I was surprised to see that I haven’t written about an Amway case in over two years. Well, a new one came out this week and James E. Hess, like pretty much every taxpayer who has ever disputed disallowance of Amway losses in Tax Court, lost. Amway cases are a subset of Section 183 (commonly known as hobby loss) cases.
The rule is that in order to post losses to your tax return, the underlying activity has to be one in which you were trying to make money. I have written about quite a variety of activities where the taxpayer has contested an IRS hobby loss determination- musicians, artists, drag racers, players of slot machines, even blogging to name a few. The most common though are horses and Amway. The horse people frequently win, but the Amway people pretty much always lose
A Bit About Amway
The Hess decision is of interest because it has more in the way of discussion of the Amway IBO (Independent Business Owner) experience. There is the big picture of how you can make money in Amway.
"Amway distributors can generate revenue by: (1) selling products directly to consumers; (2) earning points through Amway’s reward point system; and (3) sponsoring other individuals who join Amway as distributors. In the latter case, the original distributor is called an “upline” distributor, or a sponsor, in relation to his new recruit, the “downline” distributor. The upline distributor receives points when any member of his downline sells Amway products even though he does not participate in the sale. Those points can then be redeemed for cash in the form of a bonus check. If a downline distributor engages another individual to be his downline distributor, the original upline distributor takes a percentage of the sales of both downline distributors even though he had nothing to do with the activities of the new downline distributor. Thus, to maximize Amway-related income, a distributor must sell Amway products and also try to enlist other individuals as Amway distributors."
The Missing Business Plan
The Tax Court denied the losses because Mr. Hess did not have any sort of a business plan. What he received from Worldwide Group “did not contain information that is generally found in a formal business plan”. It was more of a description of how revenue could grow.
It is interesting to note that the Tax Court has become a little more relaxed in calling for formal business plans in Section 183 cases recognizing that people in essentially crap shoot businesses like art and horse breeding don’t need accountants to tell them how to make money. Yet it seems to be holding the line when it comes to Amway.
Mr. Hess reported net losses from 2005 to 2011 ranging from $10,000 to $25,000. In only one year did revenue exceed $1,500. Nothing changed.
Tax Court Seems To Align With The Critics
What I found most intriguing about this decision, is that way that it mirrors critiques of the Amway experience, which seem to have their own section of the blogosphere. For example Joecool of Amway – The Dream Or The Scheme? recently wrote in a post called Amway Success?
Submission to upline was one of the things we were told. Our group was told that upline would never purposely lead us astray so we should trust them and never try anything without checking upline.
Our group was taught to reduce debt, but ironically, upline said it was okay to go deeper in debt if it was to attend a function or to buy more cds.
Anytime we asked about how much income uplines may have been earning, we were either told it’s none of our business or shown a photocopy of a 10 year old bonus check that someone upline may have received. Our proof that the business worked was upline showing off pictures of sports cars and mansions.
Losing money is success. Many times, our group was told that losing money was a sign of success. It was success because we were investing in our futures. That the business really is not about money but about friendships. I suppose upline taught this because everyone was losing money so it was nice to hear that success was around the corner, and that we were all nicer people and on our way to success if we just attended more functions and bought more standing orders