T.C. Memo. 1997-60
UNITED STATES TAX COURT
BRYAN J. BRENNAN and KATHRYN J. BRENNAN,a.k.a. KATHRYN J. LAW,
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No 24167-95. February 3, 1997.
W. Curtis Elliott, Jr., for petitioners.
David A. Winsten, for respondent.
MEMORANDUM OPINION
FAY, Judge: This case is before the Court on petitioners'
motion for award of reasonable litigation costs pursuant to
section 74301 and Rules 230 through 232, filed June 10, 1996.
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
(continued...)
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Petitioners resided in Aloha, Oregon, at the time their petition
was filed.
Background
Petitioner Bryan Brennan became an Amway distributor in
1987. Amway produces various household products that it sells
through direct marketing efforts of distributors such as peti-
tioner. Distributors purchase products and receive bonuses from
Amway, based on the volume of Amway products sold by them.
Distributors also recruit other people to be Amway distributors
(downstream distributors). Amway distributors earn additional
bonuses from Amway, based on the sales volume of the products
sold by their downstream distributors.
By a statutory notice of deficiency dated September 1, 1995,
respondent determined deficiencies in petitioners' Federal income
taxes of $7,442 for the taxable year 1992 and $16,900 for the
taxable year 1993. Respondent disallowed deductions related to
petitioners' Schedule C Amway distributorship because respondent
determined that the Amway distributorship was not a business
operated for profit. In the alternative, respondent determined
that petitioners had failed to substantiate a few of their
Schedule C business deductions.
Petitioners filed a petition in this Court on November 20,
1995. By order dated January 16, 1996, the case was calendared
1
(...continued)
indicated.
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for trial in Spokane, Washington, during the trial session
beginning on June 10, 1996.
Prior to trial, on March 22, 1996, petitioners filed a
motion for partial summary judgment as to whether the requisite
profit motive existed in the operation of their Amway business.
In conjunction with the motion for partial summary judgment,
petitioners provided additional information to respondent
relating to their Amway business.
On June 10, 1996, the parties filed a stipulation of settle-
ment. The stipulation of settlement reflects deficiencies of
$269 and $294 for the taxable years 1992 and 1993, respectively.
On June 10, 1996, petitioners filed a motion for award of
reasonable litigation costs.
Discussion
In order to be awarded litigation costs, petitioners must
show that: (1) They exhausted all administrative remedies; (2)
they met the net worth requirement of section 7430(c)(4)(A)(iii);
(3) they have substantially prevailed with respect to the amount
in controversy or the most significant issue presented; and
(4) the position of respondent was "not substantially justified".
Sec. 7430.
Respondent concedes that petitioners satisfy conditions
(1) through (3), leaving for decision the issue of substantial
justification for respondent's position. Petitioners' motion for
award of reasonable litigation costs was filed prior to the
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enactment of the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec.
701, 110 Stat. 1452, 1463 (1996). They bear the burden of
proving that respondent's position in the proceedings was not
substantially justified. Sec. 7430(c)(4)(A)(i); Rule 232(e).
A position is "substantially justified" when it is
"justified to a degree that could satisfy a reasonable person."
Pierce v. Underwood, 487 U.S. 552, 565 (1988). It is not enough
that a position simply has enough merit to avoid sanctions for
frivolousness; it must have a "reasonable basis both in law and
fact". Id.
Whether the position of the United States in this proceeding
was substantially justified depends on whether respondent's
positions and actions were reasonable in light of the facts of
the case and the applicable legal precedents. Sher v. Commis-
sioner, 89 T.C. 79, 84 (1987), affd. 861 F.2d 131 (5th Cir.
1988). The inquiry must be based on the facts reasonably avail-
able to respondent when the position was maintained. Coastal
Petroleum Refiners, Inc. v. Commissioner, 94 T.C. 685, 689
(1990). The fact that respondent did not prevail in the under-
lying litigation does not require a determination that the
position of the Internal Revenue Service was unreasonable, Broad
Ave. Laundry & Tailoring v. United States, 693 F.2d 1387, 1391-
1392 (Fed. Cir. 1982); however, it remains a factor to be con-
sidered. Heasley v. Commissioner, 967 F.2d 116, 120 (5th Cir.
1992), affg. in part and revg. in part and remanding T.C. Memo.
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1991-189; Estate of Perry v. Commissioner, 931 F.2d 1044, 1046
(5th Cir. 1991).
Respondent's position in this case was that petitioners did
not engage in their Amway activities for profit under section
183. In the analysis of a case under section 183, the determina-
tion of whether the requisite profit objective exists depends
upon all the surrounding facts and circumstances. Golanty v.
Commissioner, 72 T.C. 411 (1979), affd. without published opinion
647 F.2d 170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax Regs.
In making this determination, more weight is accorded to objec-
tive facts than to the taxpayer's statement of intent. Siegel v.
Commissioner, 78 T.C. 659, 699 (1982); Dreicer v. Commissioner,
78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205
(D.C. Cir. 1983). Section 1.183-2(b), Income Tax Regs., sets
forth a nonexclusive list of nine factors normally considered in
determining the existence of the requisite profit objective. The
factors are: (1) The manner in which the taxpayer carries on the
activity; (2) the expertise of the taxpayer or his advisers;
(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 carrying on other similar or dissimilar activities; (6) the
taxpayer's history of income or losses with respect to the
activity; (7) the amount of occasional profits, if any, which
were earned; (8) the financial status of the taxpayer; and
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(9) the presence of elements of personal pleasure or recreation.
No single factor, nor the existence of even a majority of the
factors, is controlling. Golanty v. Commissioner, supra at 426;
Dunn v. Commissioner, 70 T.C. 715, 720 (1978), affd. 615 F.2d 578
(2d Cir. 1980).
Respondent has successfully litigated the section 183 "for
profit" issue in other cases involving Amway distributorships.
Specifically, previous cases demonstrate that there are signifi-
cant elements of personal pleasure attached to the activities of
an Amway distributorship. See Rubin v. Commissioner, T.C. Memo.
1989-290. Further, an Amway distributorship presents taxpayers
with opportunities to generate business deductions for essen-
tially personal expenditures. See Elliott v. Commissioner, 90
T.C. 960 (1988), affd. without published opinion 899 F.2d 18 (9th
Cir. 1990); Poast v. Commissioner, T.C. Memo. 1994-399. With
this in mind, we consider the facts of the case herein.
Ordinarily, respondent initially takes a litigating position
on the date she files her answer to the petition. Huffman v.
Commissioner, 978 F.2d 1139, 1148 (9th Cir. 1992), affg. in part
and revg. in part on other grounds and remanding T.C. Memo.
1991-144. Therefore, we begin by reviewing the facts reasonably
available to respondent on December 22, 1995, the date she filed
her answer to the petition, in order to evaluate the reasonable-
ness of respondent's position. Id. Petitioners had suffered
yearly losses from 1987 to 1994, which, as a general trend, grew
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as time progressed. In 1992 and 1993, however, petitioners
earned substantial amounts of income from sources other than
Amway. Additionally, petitioners did not provide respondent with
either a business plan or profit projections2. Finally, as noted
above, many activities associated with an Amway distributorship
have been found to contain significant elements of personal
pleasure and benefit. Based upon prior cases and the facts
available to her in this case, respondent reasonably took the
position in the answer that petitioners did not operate their
Amway distributorship with the objective of making a profit.
As respondent pursued her investigation, she learned more
facts concerning petitioners' Amway operation. In response to
discovery requests, petitioners provided respondent with docu-
ments substantiating their expenditures. Through affidavits
given by petitioners, respondent learned that petitioners were
receiving extensive guidance from a more experienced Amway
distributor. Perhaps most significantly, in March 1996, respon-
dent learned that petitioners reported a small profit from the
activity for 1995. Upon learning this information, respondent
reviewed her earlier position. Settlement negotiations were
2
Respondent attached a one-page document to her notice of
objection to petitioners' motion for award of reasonable liti-
gation costs filed July 10, 1996. Petitioners had provided this
document to the revenue agent. Petitioners claim that the docu-
ment represents the profit projections of their Amway business.
We agree with respondent's characterization of the document as
indecipherable.
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commenced in April 1996, and respondent conceded the for profit
issue in May 1996.
Respondent is entitled to a reasonable period of time in
which to review documentation and modify her position. Sokol v.
Commissioner, 92 T.C. 760, 765 n.10 (1989); Harrison v.
Commissioner, 854 F.2d 263 (7th Cir. 1988), affg. T.C. Memo.
1987-52. In Harrison v. Commissioner, supra, the Court held that
respondent's concession, some 6 months after she filed her
answer, was reasonable. In this instance, respondent conceded
the section 183 issue 5 months after she filed her answer and
within 2 months after the information described above was brought
to respondent's attention. This concession falls within the
boundaries of a reasonable period of time.
We conclude that respondent's position had a reasonable
basis in both law and fact. Pierce v. Underwood, 487 U.S. 552
(1988). Accordingly, we hold that respondent's position was
substantially justified and that petitioner is not entitled to
litigation costs under section 7430. Petitioners' motion will
therefore be denied.
An appropriate order and
decision will be entered.