Amway And Tax Time?

This is a re-post and a little dated, but I do not believe that anything of significance regarding Amway and taxes has changed in the Amway business that would render this post as not useful.   FYI, I, Joecool, was mentioned in this Forbes article.  Imagine that?  WWDB leaders used to say that Forbes was credible.   LOL

A recent sight visitor posted this link which I found interesting and humorous. I did not post the entire link, so there is more material. Check it out.

http://riles52.blogspot.com/2011/06/selling-soap-as-hobby-amway-ibos-in-tax.html

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

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

Ineffective Training?

 After years of studying Amway and blogging, I've noticed some things taught by IBO leaders that simply do not make any sense. It doesn't make sense business wise, and it just doesn't add up. I know that sometimes, you need to think outside of the box and go against the grain to succeed, but some of the IBO practices are simply insane and it's no wonder that so many IBOs fail in their pursuit of their Amway "dream". These same leaders may encourage you to disregard facts and just follow them. Blind loyalty like that can end up costing you a lot of money.

Most IBOs never sponsor a a single downline and relatively few products are sold to non IBOs. These are the reasons why most IBOs do not turn a profit but for some reason, many IBOs still seem to think that training materials are worth the money. The training might motivate you with the "rah rah" tactics, but in the big picture, are ineffective in generating more sales and getting IBOs to sponsor more people. If Amway tool and training worked, Amway sales would far greater than the approximate 8.3 billion they did last year, which is down more than 25% since 2013.

Also, "buy from yourself" a fairly common practice, is a bad idea. It is okay to support your business, but if you are the primary or only customer, you won't make money. Any profit you might turn is coming out of your own pockets. I don't know of any successful stores where the primary customers are the owner and the store employees. Yet some IBOs think this is how they will succeed. Also, for this reason, IBOs are always recruiting because they need downline to try to generate more sales volume. But because sponsoring people into Amway is nearly impossible, most people wind up recruiting but never sponsoring a single downline.

Sponsor others. So, you are struggling as an IBO. But the key to success is to try to open other stores by sponsoring downline. As a famous Amway apologist likes to claim, you do not get paid (directly) for sponsoring others. So why is this the emphasis for so many IBOs? Why would you think that opening more (Amway) stores will make you successful when you are running a failing Amway store yourself?? Yes, it is a way to possibly generate more volume, but your "success" will only come by having a bunch of struggling businesses sponsored by you. Is that how you wish to succeed? Also, the quest to sponsor others is probably how Amway got a bad reputation when IBOs tricked people into attending recruitment meetings and/or being deceptive when inviting someone to see the plan.

Folks, a business needs customers to succeed. I live in Hawaii and when tourism is slow, our local economy suffers. It's a very similar concept to your Amway business. Without customers circulating money through your business, you will eventually go out of business unless your job income continues to fund your Amway business. But I'm assuming you don't work a job just to keep your Amway distributorship going. Bottom line, if your Amway business can't support itself through sales, why are you still running it?

The Different Amway?

Joecool just returned from Vegas and had a great time.  Went to see a few shows, plus a local Jazz show with local but some well known musicians in a small club/restaurant just off the strip.  Spent some time at Circa and won a nice jackpot that more than covered my expenses for this trip.  Had a great time and looking forward to my next visit to Vegas!   If you're not a regular in Vegas, there's a new hotel near the Vegas IKEA (Durango Hotel) where their Oyster bar is amazing.  Has oyster shooters, clam chowder and some chicken gumbo.  Amazing!  And no Amway needed for a really awesome vacation.    

One of the funny excuses I hear from Amway folks is that Amway is different. Or that "they don't do that anymore". One of the things Amway IBOs have done in the past was to trick people into meetings and the diamonds used the Amway "dream" to sell and endless stream of cds/audios, functions, books and other materials that they profit from. And the upline profits even if all their downline lose their shirts. So what exactly has changed? All of this still happens ad I've seen nothing to suggest otherwise.  IBO denying these things happen don't change reality or the perceptions of Amway prospects who have the internet at the touch of their fingers.

Another funny thing was the lawsuit Amway settled back in 2010. While Amway did not admit wrong doing, they forked out about 155 million to settle the lawsuit (Pokorny). That's a pretty expensive settlement for doing nothing wrong. Amway defenders want to claim that Amway didn't want to be bothered with such a lawsuit and just found it cheaper to settle out of court. I believe that Amway would have fought tooth and nail if they thought they could be cleared of the charges. Instead, they paid 155 million to sweep it under the rug.  Amway likely has a staff of lawyers on payroll, so was it really in their best interest to settle for a large cash settlement if they honestly believe they did nothing wrong?  I don't know for sure because I don't know all of the details from behind the scenes, but on the surface, it sure seems like $155 million is a lot to pay for doing nothing wrong.

It seems that issue after issue comes up and all the Amway IBOs can do to defend their actions is to say that they don't do that anymore. What with they not do anymore in the future? Seems the entire Amway dream is based on a lie. Work hard for a few years (usually 2-5 years) and build it right and you can walk away with livable willable residual income. Funny how I have yet to see any diamond or emerald exercise such an option. You'd think after all these years, surely one big pin would want to "walk away" and just live on residuals. Instead, we see crown ambassadors die while still working.  Wouldn't any diamond want to build it right and build it once, then walk away into a quiet retirement with more cash than you know what to do with?

People may claim that Amway is new and different, but I just don't see it.

Joecool Headed To Vegas?

Joecool is headed to Vegas for 5 nights.  Going for some gaming, great food and a few shows.  No Amway income needed.  LOL   In the meantime, this article is titled:  The Key To Success? 

 Upline would tell the audience ad nauseum that tools and functions are the key to success.  It’s kind of ironic as tools and functions are vital to success, but it’s vital only to the success of the diamonds and higher ups.  Think about it.  The diamonds pocket the profits and show you all the luxuries they enjoy but they don’t mention that much of their luxuries come from tools and functions profits.  The tools have larger profit margins than Amway products and the rank and file IBOs don't get a cut from the pool of bonuses, like the Amway bonuses.  And while diamonds now speak about IBOs getting a shot at the tools income, but how much someone can earn, and all the details are sketchy, unlike the Amway bonus structure which is shown when prospects see the plan.

Diamonds used to lie and claim no profits were made from tools and functions but that lie is now impossible to defend so they might mention that profits are made but downplay the amount of the profits.  One revealing piece of evidence came in 2009 when a triple diamond filed for chapter 7 bankruptcy and his income details became publicly available. It revealed that the triple diamond made about half a million annually from Amway, which is a good income but certainly not the Uber wealth you would have imagined.  This diamond also made about half a million annually from tools and functions.   Despite all of that income, the diamond was unable to properly manage his cash and filed for chapter 7 bankruptcy.

So even with a million-dollar income this diamond had credit card debt, was unable to pay his bills and I didn’t see any charitable donations on his tax returns.  Now a million dollars annually is a great income, but you aren’t buying mansions and a fleet of sports cars in cash.   Living the “diamond” lifestyle is expensive and I suspect that the average diamond likely can’t sustain that lifestyle.  It seems that the income from tools and functions are vital to sustain a diamonds finances.   And it's why diamonds seemingly never "walk away" and collect residual income because once you stop working, your tools income stops.  This should speak volumes to people if you really understand what's happening.  

Think about this.  Income from tools and functions have a higher profit margin than Amway products and unlike the Amway compensation plan, rank and file IBOs do not get anything for the volume of tools they move.  Thus, the diamonds will push the tools hard and take no prisoners.  It’s also why your lifelong Amway uplines don’t give a hoot about you once you stop attending functions or stop buying tools.  You become one of the bitter and broke losers who quit.  They make no money off you if you quit so they may as well shove you off with a swift kick and the label of "broke loser".

Tools and functions are vital to Amway success; if you are a diamond. This does not apply to the rank and file.  

 

Cardinal Rules?

 Below is an excerpt from an apparently newbie IBO in Britt Worldwide (BWW). Note how they are taught that they must ask upline before doing their work. This IBO also talks about not having to use his brain, just follow your upline’s advice. Submit to the leaders. Follow the system and success is guaranteed. Right, and Amway apologists have the nerve to deny that this stuff still goes on? I suspect it is more common than Amway defenders will admit.   I recall these cardinal rules from my IBO days except the version I was taught is not verbatim, but basically the same.

===========================================================================


http://greatdealmway.blogspot.com/2009/08/bww-system-and-get-success.html

*3 Cardinal rules

A. never pass negative advises or rumors to your down lines.

B. you must ask to your up lines before going on your first work.

C. never ever go bad with anyone’s self motive, money and family members.

*4 powers

1. Unity: unity is most powerful aspect. Do work in unity.

2. Power of submission to your work, up lines and customers: you must understand that you do not need to use your brain in this business. Just follow your leaders and submit yourself to them.

3. Power of spoken words: try out this simple but effective formula to gain success in your life. Speak out regularly about what you want in your life. It should be for this business, for family, for country or anything you want. This will reduce the negative energy and will create positive energy around you.

Do best and follow this system. Success is guaranteed!

What Other Conclusion Is There?

 When I was an IBO, I recall so many of the "rah rah" types of meetings and functions I attended.  Yeah, some of the big functions were glitzy and the diamonds paraded around in nice business attire while showing off alleged trappings just as jet skis, sport cars or fancy vacations that they attained from the Amway business.  To an unknowing or unsuspecting person, it seems like a great dream to be able to retire at the age of 29 with more money than you know what to do with.  No brainer right?  But that's only if you don't comb through the details with a discerning eye.

If you carefully go through Amway's own disclosures, you'll see that the "average" IBO or distributor earns $202 a month.  And that $202 includes the uber wealthy diamonds (minus their bonuses), but most importantly that the $202 average does not include distributors who signed up and did nothing.  So, it's not a true "average" because it excluded the least productive of the salesforce.  Thus, this average income includes the diamonds but not the one who didn't lift a finger.   That math is extremely telling.  The Amway defenders will say "diamonds make over $500K".  But they don't tell you that a diamond making that much is Q12 diamond, which is very rare because the diamond and his/her qualifying legs all need to qualify for all 12 months in Amway's fiscal year.   

So why do the Amway folks hype up the (in reality) "ho hum" business of moving household products and cleaners, vitamins, etc.?     Because they have to.  If you do the math behind the business and even if you consider that diamonds "augment" their income by selling audios, books, functions and yes, some even still sell "voicemail", you'll see that the hype and glitz is just a facade like the front of a fancy building on a movie set.   And it's because nobody in their right mind would want to sign up and do all the (time and expenses) activities associated with the Amway  business in hopes of living a mostly ordinary middle class lifestyle.   They show you mansions, cars and alleged wealth because those kinds of prizes make the possibility of wealth seem tolerable in exchange for a person's investment time, money and effort.   Would anyone join with all the hype in hopes of living a middle class lifestyle?    Looking at all of these factors, "what other conclusion is there"?   

What happens is many young and entry level types of workers get into Amway because they believe that Amway is a short cut to wealth and early retirement.   They want to believe.  These young and often motivated youngsters think that $100K or a bit more will solve all of their problems.  But do the math.  After taxes and business expenses, there won't be much left.   I live in Hawaii and flying from here to LA for example, first class can cost upwards of $5000 for two people.   Do you believe that diamonds and their families are shelling out $10,000 for first class ever time they fly to functions if they earn even say $250K   And that's just flights.  What about 5 star hotels and fancy restaurants?    The math is where the uber wealthy diamond's stories fall apart.   What other conclusion is there?

Amway Tidbits?

 So many people get duped into thinking that they will somehow get extremely wealthy by becoming an Amway IBO. Many recruiters will tell stories about how they were once broke, but signed up, endured challenges and now they are diamonds enjoying untold wealth and luxuries. People get caught up in "dreams" and are often encouraged to ignore the facts. People running businesses should pay close attention to the facts because it tells you much about your business and your likelihood of success. But what are some facts about the Amway business that many people don't know about? I have outlined a few important ones for those who harbor dreams of going diamond.

1. The average diamond, according to Amway, earns about than $150,000 a year. Yes, some of this may be supplemented with money from the sale of tools, but after taxes and business expenses such as travel to and from the many functions that a diamond attends, would leave a diamond living an ordinary middle-class lifestyle, not one with mansions and sports cars as portrayed in many functions or meetings. Yes, a Q12 diamond would have more earnings, but a Q12 diamond is the rare exception, and not the rule. (Amway.com says a Q12 diamond makes over 500K but a Q12 Diamond is the rare exception)  If you truly understand what a Q12 diamond is, you will know what I'm talking about.

2. Most IBOs are NEVER able to sponsor a single downline. Pretty hard to develop six (6) downline platinums when most people cannot sponsor anyone. Even finding people willing to just see the plan can be time consuming and challenging.

3. Most Amway products are purchased (apparently) by IBOs and not sold to customers. Name a real business that sustains itself by having its own workers or salesforce purchase most of the goods. MLM is probably the only business where this occurs. Understandably, it explains why 99%+ of "system" Amway IBOs make nothing or lose money.   Upline might teach Amway's 10 customer rule, but is it actually enforced?

4. For most IBOs, the cost of functions, books, voicemail, and standing orders and other support materials represent the reason why most business building IBOs lose money and it also represents a significant profit for some of the diamonds who sell the materials. BTW, who needs voicemail these days?

5. Not working hard is not necessarily the reason for someone's failure. But conversely, working hard does not equate success in Amway. I would guess that out of those who work hard, it is still a fraction of 1% of hard working IBOs that even attain a significant profit. Doing nothing won't get you anywhere, but in this business, working hard often gets you nowhere as well. It is my informed opinion that the cost of the support materials is the direct reason why so many IBOs lose money, even out of those who work very hard.

I could go on and on, but these are a handful of facts that IBOs and information seekers should be aware of. I welcome differing thoughts and opinions.