United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
December 3, 2004
FOR THE FIFTH CIRCUIT
_____________________ Charles R. Fulbruge III
Clerk
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’s determination of deficiencies in their federal
income taxes for the years 1998 and 1999. On appeal, the Lopezes
argue: that the tax court erred in failing to shift the burden of
proof of the deficiency to the Commissioner under 26 U.S.C. §
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
*
Pursuant to 5TH CIR. 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this opinion should not be published and is not precedent except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 5TH CIR. R. 47.5.4.
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’s determination that the
Lopezes failed to meet the burden-shifting requirements in §
7491(a), and that the burden of proof properly remained on the
Lopezes. Neither do we find error in the tax court’s holding that
the Lopezes’ Amway activities were not conducted for profit.
Finally, in accord with the Commissioner’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 court’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 distributors.
For most distributors, gross income from Amway activities is based
on a combination of retail sales and performance bonuses.
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
2
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’ 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 Lopezes timely filed federal income tax returns for both
years, citing business losses of $18,388 in 1998 and $18,360 in
1999. The Commissioner disallowed the deduction of these expenses
after determining that the Lopezes’ Amway activities were not
entered into for profit. The Commissioner further determined that
the improper deductions resulted in a deficiency in the Lopezes’
federal income taxes for 1998 and 1999. The Lopezes petitioned the
tax court for redetermination of the deficiency.
II
The tax court noted that the Commissioner’s determinations as
to a tax deficiency are presumptively correct, and the taxpayer
generally bears the burden of proving otherwise. Welch v.
1
The tax court noted that the Lopezes recruited downline
distributors largely from among their family and friends.
3
Helvering, 290 U.S. 111, 115 (1933). Moreover, because the Lopezes
did not cooperate with the reasonable requests of the Commissioner
for pre-trial meetings and for documents to be used at trial, the
tax court held that the Lopezes did not satisfy the requirements
outlined in 26 U.S.C. § 7491(a), which shifts the burden of proof
to the Commissioner in some cases.
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. The fact that
the Lopezes’ 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
4
they had recruited as downline distributors. Finding that the
Lopezes did not meet their burden of proof as to their profit
motive, the tax court sustained the Commissioner’s assessment of
liability for the deficiency.
The tax court also accepted the Commissioner’s calculation of
the amount of the deficiency. The Commissioner now concedes that
this calculation was incorrect because it did not subtract the cost
of goods sold from gross receipts in determining the Lopezes’ gross
income.
III
A
The Lopezes first argue that the tax court erred in failing to
shift the burden of proof to the Commissioner under 26 U.S.C. §
7491(a). That statute provides for shifting the burden of proof
when the taxpayers have, inter alia, “cooperated with reasonable
requests by the [Commissioner] for witnesses, information,
documents, meetings, and interviews.” 26 U.S.C. § 7491(a)(2)(B).
The tax court refused to shift the burden of proof after finding
that the Lopezes did not cooperate with the Commissioner’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
5
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 meeting with the Commissioner’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 court’s conclusion that the Lopezes’
lack of cooperation with the Commissioner precluded shifting 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’ Amway
activities were not a trade or business under § 162 of the Internal
Revenue Code (“IRC”) during the years at issue. On appeal, the
Lopezes argue that this determination was clear error, and that
they did have a profit motive requisite for satisfying § 162(a).
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 “must be involved in the activity with
continuity and regularity and ... the taxpayer’s primary purpose
for engaging in the activity must be for income or profit.”
6
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). Section 183
of the IRC provides that, in relation to an activity not engaged in
for profit, a taxpayer can take deductions which would be allowed
if the activity were engaged in for profit, but only to the extent
“that gross income derived from such activity for the taxable year
exceeds the deductions allowable.” 26 U.S.C. § 183(a).
Courts inquiring into whether a profit motive exists usually
consider nine non-exclusive factors in 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 time 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
taxpayer’s history of income or losses attributable to the
activity; 7) the amount of occasional profits, if any, which are
earned; 8) the taxpayer’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’s statements regarding his or her
intent. Westbrook v. Commissioner, 68 F.3d 868, 875 (5th Cir.
1995).
Whether a profit motive exists is a finding of fact, which the
court reviews for clear error. Ogden v. Commissioner, 244 F.3d
7
970, 971 (5th Cir. 2001). We find clear error when we are “left
with the definite and firm conviction that a mistake has been
made.” Id.
Here, the tax court correctly applied the factors set out in
the Treasury Regulations § 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’ arguments do
not leave us with the “definite and firm conviction that a mistake
has been made.” At best, the Lopezes have made arguments to show
that their Amway activities possibly had a profit motive. Their
arguments do not show that the tax court clearly erred in viewing
the evidence differently and finding that their Amway activities
lacked the requisite profit motive.
Indeed, ample evidence supports the tax court’s conclusion
that the Lopezes lacked a profit motive in conducting their Amway
activities. The record supports the tax court’s findings that the
Lopezes maintained unbusinesslike records, continued in an
unprofitable endeavor without altering their methods for several
years, did not depend for their livelihood on their Amway
activities, and spent much of their Amway-related time socializing
with family and friends.
Having reviewed the record and the briefs, we see no clear
error in the tax court’s findings and conclusions and therefore
8
AFFIRM its holding that the Lopezes did not have a profit motive
for their Amway activities as required by IRC § 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 income.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 the tax court’s determination that the
burden of proof remained with the Lopezes because the Lopezes did
not satisfy the requirements of 26 U.S.C. § 7491(a). We AFFIRM the
tax court’s holding that the Lopezes lacked a profit motive in
their Amway activities. We VACATE the tax court’s calculation of
the Lopezes’ gross income and REMAND this case to the tax court for
the limited purpose of recomputing the Lopezes’ federal income tax
deficiencies.
AFFIRMED in part, VACATED in part and REMANDED.
2
The Lopezes also argued in their brief that they were
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.
9