Claiming business losses of nearly $25,000 annually over eight years, Kenneth J. Nissley and Terri C. Connor-Nissley are Amway distributors in Indianapolis. They are both Certified Public Accountants (CPAs), and both have worked for a number of years for the prestigious "Big Five" firm of Price Waterhouse. You would think that their professional credibility and business acumen would help them to become "successful" in Amway. You would be wrong. Following upline advice instead of accepted business standards and practices has proven very expensive for them. In addition to business losses of more than $187,000 in eight years, the Nissleys have just been denied three years' worth of tax writeoffs.

In a separate case, Docket Nos. 5084-98, 5085-98, filed December 7, 1999, the Tax Court found against petitioners Michael and Colleen Ogden. The Ogdens are also a professional couple. He is an engineer, she holds a Bachelor's Degree in Business Administration, and is a paralegal as well. Their Amway losses for the three years in question, 1993, 1994, and 1995, totaled $59,594.

In Docket No. 20757-98, filed May 30, 2000, the Court ruled strongly against the Nissleys' attempt to use their Amway "business" as a tax writeoff. The court examined the Nissleys' returns for tax years 1994, 1995 and 1996. The couple showed "deficiencies" in their taxes for those years of $9,189, $9,446, and $7,495, respectively. According to the Tax Court:

"The issue for decision by the Court is whether petitioners engaged in their Amway activity for profit within the meaning of section 183. We hold that they did not."

Both of the defendants have substantial earnings from their professions, over $70,000 annually for the time in question. According to the decision, the Nissleys:

"have never succeeded in earning a profit from their Amway activity. Rather, petitioners have consistently claimed losses from their Amway activity and have used such losses to offset their other income, principally salary (or net profit from business consulting) from their full-time positions."

The Nissleys' Amway business losses have been quite significant. With about 75 distributors in their group during each of the three years (which should put them at or near the Direct Distributor/Platinum level), they claimed losses of $27,407 in 1994; $33,539 in 1995; and $27,787 in 1996. The tax court looked at their profit/loss for each year of their Amway involvement. Between 1991 and 1999, the couple lost a total of $187,754, or an average of almost $25,000 annually.

Part of the Tax Court's job was to determine whether the Nissleys had engaged in the Amway business with the intention of making a profit. The court's determination? They did not. According to the Court:

"For purposes of deciding whether the taxpayer has the requisite profit objective, profit means economic profit, independent of tax savings."

In determining the profit motive, the Court took a number of factors into account, including the way the taxpayer conducted business, his expertise and the expertise of his advisors, time and effort expended, his profits (or losses), and "any elements indicating personal pleasure or recreation."

The court found several items of interest. First, although the couple are both CPAs and apparently successful in their profession, they relied entirely on upline advice when it came to managing their business and filing tax returns. They had no business plan, and did no normal business forecasting or budgeting.

"Although petitioners may have maintained a separate bank account and records for their Amway activity, such bank account and records appear to have been maintained principally to satisfy substantiation requirements imposed by the Internal Revenue Code and thus to 'guarantee' the deductibility of expenses.

". . . the history of consistent and substantial losses incurred by petitioners in their Amway activity is indicative of a lack of profit objective. . .

"In the present case, there is no persuasive evidence that petitioners will enjoy 'future net earnings', much less that petitioners will be able to recoup the substantial losses ($187,754 through 1998) 'which have meanwhile been sustained'. . .

"Moreover, petitioners did not maintain certain types of records, nor did petitioners employ certain elementary business practices that one would expect of individuals pursuing an activity with a profit objective."

And, as the Court rightly points out:

"Petitioners have steadfastly refused to seek counsel from disinterested third parties, even though the advice they have received from interested Amway individuals has done nothing to reverse petitioners' history of uninterrupted and substantial losses. Furthermore, the record suggests that the 'advice' petitioners received has consisted of little more than platitudes, generalities, and encouragement to 'stick with it'."

Finally, the Court determined that the Nissleys' Amway involvement was more in the nature of a social hobby than a business:

"Finally, this Court has observed that 'there are significant elements of personal pleasure attached to the activities of an Amway distributorship' and that 'an Amway distributorship presents taxpayers with opportunities to generate business deductions for essentially personal expenditures.'

"In the present case, the personal dimensions of petitioners' Amway activity indicate that such activity was not engaged in for profit. The fact that petitioners have 'no intentions of getting out of * * * Amway' underscores this conclusion.

"The record also suggests that Amway constitutes an important part of petitioners' social life."

The Court's inevitable conclusion:

"In view of the foregoing, we hold that petitioners are not entitled to deduct the losses from their Amway activity for the years in issue."

The Ogdens apparently falsfied their tax returns, neglecting to show their gross sales from their Amway business, but claiming deductions for mileage, training and motivation, attendance at functions, and other "standard" Amway activities and expenses.

"The parties stipulated that petitioners realized gross sales income of $43,575 in 1993, $66,276 in 1994, and $76,526 in 1995. Although Mr. Ogden and then petitioners did not report these gross sales on their returns, they did report them to Amway for bonus purposes. After reducing the gross sales income by the cost of the goods sold, the gross income of Mr. Ogden and then petitioners was $1,082 in 1993, $2,041 in 1994, and $5,290 in 1995. The net losses of Mr. Ogden and then petitioners were $20,250 in 1993, $19,652 in 1994, and $19,692 in 1995."

With job-related income of nearly $65,000 annually, the Ogdens "obviously benefited from the significant deductions they took as a result of the losses from their Amway activities. These losses amounted to about 64 percent of income in 1993 and about 30 percent of income in 1994 and 1995."

The tax court found that:

"The large volume of losses, which he used to offset about 64 percent of his income from other sources on his return for 1993, would have put an ordinary prudent taxpayer on notice that this activity was unlikely to produce a profit."

The Court concluded:

"Upon review of the facts and circumstances of this case, we find that petitioners are well-educated individuals with professional backgrounds. They entered into an Amway endeavor even though the Amway Business Review highlighted the fact that the average gross income for active distributors was $88. Petitioners consistently hid the fact that their losses were from an Amway entity. They continued this endeavor even though the result was years of substantial tax losses and years of substantial tax deductions. We were not satisfied with their purported record keeping or their testimony. We do not believe the aforesaid actions are the actions of reasonable and prudent persons. We sustain the section 6662(a) accuracy-related penalties for all 3 years in question."

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