B. Ollett, et ux. v. Commissioner, TC Summary Opinion 2004-103

In addition to the travel-related expenses, petitioners also had expenses of $3,571 in 1999 and $710 in 2000 for professional books and other materials that were part of Amway's “training program”. These books were recommended by petitioners' upline network and may be described as general self-motivation books. Petitioners also purchased various audio tapes that included stories told by other Amway distributors of how they built successful networks.

As noted above, petitioners' revenue from the Amway activity for the years in issue was minimal, and even that amount was attributable in part to petitioners' purchases of household goods for their own personal use. When asked about how they intended to turn their losses into profits, Mr. Ollett responded: “The only way I can solve it is to talk to more people. And there, in essence, is the challenge that I have, which is finding those people”.

Petitioners did not have any sales experience prior to becoming Amway distributors. Petitioners relied exclusively on their upline distributors, who stood to benefit from petitioners' participation, for advice and training. They did not seek independent business advice at the beginning of their Amway activity to assess their potential for success, and they did not seek independent business advice for turning around years of operating losses. Petitioners' failure to seek independent business advice strongly suggests that petitioners did not carry on the Amway distributorship in a businesslike manner.

Joe Guadagno, et ux. v. Commissioner, TC Summary Opinion 2003-88

Included with petitioners' timely filed return for each year is a Schedule C, Profit or Loss From Business. Each return was prepared by a certified public account who also was an Amway distributor. Petitioners' Schedules C for 1996 and 1997 list their principal business as “Amway”. For 1998, petitioners' Schedule C lists their principal business as “DistConsumerProduct”. Petitioners reported net losses of $26,264, $24,047, and $19,810 on their Schedules C for 1996, 1997, and 1998, respectively.

Before becoming Amway distributors, petitioners had neither experience with Amway nor experience in running a business. Nevertheless, they did not seek independent business advice at the outset, and they did not seek independent business advice afterwards even though losses were sustained year after year. Instead, they relied upon other Amway distributors whose advice is more accurately characterized as personal motivational advice than strategic business advice.

Larry Minnick, et ux. v. Commissioner, TC Summary Opinion 2002-147

As previously stated, more weight must be given to objective facts indicating a profit objective than to petitioners' statement of intent. Dreicer v. Commissioner, supra. After considering the objective factors detailed above, we find especially relevant the manner in which petitioners carried on the Amway activity and petitioners' history of losses and lack of profits. We find from these and the other objective facts in the record that petitioners did not have an actual and honest intent to profit from the Amway activity in 1996 and 1997.

Broadrick R. Moore, et al. v. Commissioner, TC Summary Opinion 2001-173

Considering the record in its entirety, we are satisfied that petitioners did not have the actual, honest, and bona fide objective of making a profit. It appears that they became Amway distributors simply to deduct expenses for items of a personal nature

Karl Meyer, et ux. v. Commissioner, TC Summary Opinion 2001-157

The Amway “pyramid” incentive system is promoted by Amway in the form of the “9-4-2 plan”. Under the “9-4-2 plan”, each Amway distributor is encouraged to personally recruit 9 “downline” distributors, each of whom in turn is encouraged to recruit at least 4 “downline” distributors, each of whom in turn is encouraged to recruit at least 2 “downline” distributors (for a total of 117 “downline” distributors in the initial distributor's organization). The “9-4-2 plan” is promoted as the theoretical break-even point for a distributorship, assuming that (1) the distributor and each “downline” distributor within the distributor's organization purchases $200 of Amway products per month and that (2) the distributor does not have expenses exceeding $2,000 per month. At least in theory, the potential for profit is enhanced as each of the 117 “downline” distributors in the distributor's network successfully implements the “9-4-2 plan”.

The Amway “9-4-2 plan” does not provide meaningful guidance to distributors regarding how expenses incurred in pursuing an Amway activity may be reduced

Despite their lack of experience with either Amway or an Amway type activity, petitioners never sought meaningful counsel from disinterested third parties. Rather, petitioners relied principally on advice from “upline” distributors and other interested Amway individuals

James R. Landrum, et ux. v. Commissioner, TC Summary Opinion 2001-112

Prior to the years in issue, petitioners had three separate experiences with Amway, beginning in 1974. Mr. Landrum was a corporal in the Marine Corps and was stationed in Hawaii in 1974. His Amway activity consisted of purchasing cases of wax from an Amway distributor at wholesale, selling “a case or two a month to [his] friends,” and keeping the difference between the wholesale and retail prices. He ceased his activities with Amway in 1976 when he was transferred from Hawaii and then released from active duty with the Marine Corps. After their marriage in 1977, petitioners participated in an Amway distributorship. Their experience with Amway was unprofitable, and they terminated it after 2 years. Petitioners became involved with Amway a third time in 1985, while Mr. Landrum was employed at Goodyear. Although petitioners had about 50 persons reporting to them, directly or indirectly, in the pyramid structure of Amway, there were insufficient sales for profit. Petitioners' third Amway venture lasted approximately 2 years, and again, petitioners terminated the activity for lack of profit. In late 1995, petitioners were introduced to Amway a fourth time by friends of Mrs. Landrum. This fourth Amway experience is the subject of the present controversy.

Mr. Landrum estimated that the person who established a successful 6-4-2 grouping would receive $1,800 to $2,200 in monthly commissions and then might proceed to gain even greater benefits as a “direct distributor” who might then triple his organization and receive an “Emerald bonus” and then expand to have six legs and a “Diamond organization”. According to Mr. Landrum, Amway distributors with an emerald organization make $75,000 to $100,000 annually, and those with a diamond organization make $125,000 to $250,000 yearly, “And it goes up from there” as he put it.

Conclusion:

23 cases on the same issue is a goodly number, but of course they are over a long period of time. It's clearly not a random sample. If you are say the 20th case like this either you didn't do your homework or you are really stubborn. The other thing that biases this is that the IRS picks the worst cases to contest. Before you get a "90 day letter", which is what allows you to go to Tax Court, you can have an independent appeal in the IRS. Once you file to go to Tax Court, the case will get kicked back to appeals to see if they can settle. At that point appeals can consider "hazards of litigation". So there are probably many people who got decent settlements from the IRS. Of course there are also many who just wrote a check to close out the audit. All in all, though, if the reason you want to start a business is so that you can deduct money you spend anyway (Something I advise you not to do), Amway is probably one of the worst things that you could pick. It's worse than horse breeding, which the IRS seems to have a particular antipathy for, but the Tax Court often allows.

Interestingly, I did not find any cases of people who were using other types of tax shelters to shelter their Amway income. Also, if the Amway dream is really true, you would think I would find a case like that of Peter Morton, who was being challenged on deducting his jet expenses, only with the taxpayer being a Quintuple Diamond Super Duper Amway guy. At the Amway meeting I went to they said that they were glad not everybody took advantage of the Amway opportunity, since they needed pilots for their planes and the like.

All in all, I would say that while not determinative, the record in the tax court is supportive of Joecool and Anna Bannana. At least, there are some more stories for them.

Gifts of California Real Estate - Who's Gonna Know ?

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IN RE: DOES, Cite as 107 AFTR 2d 2011-XXXX, 05/20/2011

Houses In Southern California image

I remember the first tax course I ever took. It was at Qunisigamond Community College. The instructor was an attorney and he told a story about a client coming on a large pile of cash in his deceased father's house. The clients attitude was "Who's gonna know ?". I forget the rest of the story except that is didn't have a happy ending. As technology improves, there will be more and more ways that they are "gonna know". The IRS lost this skirmish, but it should be a heads up to people who have made transfers of real estate for less than full consideration.

The essence of the case is pretty well summed up in the John Does who are being defended:

United States taxpayers, who during any part of the period January 1, 2005, through December 31, 2010, transferred real property in the State of California for little or no consideration subject to California Propositions 58 or 193, which information is in the possession of the State of California Board of Equalization, sent to BOE by the 58 California counties pursuant to Propositions 58 and 193.

The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.

Increases in California property taxes are limited to 2% per year unless there is a transfer of the property. If the transfer is to a child or a grandchild it does not count and will not trigger a reassessment. In order to qualify for this treatment you need to file a form either BOE-58-G or BOE-58-AH, which you can get from your assessors office. Sometimes it can be downloaded. The existence of these forms is pretty convenient for the IRS because they think that maybe if you filed one of them then maybe you should have filed Form 709, which also can be downloaded, but I suggest that you might want to use a professional.

California has argued that their privacy laws prevent them from just turning the forms over to the IRS. It all gets kind of lawerly from here. The short answer is that the Court has initially refused to enforce the John Doe summons against the state because the IRS has not shown that it can't gather the information in some other way. The denial is without prejudice so they may be back.

The lawyerly stuff actually sounds pretty interesting :

It bears mention here as well, however, that, should the United States choose to renew its Petition, this Court has serious concerns about the fact that the United States seeks to utilize the power of a federal court to sanction the issuance of a John Doe Summons upon a state. Indeed, the Court's own review of the case law has revealed no other circumstances on par with the United States' current request. As such, prior to resubmitting the Petition, the United States is cautioned that it must address, inter alia, the following issues:

(1)) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f);

(2)) Whether a state's sovereign immunity precludes issuance of a John Doe Summons;

(3)) Whether, assuming a state is subject to the Court's power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and

(4)) Whether the United States should be required to attempt to pursue any and all state court remedies prior to seeking relief in federal court.

The Government is strongly advised to be thorough in any future briefing since it will be asking this Court to make a decision ex parte without the benefit of any similar briefing from the state.

The practical take away to me though is that it might be a good idea to see if you kinda of sorta forgot to file the gift tax return because you were so busy with those complicated forms the assessor wanted. Before long, one way or the other, I think they are "gonna know".

23 Şubat 2013 Cumartesi

Constitutional bibliolatry

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So once again those experts on American constitutional history, the Republican presidential contenders, have been explaining what the Founding Fathers really intended.
According to Professor Newt Gingrich, the Founders, in creating an independent federal judiciary, actually meant a federal judiciary whose independence only would be guaranteed so long as it issued rulings that Professor Gingich agrees with. When they issue rulings Professor Gingrich disagrees with, they are "rogue courts" that Congress should reign in by cutting their budget, disestablishing their jurisdiction, or (according to those other constitutionals scholars Rick Perry and Michele Bachmann), have their terms limited or salaries reduced.

Of course, the Constitution, that perfect enshrinement of every earthly wisdom, forbids Congress to reduce judicial salaries and provides for lifetime tenure of judges, but never mind. It's the principle that counts. And the principle is that the rule of law, the separation of powers, equal protection, due process, and other things you might have thought were the basis of ordered liberty, in fact apply only until judges start ruling in ways you don't like.

At the risk of stating the obvious, it continues to be a source of a certain wonder to me that (a) the Founding Fathers are viewed by the Tea Partyniks et al. (and their favorite paid speaker, Justice Scalia) as the last word on all controversies of our day and (b) that they are viewed as a uniform chorus all singing the same tune of limited government and dismay over federal "overreaching" as those guys wearing the tricorn hats and brandishing their pocket copies of the Sacred Word running around today.

At the risk of really stating the obvious, the creators of the Constitution recognized themselves that times change, and thus provided a mechanism for their creation to be amended. It's remarkable that some fundamentalist GOPs have been denouncing the income tax, the Fourteenth Amendment, and other constitutional changes on the grounds that the Founding Fathers would be "appalled" by such developments. Of course the Founding Fathers also enshrined in the Constitution the protection of slavery, the right of slave owners to recover runaway slaves, and the astonishingly anti-democratic provision to give slaveowners as much as 1.75 or so votes for every voter in the northern states by including 3/5 of the obviously nonvoting slave population in apportioning representation in Congress and the Electoral College. I think most people would agree it's a good thing that later generations eventually showed themselves wiser and more moral than the Founders on that little matter of holding their fellow human beings in chattel slavery and constitutionally protecting the political hegemony of slave power.

But my real point is that even if we do mean to appeal to the authority of original intent of the Founders as a useful arbiter of what goes today, there was a sizable body of opinion among some of the most influential and wisest of those men that is almost the diametrical opposite of the claims Gingrich et al. are advancing. John Adams, Alexander Hamilton, George Washington, and James Madison all favored a very strong federal judiciary precisely because they wanted to see the power of the states weakened. They and their fellow Federalists argued that as with all general courts in the English-American tradition, English common law ran through the U.S. federal courts; they believed that in time the federal courts would in fact supplant the state courts in the administration of justice. They certainly believed that the federal courts had concurrent jurisdiction in common law crimes with the state courts. Hamilton wanted the federal court districts deliberately drawn not to follow state lines to emphasize the national character of the federal courts. They all believed that the state courts were corrupt, inept, amateurish, untrustworthy, politically malleable, and inconsistent.

The reason they favored lifetime tenure and insulation of the judiciary from the electorate was precisely because they saw the dangers of politicizing the judiciary and making it a creature of the political passions of the moment — forces fundamentally antipathetic to the rule of law. Many of the states in a wave of populist democracy following the Revolution instituted elections for every post including judgeships. It was no coincidence that the framers of the Constitution chose a completely different tack, and prescribed the appointment of judges and protected their independence with lifetime tenure. It is thus doubly ironic that the GOP history buffs should be denouncing the federal courts for defying popular sentiment, for being "unelected" judges, for being "elitists" (my favorite idiotic expression: I don't know about you, but I kind of like the idea of judges who have gone to good schools and studied hard).

It is one of those almost childishly simple lessons of morality that the framers all understood, that a system of government built on true liberty and the rule of law requires respect for the process even when the result is one we may from time to time disagree with. The populist, know-nothing rabble-rousing espoused by Gingrich in particular to vilify and incite contempt for the federal judiciary is exactly the sort of political gutter tactics that the Framers, whom he pretends to revere, had the greatest contempt for and fear of. If they want to show that they really respect the accomplishments of the Founders, they need to stop brandishing the Constitution as a rhetorical applause line, and read the damn thing.

--

Having just emerged from several months of writing another book in the hopes of paying the light bill, I am once again peeking above the parapet and wondering if it's not better to go back to cowering. But I will try to post from time to time once again on this blog as my uncontainable irritation moves me.

I have made one change, however: no more comments! You got something you think is worth saying, get your own blog.

Thank god all politics isn't local

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Among the wonderful legacies of segregation days here in the Old South is Virginia's peculiar election schedule, which has us voting for state and local candidates the year before the quadrennial presidential elections.
This was an innovation of the Byrd Machine, which wanted to make voting as hard as possible and thereby keep important decisions — such as who would control the state legislature and county courthouses — out of the hands of the riff-raff who came out for national elections.

So election day is tomorrow, and here in Loudoun County we have the interesting spectacle of the local Republican Party having been so completely purchased by the development industry and the loony right that you can find some of the most acerbic attacks on the Republican candidates coming from a staunchly conservative political website called "Too Conservative."

Among the parade of GOP loonies on the ballot are

a candidate for sheriff who was shot by his girlfriend and was served with a restraining order for domestic abuse ("I was the victim," he explained, adding, "I’m not a womanizer. I tried it, I’m not very good at it")

an incumbent candidate for county board of supervisors who runs a political action group devoted to exposing the "radical homosexual agenda" (last year he revealed that the TSA's body scanners at airports are actually "homosexual porno scanners")

a candidate for state senate who got his start in politics on the county library board crusading against the "pornography" available on the computers in the libraries and upon his election to the general assembly spent most of his time sending plastic fetuses to fellow legislators to protest abortion (he also opposed a spousal rape bill, explaining that a woman in a nightie is asking for it: “I do not know how on earth you can validly get a conviction of a husband-wife rape where they are living together, sleeping in the same bed, she’s in a nightie, and so forth")

the county prosecutor, up for reelection, who cost the county hundreds of thousands of dollars in legal expenses and nearly ruined the life and career of a well-regarded school assistant principal in a baseless prosecution on a completely fabricated charge of child pornography

a school board candidate whom the same prosecutor declined to file charges against after he was arrested for spousal abuse

We are also proud home to the Republican Party local committee that sent out the tasteful picture of President Obama as a zombie with a bullet hole in his head ("a light-hearted attempt to inject satire humor," an official explained), while another recent member of the local Republican Committee routinely threatens to "beat up" people who disagree with him.

It almost makes me nostalgic for the Byrd Machine.