t c memo united_states tax_court jack b newhart petitioner v commissioner of internal revenue respondent docket no filed october richard c miller for petitioner kenneth p dale for respondent memorandum findings_of_fact and opinion chiechi judge respondent determined a deficiency in petitioner’s federal_income_tax tax for in the amount dollar_figure of - - the issues remaining for decision’ are ’ did petitioner materially participate in a certain business within the meaning of sec_469 we hold that he did not is petitioner entitled to deduct under sec_212 certain claimed expenses with respect to a rental property that he owned we hold that he is not findings_of_fact some of the facts have been stipulated and are so found at the time the petition was filed petitioner resided in redwood city california petitioner was a full-time_employee of scimed boston scientific corporation scimed a medical device corporation working to hours a day in that company’s sales operations the sales territory of petitioner who resided in foster city california foster city included california nevada and hawaii petitioner’s employment with scimed reguired him to travel an aggregate of about one week each month ‘computational issues also remain resolution of which flows automatically from our resolution of the issues that we address herein although not expressly stated except where needed for clarity our statement of issues findings_of_fact and opinion pertain to the year at issue unless otherwise indicated 7a1ll section references are to the internal_revenue_code in effect for the year at issue all rule references are to the tax_court rules_of_practice and procedure chicken bar during petitioner marc caplan mr caplan a friend of petitioner who lived in lake oswego oregon lake oswego and three other individuals incorporated chicken bar inc chicken bar under the laws of the state of oregon at all relevant times including chicken bar owned and operated a fast food restaurant chicken bar restaurant located in beaverton which is near portland at all relevant times including petitioner owned percent mr caplan owned percent and three other individuals owned the remaining percent of the stock of chicken bar the board_of directors of chicken bar consisted of five members two of whom were petitioner and mr caplan mr caplan was the president and petitioner was the secretary of chicken bar mr caplan as president had primary responsibility for the day-to-day management and operations of chicken bar including the chicken bar restaurant petitioner lake oswego is near portland oregon portland and beaverton oregon beaverton in addition to mr caplan petitioner had two or three other friends who lived in the portland area the bylaws of chicken bar provided in pertinent part that the business and affairs of the corporation shall be managed by a board_of directors who shall exercise or direct the exercise of all corporate powers ‘the bylaws of chicken bar provided in pertinent part that the president shall have general supervision direction continued q4e- as secretary had no responsibility for the day-to-day management and operations of chicken bar including the chicken bar restaurant ’ sometime during chicken bar hired a general manager continued and control of the business and affairs of the corporation he shall have the general powers and duties of management usually vested in the office of president of a corporation ‘article iii of the bylaws of chicken bar provided in pertinent part sec_4 secretary a the secretary shall keep or cause to be kept at the principal office or such other place as the board_of directors may order a book of minutes of all meetings of directors and shareholders showing the time and place of the meeting whether it was required by the bylaws of the corporation how authorized the notice given the names of those present at directors’ meetings and the proceedings thereof bob the secretary shall keep or cause to be kept at the principal office of the corporation’s transfer stock agent a share register or a duplicate share register showing the names of the shareholders and their addresses the number of shares held by each the numbers and dates of certificates issued for such shares and the number and date of cancellation of each certificate surrendered for cancellation c the secretary shall give or cause to be given such notice of the meetings of the shareholders and of the board_of directors as is required by the bylaws and shall have such other powers and perform such other duties as may be prescribed by the board_of directors or bylaws d the secretary shall be responsible for the funds of the corporation and have payments made only on the check of the corporation signed in the manner authorized by the board_of directors - - general manager who was to be directly responsible for planning and implementing its objective of opening three additional restaurants during dollar_figure was made available to the general manager in order to enable him to accomplish that objective through the efforts of the general manager sometime during a new corporation was organized which opened and operated a fast food restaurant in beaverton because the general manager exhausted the entire dollar_figure that had been made available to him in order to open only one restaurant in his services were terminated around date petitioner did not keep a contemporaneous log of any activities that he undertook with respect to the chicken bar business at a time or times not disclosed by credible_evidence in the record petitioner prepared a handwritten document entitled - chicken bar log book of time spent on chicken bar business document the document contains a series of entries’ consisting of very brief summaries of certain activities that petitioner claims he undertook with respect to the chicken bar business the respective dates on which petitioner claims he undertook those activities and the number of hours that he claims he spent on each such the record does not disclose the identities of the stockholders the officers and other employees of the corporation organized in the document contain sec_151 entries -- - activity the document does not indicate where petitioner claims he undertook the various activities listed in that document or whether petitioner was required to travel in order to perform any of those claimed activities the following chart shows the total number of hours listed in the document that petitioner contends he spent on certain types of activities claimed types of activities claimed total hours review of management files and responsibilities review of catering functions with local dollar_figure schools review of and or planning new busine sec_3_5 sites review of and or recommendations on employee hiring criteria and or employee pay scales review of and or recommendations on menu items and or pricing review of employee files review of and or drafting of budgets review of prospective purchase proposal sec_22 internet search for and or study of licensing information and or opportunities review of payroll report sec_28 review of past growth and or drafting of or review of projections relating to expansion discussions with mr caplan regarding franchising concepts and possibilitie sec_4 advertisements budgets and payroll licensing and franchising pro forma employee issues wages and payroll budget and menu item sec_4 financial report sec_3_5 current financial statu sec_4 budgets for and review of and or recommendations on budgets advertisement and media review and or study internet stock market search and or comparison analysis to chicken bar internet searches for and or study of franchising information and or opportunities internet searches for and or analysis of restaurant statistics review and analysis of financial reports total hours listed ‘the document does not show any number of hours for the entry relating to claimed discussions with mr caplan regarding budgets the document shows the total number of hours listed in that document as that total is wrong the following chart shows the total number of hours listed in the document that petitioner claims he spent on each day of the week on the activities listed in that document day of the week for total hours shown which entries were made for bach day of the week monday sec_36 tuesday sec_30 wednesday sec_29 thursdays friday sec_116 saturday sec_150 sunday sec_144 tacoma property petitioner owned certain rental real_property tacoma property located in tacoma washington tacoma a city in which various members of his family lived including his father jack e newhart his mother juanita demas his brother david newhart and his sister julie ayala stan cybaliski mr cybaliski managed the tacoma property on behalf of petitioner mr cybaliski was a property manager who worked for clover creek realty a real_estate company owned by roy burnsides as the property manager mr cybaliski was responsible for inter alia collecting the rent and soliciting bids when the tacoma property needed work petitioner paid approximately dollar_figure a month for the management of the tacoma property petitioner traveled at various times to portland and to tacoma petitioner’s trips to portland were usually made in combination with his trips to tacoma combination trips on his combination trips petitioner usually drove from his home in foster city to the airport in san francisco california san francisco flew from that airport to the portland airport rented a car drove to tacoma returned the rental car to portland flew from the portland airport to the san francisco airport and drove home to foster city a one-way trip from --- - petitioner’s home in foster city to portland took approximately three hours including ground transportation during at the recommendation of the revenue_agent examining petitioner’s tax_return return petitioner prepared a handwritten document entitled jack newhart travel log expenses document the document contains a series of entries consisting of very brief summaries of certain activities that petitioner claims he undertook with respect to both the chicken bar restaurant and the tacoma property the respective dates on which petitioner claims he undertook those activities and the respective locations at which petitioner claims such activities took place the document does not indicate the number of hours that petitioner claims he spent on the activities listed in that document petitioner paid the amounts indicated with respect to the following airplane flights from san francisco departure date destination amount portland dollar_figure portland portland seattle wash seattle portland portland portland portland portland portland total dollar_figure -- - petitioner paid the amounts indicated with respect to the following car rentals ’ location where date car was rented amount portland dollar_figure portland dollar_figure portland dollar_figure portland dollar_figure total dollar_figure petitioner paid the amounts indicated with respect to the following meals location where date meal took place amount dollar_figure dollar_figure tacoma dollar_figure tacoma dollar_figure dollar_figure dollar_figure dollar_figure tacoma dollar_figure dollar_figure total dollar_figure ‘there is no credible_evidence in the record disclosing the location at which the meal took place petitioner paid the amounts indicated with respect to the following hotel expenses mon date an individual identified as jack newhart rented a car in seattle and returned that car at the portland airport on date the total charges for that rental car were dollar_figure no credible_evidence in the record discloses whether the individual who rented the car over the period dec was jack b newhart petitioner in this case or jack e newhart his father location where date hotel was located amount lake oswego dollar_figure beaverton dollar_figure lake oswego dollar_figure lake oswego dollar_figure total dollar_figure petitioner paid the amounts indicated with respect to the following types of expenses type of location where date bxpense expense was paid amount parking san francisco sec_85 airport parking san francisco airport gasoline federal way wash federal way parking san francisco airport gasoline federal way parking san francisco airport total dollar_figure petitioner’s return for the year at issue petitioner timely filed form_1040 u s individual_income_tax_return for return the return included schedule e supplemental income and loss schedule e with respect to the tacoma property the schedule e reported rental income of dollar_figure and claimed rental expenses of dollar_figure which included dollar_figure of claimed travel_expenses petitioner’s claimed traveling expenses anda schedule e loss of dollar_figure -- on a date not disclosed by the record chicken bar an s_corporation issued petitioner schedule_k-1 shareholder’s share of income credits deductions etc for that schedule indicated inter alia that petitioner’s pro_rata share of chicken bar’s ordinary_loss from trade_or_business activities schedule_k-1 loss was dollar_figure on a date not disclosed by the record petitioner filed form 1040x amended u s individual_income_tax_return form 1040x for in form 1040x for petitioner claimed inter alia the schedule_k-1 loss of dollar_figure attributable to chicken bar and a refund of dollar_figure on date the internal_revenue_service sent petitioner a refund of dollar_figure with respect to his tax_year notice_of_deficiency in the notice_of_deficiency notice issued to petitioner for respondent determined inter alia to disallow dollar_figure of the dollar_figure schedule_k-1 loss that petitioner claimed in the form 1040xk on the ground that petitioner did not materially participate in the chicken bar business within the meaning of sec_469 respondent further determined to disallow petitioner’s claimed traveling expenses of dollar_figure on the ground that petitioner did not prove that the amount shown dollar_figure was a rental expense and b paid - - opinion petitioner bears the burden of showing error in the determinations in the notice that remain at issue see rule a 290_us_111 deductions are strictly a matter of legislative grace and petitioner bears the burden of proving that he is entitled to any deductions claimed 503_us_79 petitioner attempted to satisfy his burden_of_proof through his own testimony and certain documentary_evidence including the document the document and certain alleged receipts for a claimed car rental expense ' taxi expense and meal expenses ’ we found petitioner’s testimony to be questionable and not credible in certain material respects we also found the document ’ the document and the alleged car rental ‘petitioner relies on a receipt issued to jack newhart for a rental car expense incurred for the period dec see supra note 2petitioner relies on nine claimed meal receipts eight of those nine receipts consist of restaurant chits chits that were removed from certain restaurant bills and that were filled in by hand only four of those eight chits indicate the names of the restaurants at which petitioner contends he ate meals the cost of which he is claiming as rental expense deductions under sec_212 two of those four chits also indicate the locations of the restaurants petitioner indicated in his handwriting on each of the nine claimed meal receipts the individuals who he contends attended each of the meals in question and the purpose that he claims for each such meal petitioner’s handwriting on two of the claimed meal receipts indicates that his mother juanita demas attended the meals to which those receipts purportedly refer the document contains a series of entries claiming continued receipt taxi receipt and meal receipts to be questionable and not credible in this connection virtually all of that documentary_evidence was prepared by petitioner whose testimony we found to be questionable and not credible in certain material respects we found certain inconsistencies and or discrepancies between the document and the document and we found continued that petitioner spent a total of hours on certain activities with respect to the chicken bar business of those total claimed hours the document indicates that throughout petitioner allegedly spent hours on mondays hours on tuesdays hours on wednesdays hours on thursdays and hours on fridays or a total of hours on weekdays petitioner also claims in the document that during he spent a total of hours on weekend days in activities with respect to the chicken bar business petitioner testified that he spent between to hours a day or to hours each workweek working for scimed and that his employment with that company required him to travel an aggregate of about one week each month given that each workweek petitioner worked for scimed to hours a day and that he traveled for that company an aggregate of one week each month we find the total number of hours especially weekday hours shown in the document as hours that petitioner spent in undertaking activities with respect to the chicken bar business to be highly suspect many of the entries in the document contradict or otherwise appear to be inconsistent with the document by way of illustration the document contains an entry for date which indicates that petitioner spent hours studying and reviewing franchising information the document contains an entry for date which indicates that petitioner flew to portland and met with mr caplan to discuss the purchase of cooking pots and other equipment by way of further illustration the document contains an entry for date which indicates that petitioner spent hours reviewing new franchising ideas on the internet the document contains an entry for date which indicates that petitioner flew to portland met with mr caplan and attended an employee meeting another illustration relates to an entry in continued -- - certain of the entries in the document and the document with respect to the activities that petitioner claims he undertook and on the claimed meal receipts with respect to the purposes for which petitioner claims he incurred the meal expenses at issue to be vague and ambiguous ’ based on our evaluation of petitioner’s testimony and the documentary_evidence on which he relies we are not required to and we shall not rely on that evidence in determining whether petitioner has m4 continued the document for date which indicates that petitioner flew to portland for an emergency meeting w marc caplan to discuss firing of employee sic the document also lists date as possibly the date on which that alleged emergency meeting took place the document does not contain any entry for date or date asa final illustration the document contains an entry for date which indicates that petitioner flew to portland met with mr caplan drove to tacoma on date returned to portland on date and had another meeting with mr caplan the document contains no entries for any of the dates listed in the document on which petitioner claims he was meeting with mr caplan by way of illustration of the vague and ambiguous nature of some entries in the document a number of those entries claimed that petitioner undertook the following analyse sic national restaurant statistics from internet study review franchising from on internet internet---review national restaurant statistics to see how we compare look on internet for stock market data to compare---vs---our s study review text on franchising although petitioner testified about certain entries in the document as indicated above we found his testimony to be guestionable and not credible in certain material respects by way of illustration of the vague and ambiguous nature of some entries in the document and on the claimed meal receipts a number of those entries merely indicated that the purpose of certain claimed meetings and claimed meals was to discuss rental property or rental property issues -- - carried his burden of establishing error in respondent’s determinations with respect to the two issues that remain in this case chicken bar respondent determined to disallow dollar_figure of the dollar_figure loss that petitioner claimed with respect to chicken bar on the ground that respondent determined that petitioner did not materially participate in the chicken bar business within the meaning of sec_469 petitioner disagrees with respondent’s determination before turning to the specific contentions of the parties in support of their respective positions we shall set forth the general framework of sec_469 and the regulations thereunder pursuant to sec_469 a passive_activity_loss of an individual for the taxable_year is generally not allowed as a deduction for such year ’ for this purpose the passive_activity_loss for the taxable_year is generally the amount if any by which the passive_activity deductions for the taxable_year exceed the passive_activity_gross_income for such year sec_469 as pertinent here sec_469 defines the term passive_activity to include any activity which involves the conduct of ' n disallowed passive_activity_loss for a taxable_year is generally treated as a deduction allocable to a passive_activity for the next year sec_469 any trade_or_business and in which the taxpayer does not materially participate sec_469 for purposes of sec_469 the term trade_or_business is defined in sec_469 to include any activity in connection with a trade_or_business or any activity with respect to which expenses are allowable as a deduction under sec_212 sec_469 provides that generally an individual is to be treated as materially participating in an activity only if such individual is involved in the operations of the activity on a basis that is regular continuous and substantial congress expressly authorized the secretary_of_the_treasury to prescribe such regulations as may be necessary or appropriate to carry out the provisions of sec_469 including regulations that specify what constitutes material_participation sec_469 both temporary and final regulations relating to the meaning of the terms participation and material_participation have been promulgated under sec_469 with respect to the term participation final regulations issued under sec_469 provide that generally any work done by an individual without regard to the capacity in which the individual does the work in connection with an activity in which the individual owns an interest at the time the work is done shall be treated for purposes of this section as participation of the individual in the activity sec_1 income_tax regs temporary regulations issued under sec_469 provide certain -- - exceptions to that definition of participation as pertinent here sec_1_469-5t a temporary income_tax regs fed reg date provides that work done by an individual in such individual’s capacity as an investor in an activity 1s not to be treated as participation by the individual in the activity unless the individual is involved in the day-to- day management or operations of the activity for this purpose work done by an individual in such individual’s capacity as an investor in an activity includes studying and reviewing financial statements or reports on operations of the activity preparing or compiling summaries or analyses of the finances or operations of the activity for the individual’s own use and monitoring the finances or operations of the activity in a non-managerial capacity sec_1 5t f b temporary income_tax regs fed reg date temporary regulations relating to the meaning of the term material_participation in sec_469 provide that in general an individual shall be treated for purposes of sec_469 and the regulations thereunder as materially participating in an activity for the taxable_year if and only if-- the individual participates in the activity for more than hours during such year the individual’s participation in the activity for the taxable_year constitutes substantially_all of the participation in such activity of all individuals including individuals who are not owners of interests in the activity for such year the individual participates in the activity for more than hours during the taxable_year and such individual’s participation in the activity for the taxable_year is not less than the participation in the activity of any other individual including individuals who are not owners of interests in the activity for such year the activity is a significant_participation_activity within the meaning of paragraph c of this section for the taxable_year and the individual’s aggregate participation in all significant participation activities during such year exceeds hours the individual materially participated in the activity determined without regard to this paragraph a for any five taxable years whether or not consecutive during the ten taxable years that immediately precede the taxable_year the activity 1s a personal_service_activity within the meaning of paragraph d of this section and the individual materially participated in the activity for any three taxable years whether or not consecutive preceding the taxable_year or based on all of the facts and circumstances taking into account the rules in paragraph b of this section the individual participates in the activity on a regular continuous and substantial basis during such year sec_1_469-5t temporary income_tax regs fed reg date according to petitioner he is to be treated as having materially participated in the chicken bar business within the meaning of sec_469 because he satisfies both sec_1_469-5t and temporary income_tax regs fed reg - date ’ respondent counters that petitioner does not comply with either of those provisions of the temporary regulations and that consequently he is not to be treated as having materially participated in the chicken bar business within the meaning of sec_469 we turn first to sec_1_469-5t temporary income_tax regs fed reg date on which petitioner relies according to petitioner the document and his testimony establish that he spent hours on activities relating to the conduct of the chicken bar business and that all of those hours must be taken into account in determining whether he satisfies sec_1_469-5t temporary income regs fed reg date as we indicated above we shall not rely on that evidence in determining whether petitioner has carried his burden of establishing that he satisfies that temporary_regulation ’ on the record before us we find that petitioner does not rely on sec_1_469-5t or temporary income_tax regs fed reg date in support of his position that he is to be treated as having materially participated within the meaning of sec_469 in the chicken bar business 'spetitioner failed to call mr caplan the president of chicken bar who was involved in its day-to-day operations as a witness to corroborate petitioner’s position with respect to his claimed role in the chicken bar business we infer from petitioner’s failure to call mr caplan that his testimony would not have been favorable to petitioner’s position on the question of whether petitioner materially participated in the chicken bar business within the meaning of sec_469 and the regulations continued - petitioner has failed to carry his burden of proving that he is to be treated as having materially participated in the chicken bar business under sec_1_469-5t temporary income_tax regs fed reg date we turn next to sec_1_469-5t temporary income_tax regs fed reg date on which petitioner relies petitioner argues that in applying that temporary_regulation in this case we should disregard sec_1 5t b temporary income_tax regs fed reg date that is because according to petitioner that scontinued thereunder on which petitioner relies see 6_tc_1158 affd 162_f2d_513 10th cir assuming arguendo that we had found the document to be credible on the record before us we find that petitioner has failed to carry his burden of showing that many of the activities listed in that document constitute activities performed by him in his capacity as other than an investor see sec_1 5t f temporary income_tax regs fed reg date in this connection petitioner’s reliance on mordkin v commissioner tcmemo_1996_187 is misplaced mordkin is distinguishable from the instant case tn determining whether a taxpayer is to be treated as materially participating in an activity under sec_1 5t a temporary income_tax regs fed reg date sec_1_469-5t temporary income_tax regs fed reg date provides certain management activities an individual’s services performed in the management of an activity shall not be taken into account in determining whether such individual is treated as materially participating in such activity for the taxable_year continued -- - latter temporary_regulation is invalid in support of that position petitioner asserts that fed the regulation sec_1_469-5t temporary income_tax regs fed reg date too simplistically uses the word management without any attempt to actually look at the surrounding facts and circumstances the regulation provides that only one person can materially participate as a manager under the facts_and_circumstances_test the regulation’s test is two-fold no person is compensated and no other individual invests more hours in management of the activity this emasculates the regular continuous and substantial requirement we need not decide whether petitioner is correct in arguing sec_1_469-5t temporary income_tax regs reg date is invalid that is because on the record before us we find that without regard to that continued under paragraph a of this section unless for such taxable year--- a no person other than such individual who performs services in connection with the management of the activity receives compensation described in sec_911 a in consideration for such services and b no individual performs services in connection with the management of the activity that exceed by hours the amount of such services performed by such individual petitioner concedes on brief that if we were to find sec_1_469-5t temporary income_tax regs fed reg date to be valid he does not satisfy that temporary_regulation ias discussed above we did not find petitioner’s testimony and the document to be credible and we shall not rely on that evidence - - temporary_regulation petitioner has failed to carry his burden of showing that he participated in the chicken bar business on a regular continuous and substantial basis during the year at issue and that he should be treated as having materially participated in the chicken bar business under sec_1 5t a temporary income_tax regs fed reg date see sec_469 based on our examination of the entire record before us we find that petitioner has failed to carry his burden of establishing that he is to be treated as having materially participated in the chicken bar business within the meaning of sec_469 and the regulations thereunder on which he relies tacoma property respondent determined that petitioner is not entitled to deduct petitioner’s claimed traveling expenses of dollar_figure although not altogether clear petitioner appears to contend that not only is respondent’s determination wrong but he is entitled to deduct an additional dollar_figure of claimed traveling expenses with respect to the tacoma property or a total of dollar_figure -the parties stipulated and therefore respondent concedes that petitioner paid the following expenses continued -- - in support of respondent’s position that petitioner is not entitled to deduct any of the traveling expenses that petitioner claims with respect to the tacoma property respondent contends that petitioner failed to prove that those claimed expenses are ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income and or for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income under sec_212 and that petitioner complied with the substantiation requirements of sec_274 an individual is allowed a deduction for all the ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income and for the management_conservation_or_maintenance_of_property_held_for_the_production_of_income sec_212 and sec_274 operates to disallow any continued type of expense amount airplane flights dollar_figure car rentals dollar_figure meals dollar_figure parking dollar_figure hotels dollar_figure gasoline dollar_figure total dollar_figure in addition to the foregoing stipulated expenses that petitioner paid petitioner contends that he is entitled to deduct with respect to the tacoma property a car rental expense of dollar_figure and a taxi expense of dollar_figure both of which he claims he paid - - deduction otherwise allowable under sec_212 for any traveling expense including meals_and_lodging while away from home sec_274 and for any item with respect to an activity that is of a type generally considered to constitute inter alia entertainment such as a meal expense paid_by a taxpayer for a guest sec_274 unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the individual’s own statement the amount of such expense the time and the place of the travel and entertainment the business_purpose of the expense and the business relationship to the taxpayer of any person entertained rules for substantiation of each element of an expenditure for traveling and for entertainment are prescribed by sec_1_274-5t temporary income_tax regs fed reg date according to petitioner the document the claimed car rental receipt taxi receipt and meal receipts and his testimony establish that he is entitled under sec_212 to deduct the expenses at issue as we indicated above we shall not rely on that evidence in determining whether petitioner has carried his burden of establishing that he is entitled under sec_212 to deduct those expenses on the record before us we find that petitioner has failed to carry his burden of proving that the expenses at issue constitute ordinary and necessary expenses paid_or_incurred for the production_or_collection_of_income and or for - - the management_conservation_or_maintenance_of_property_held_for_the_production_of_income under sec_212 we further find on that record that petitioner has failed to carry his burden of establishing that he is entitled under sec_212 to deduct any of those claimed expenses we have considered all of the contentions and arguments of petitioner that are not discussed herein and we find them to be without merit and or irrelevant to reflect the foregoing and the concessions of the parties decision will be entered under rule assuming arguendo that we had found that petitioner had satisfied his burden of showing that he is entitled under sec_212 to deduct the expenses at issue on the record before us we find that petitioner has failed to satisfy his burden of showing that he complies with the substantiation requirements of sec_274 and and the regulations thereunder with respect to those expenses


internal_revenue_service number release date index number --------------------------------------------------------- ------------------------------------------------------ -------------------- -------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------ id no ------------------ telephone number --------------------- refer reply to cc ita b01 plr-113766-17 date date taxpayer ------------------------------------------------------------------------------- date1 date2 date3 date4 date5 date6 date7 date8 a b c d e f g h -------------------------- ----------------------- -------------------------- -------------------------- ------------------- ---------------------- ---------------------------- ------------------------ ------------------------- ------------------------------------------------------------------------ ------------------------------------------------------------- ---------------------------- --------------------------------------- ----------------------- ----------------------------------------------------------- --------------------------- dear this letter responds to your letter dated date submitted on behalf of taxpayer requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to make the election described in sec_4 of revproc_2011_29 2011_18_irb_746 which includes attaching statements to taxpayer’s original consolidated federal_income_tax return for short taxable_year ended date1 facts taxpayer is a corporation organized under the laws of a on date2 and was the parent of an affiliated_group_of_corporations that elected to join in the filing of consolidated plr-113766-17 federal_income_tax returns under sec_1_1502-75 of the income_tax regulations hereinafter collectively referred to as taxpayer’s consolidated_group the other members of taxpayer’s consolidated_group are b and c b is a corporation organized under the laws of d on date3 and c is a corporation organized under the laws of d on date4 each member of taxpayer’s consolidated_group has an annual_accounting_period ending date5 and uses an accrual_method as its overall_method_of_accounting for financial_accounting and federal_income_tax purposes taxpayer is a holding_company b owns and operates a paper mill in e c owns and operates a corrugated packaging facility in f on date1 g acquired all of the outstanding_stock of taxpayer hereinafter referred to as the transaction the transaction caused taxpayer’s consolidated_group to terminate as a result of g becoming the new parent_corporation also the transaction was a covered transaction described in sec_1_263_a_-5 during the short taxable_year ended date1 taxpayer paid_or_incurred success-based fees within the meaning of sec_1_263_a_-5 in connection with the transaction taxpayer engaged h a tax advisory and accounting firm to prepare and file both an extension of time to file taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 and taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 the unextended due_date for taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 was date6 prior to date6 h took steps in an attempt to electronically file the extension and believed that the extension was timely filed extending the due_date of taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 to date7 on or about date6 h notified taxpayer that the due_date of taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 had been extended to date7 on date7 taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 was electronically filed by h and accepted by the internal_revenue_service service taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 was filed on a basis consistent with the safe_harbor election described in sec_4 of revproc_2011_29 for success-based fees having been made on or about date8 taxpayer received a notice from the service notifying taxpayer of its assessment of a penalty for taxpayer’s failure to timely file forms information_return of u s persons with respect to certain foreign_corporations for the taxable_year ended date1 upon investigation h discovered that its attempt to electronically file the extension of time for taxpayer’s consolidated federal_income_tax return for the short plr-113766-17 taxable_year ended date1 was unsuccessful and as a result taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 was not timely filed thus since taxpayer’s consolidated federal_income_tax return for the short taxable_year ended date1 was not timely filed the safe_harbor election described in sec_4 of revproc_2011_29 for success-based fees associated with this tax_return was not timely filed law sec_263 of the internal_revenue_code and sec_1_263_a_-2 of the income_tax regulations provide that no deduction shall be allowed for any amount_paid out for property having a useful_life substantially beyond the taxable_year in the case of an acquisition or reorganization of a business_entity costs that are incurred in the process of acquisition and that produce significant long-term benefits must be capitalized 503_us_79 112_sct_1039 117_led_226 397_us_572 90_sct_1302 25_led_577 under sec_1_263_a_-5 a taxpayer must capitalize an amount_paid to facilitate the business acquisition or reorganization transactions described in sec_1_263_a_-5 in general an amount is paid to facilitate a transaction described in sec_1_263_a_-5 if the amount is paid in the process of investigating or otherwise pursuing the transaction whether an amount is paid in the process of investigating or otherwise pursuing the transaction is determined based on all of the facts and circumstances see sec_1_263_a_-5 sec_1_263_a_-5 provides that an amount_paid that is contingent on the successful closing of a transaction described in sec_1 a - a ie a success-based_fee is presumed to facilitate the transaction a taxpayer may rebut this presumption by maintaining sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction section dollar_figure of revproc_2011_29 provides a safe_harbor election for taxpayers that pay or incur success-based fees for services performed in the process of investigating or otherwise pursuing a covered transaction described in sec_1_263_a_-5 in lieu of maintaining the documentation required by sec_1_263_a_-5 a taxpayer may elect to allocate a success-based_fee between activities that facilitate the transaction and activities that do not facilitate the transaction and by treating percent of the amount of the success-based_fee as an amount that does not facilitate the transaction and by capitalizing the remaining percent as an amount that does facilitate the transaction in addition the taxpayer must attach a statement to its original federal_income_tax return for the taxable_year the success-based_fee is paid_or_incurred stating that the taxpayer is electing the safe_harbor identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized plr-113766-17 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make certain regulatory elections sec_301_9100-1 defines a regulatory election as an election whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government see also sec_301_9100-3 and c conclusion based solely on the facts and representations submitted we conclude that taxpayer acted reasonably and in good_faith and granting relief will not prejudice the interests of the government accordingly the requirements of sec_301_9100-1 and sec_301_9100-3 have been met taxpayer is granted an extension of days from the date of this ruling to file its mandatory statements as required by section dollar_figure of revproc_2011_29 stating that it is electing the safe_harbor for success-based fees identifying the transaction and stating the success-based_fee amounts that are deducted and capitalized the rulings contained in this letter are based upon information and representations submitted by taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter including whether taxpayer properly included the correct costs as success- based fees subject_to the retroactive election or whether taxpayer’s transactions were within the scope of revproc_2011_29 plr-113766-17 this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent a copy of this ruling should be attached to taxpayer’s federal tax returns for the tax_year s affected alternatively taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter_ruling in accordance with the provisions of the power_of_attorney currently on file with this office a copy of this letter is being sent to your authorized representative sincerely lewis k brickates lewis k brickates branch chief branch office of associate chief_counsel income_tax accounting cc


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc intl br1-plr-121723-02 date date taxpayer parent dear this is in response to a letter dated date requesting a ruling that premiums received by taxpayer on policies of insurance or reinsurance of u s risks are exempt from the insurance excise_tax imposed by sec_4371 pursuant to the united states-sweden income_tax convention treaty additional information was received in a letter dated date the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by or on behalf of taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party although this office has not verified any of the material submitted in support of the request for a ruling it is subject_to verification on examination taxpayer is an insurance_company organized in sweden taxpayer is wholly owned by parent also organized in sweden parent has only one class of stock and all of parent’s stock is traded on the stockholm fondbors the stockholm stock exchange taxpayer’s primary business during was to accept reinsurance business from parent this reinsurance business was derived mainly from risks insured by parent in sweden taxpayer now wishes to accept reinsurance_premium from risks located in the united_states plr-121723-02 taxpayer represents that not more than of its gross_income is used directly or indirectly to meet liabilities to persons not entitled to benefits under article a b e or f of the treaty the swedish tax authority has certified that taxpayer is resident in sweden within the meaning of the treaty sec_4371 imposes an excise_tax on premiums_paid on insurance policies issued to u s persons and covering risks wholly or partly within the united_states and to foreign persons engaged in a u s trade_or_business and covering risks within the united_states sec_4372 revproc_92_39 1992_1_cb_860 establishes procedures for entering into a closing_agreement to establish an exemption from the excise_tax imposed by sec_4371 when the exemption is claimed under a u s income_tax treaty paragraph a of article business profits of the treaty provides a the united_states tax on insurance premiums_paid to foreign insurers shall not be imposed on insurance and reinsurance premiums which are the receipts of a business of insurance carried on by a resident of sweden whether or not that business is carried on through a permanent_establishment in the united_states but only to the extent that the relevant risk is not reinsured directly or indirectly with a person not entitled to relief from such tax under article limitation_on_benefits of the treaty a person may qualify for benefits if an ownership test is met a person that is a resident of a contracting state and derives income from the other contracting state shall be entitled under this convention to relief from taxation in that other contracting state only if such person is d a person other than an individual if i more than percent of the beneficial_interest in such person or in the case of a company more than percent of the number of shares of each class of the company’s shares is owned directly or indirectly by persons entitled to benefits of this convention under subparagraphs a b e or f of this paragraph or who are citizens of the united_states and plr-121723-02 ii not more than percent of the gross_income of such person is used directly or indirectly to meet liabilities including liabilities for interest or royalties to persons who are not entitled to benefits of this convention under subparagraph a b e or f of this paragraph and are not citizens of the united_states article e referred to above in subparagraph d states that a person is entitled to benefits of the swedish convention if such a person is a company in whose principal class of shares there is substantial and regular trading on a recognized stock exchange article defines the term recognized stock exchange as a b c the nasdaq system owned by the national association of securities dealers inc and any stock exchange registered with the securities_and_exchange_commission as a national securities exchange for the purposes of the securities exchange act of the stockholm stock exchange stockholms fondbors and any other stock exchange agreed upon by the competent_authorities of the contracting states to satisfy the test under article e of the treaty there must be substantial and regular trading in a company’s stock the term substantial and regular trading is not defined in the treaty the senate foreign relations committee report or the treasury department’s technical explanation of the treaty however the senate foreign relations committee report describes article of the treaty as being similar to the limitation_on_benefits provisions in the code and regulations relating to the branch_profits_tax under sec_884 a publicly-traded corporation shall be treated as a qualified_resident of a treaty country if - i the stock of such corporation is primarily and regularly_traded on an established_securities_market in such country sec_1_884-5 of the regulations provides plr-121723-02 for purposes of this section stock of a corporation is regularly_traded on one or more established securities markets in the foreign corporation’s country of residence for the taxable_year if - a one or more classes of stock of the corporation that in the aggregate represent percent or more of the total combined voting power of all classes of stock of such corporation are listed on such market or markets during the taxable_year b with respect to each class relied on to meet the percent requirement of paragraph d i a of this section - trades in each such class are effected other than in de_minimis quantities on such market or markets on at least days during the taxable_year and the aggregate number of shares of each such class that is traded on such market or markets during the taxable_year is at least percent of the average number of shares outstanding in that class during the taxable_year or in the case of a short taxable_year a percentage that equals at least percent of the number of days in the short taxable_year divided by taxpayer represents that the trading on the highest trading days of the tax_year big_number of big_number approximately shares of parent stock were traded and of the outstanding_stock of parent was traded during the taxable_year taxpayer represents that not more than of its gross_income is used directly or indirectly to meet liabilities to persons not entitled to benefits under article a b e or f of the treaty on the basis of the information submitted by taxpayer for purposes of article e there was substantial and regular trading in the principal class of shares of parent which owns all of the stock of taxpayer therefore taxpayer satisfies the requirements of the limitation_on_benefits provisions of article according to paragraph a of the closing_agreement the liability of taxpayer for federal excise_tax as agreed upon including liability resulting from reinsurance of u s risks with persons not entitled to exemption under the treaty or another convention will commence on date the date specified by taxpayer the plr-121723-02 letter_of_credit required by paragraph a of the closing_agreement in the amount of dollar_figure must be in effect within days of the date the agreement is signed on behalf of the commissioner any person otherwise required to remit the federal excise_tax on foreign insurance or reinsurance policies issued by taxpayer pursuant to sec_46_4374-1 of the excise_tax regulations may rely upon a copy of this letter or an executed copy of the closing_agreement as authority that they may consider premiums_paid to taxpayer on and after date as exempt under the treaty from the federal excise_tax except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter this ruling does not address the issues of whether taxpayer is an insurance_company or whether premiums_paid to taxpayer are deductible under sec_162 this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to taxpayer sincerely _______________ w edward williams senior technical reviewer office of cc intl br1


t c memo united_states tax_court kenneth j nissley and terri c connor-nissley petitioners v commissioner of internal revenue respondent docket no filed date w curtis elliott jr william r culp jr and niles a elber for petitioners timothy s sinnott for respondent memorandum findings_of_fact and opinion armen special_trial_judge respondent determined deficiencies in petitioners’ federal income taxes for the taxable years and in the amounts of dollar_figure dollar_figure and dollar_figure respectively the issue for decision by the court is whether petitioners engaged in their amway activity for profit within the meaning of sec_183 we hold that they did not findings_of_fact some of the facts have been stipulated and they are so found petitioners resided in indianapolis indiana at the time that their petition was filed in this case petitioner husband mr nissley graduated in with a bachelor of science degree in accounting from manchester college in north manchester indiana he was licensed as a certified_public_accountant c p a in thereafter from through he worked as a staff auditor a senior auditor and ultimately as an audit manager for the big accounting firm of price waterhouse since date mr nissley has been employed on a full- time basis hours per week as the director of information systems and planning and procurement for creative expressions group inc of indianapolis indiana his salary for and was dollar_figure dollar_figure and dollar_figure respectively all section references are to the internal_revenue_code in effect for the taxable years in issue and all rule references are to the tax_court rules_of_practice and procedure all amounts are rounded to the nearest dollar petitioner wife mrs nissley graduated in with a bachelor of science degree in accounting from indiana university she was licensed as a c p a in upon graduating from college mrs nissley began employment with price waterhouse where she worked full time providing consulting services related to financial systems to fortune companies at the time that she resigned from the firm in she was a senior manager after her resignation from price waterhouse and through the middle of mrs nissley served as the director of information systems for administar information technologies of indianapolis indiana earning dollar_figure in thereafter through the end of mrs nissley was self-employed as a business consultant earning a net profit of dollar_figure based on gross_receipts of dollar_figure and total expenses of dollar_figure for that year her combined salary and net profit from self-employment in was dollar_figure in date mrs nissley obtained a full-time position as president and chief_executive_officer of pathway family center of southfield michigan pathway a nonprofit health-care organization dedicated to the treatment and prevention of substance abuse by adolescents mrs nissley continued to hold this position at the time of trial date her salary for and was dollar_figure per year during the years in issue petitioners operated an amway distributorship under the name of kt enterprises petitioners began their amway activity in may or date when they were recruited as downline distributors by an upline distributor at the time of trial petitioners were continuing to pursue their amway activity amway is a supplier of household and personal_use products that are sold by individuals distributors through direct marketing an amway distributor purchases amway products for resale to both customers and downline distributors as well as for personal_use at least in theory amway distributors generate receipts by selling amway products directly to customers and by recruiting new distributors the new recruits become downline distributors of the sponsoring distributor and a part of his or her organization the sponsoring distributor is referred to as the upline distributor in turn each downline distributor is encouraged to sponsor additional new distributors all of whom become a part of the initial distributor’s organization the process of recruiting new distributors is often referred to as pbuilding the legs of a distributor's network amway does not assign exclusive geographical territories to any distributor nor does amway impose a minimum sales quota on any distributor amway maintains a pyramid incentive system under this system an upline distributor receives a bonus based on the volume of sales generated by his or her downline distributors ’ thus the system presumes that the upline distributor’s potential for profit will increase as his or her network of downline distributors becomes wider and deeper because the upline distributor’s bonus is based on the volume of sales generated by downline distributors such bonus is not directly affected by a downline distributor’s profitability or lack of profitability the amway pyramid incentive system is promoted by amway in the form of the plan under the plan each amway distributor is encouraged to personally recruit downline distributors each of whom in turn is encouraged to recruit at least downline distributors each of whom in turn is encouraged to recruit at least downline distributors for a total of downline distributors in the initial distributor’s organization amway promotes the plan as the the upline distributor’s bonus is also based on the volume of sales generated by the upline distributor himself or herself however the volume of such sales is generally minimal and the portion of the bonus attributable to such sales is negligible the width of a network refers to the number of downline distributors that are personally sponsored by the distributor in guestion and length refers to the number of downline distributors that make up each leg of the network theoretical break-even point for a distributorship assuming that the distributor and each downline distributor within the distributor’s organization purchases dollar_figure of amway products per month and that the distributor does not have expenses exceeding dollar_figure per month at least in theory the potential for profit is enhanced as each of the downline distributors in the distributor’s network successfully implements the plan the amway plan does not provide meaningful guidance to distributors regarding how expenses_incurred in pursuing an amway activity might be reduced the structure of the amway pyramid incentive system effectively serves to discourage distributors from spending their time personally trying to sell amway products in contrast the system effectively serves to encourage distributors to spend their time trying to recruit an ever-increasing number of downline distributors petitioners themselves spent little time personally trying to sell amway products and concentrated instead on trying to recruit and retain downline distributors gross_income received by petitioners consisted principally of bonuses earned from the sale or personal consumption of amway products by downline distributors at the end of and petitioners had a total of and downline distributors respectively in their organization as amway distributors petitioners were entitled to purchase for their personal_use amway products at distributor’s cost without the customary 30-percent markup in and petitioners purchased amway products valued at dollar_figure dollar_figure and dollar_figure respectively for their personal_use since inception petitioners have treated their amway activity as a proprietorship on schedule c profit or loss from business of their federal_income_tax return petitioners describe their activity on schedule c as product distribution but do not identify the activity as an amway distributorship petitioners 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 following schedule reflects the losses claimed by petitioners from their amway activity on schedule c of their tax returns for through year net_loss part year sdollar_figure big_number big_number big_number big_number big_number big_number big_number dollar_figure at the time of trial date petitioners anticipated that for they would once again incur a loss from their amway activity petitioners determined their net losses from their amway activity on schedule c of their tax returns for through as follows gross_income s big_number dollar_figure dollar_figure s big_number less expenses incl home_office big_number big_number big_number big_number net_loss gross_income ’ less expenses incl home_office net_loss dollar_figure dollar_figure big_number dollar_figure dollar_figure big_number dollar_figure sdollar_figure big_number dollar_figure sdollar_figure dollar_figure dollar_figure dollar_figure dollar_figure ‘for petitioners gross_income was essentially the bonuses earned from the sale or personal consumption of amway products by downline distributors petitioners themselves sold relatively few amway products although they did order such products on behalf of downline distributors petitioners claimed expenses related to their amway activity on schedule c of their tax returns for through as follows bad_debts car expenses commissions fees interest_expense office expense repairs supplies travel meals entertainment utilities other expenses awards gifts books subscriptions tapes seminars use of home total expenses ‘net after percent reduction for percent reduction for per sec advertising car expenses commissions fees depreciation interest_expense legal professional office expense supplies travel meals entertainment other expenses books subscriptions tapes seminars uniforms use of home total expenses ‘net after percent reduction for per sec_274 dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number sdollar_figure dollar_figure big_number big_number big_number big_number --- big_number big_number big_number big_number --- big_number --- big_number big_number dollar_figure dollar_figure n dollar_figure dollar_figure big_number big_number big_number --- --- big_number big_number big_number big_number big_number big_number big_number big_number --- big_number big_number --- big_number ---- dollar_figure dollar_figure big_number dollar_figure and dollar_figure -- - for the years in issue petitioners claimed car expenses for a oldsmobile and or a bmw 535i based on claimed business miles driven petitioners reported business miles commuting miles and other mileage on schedule c of their tax returns for the years in issue as follows business miles big_number big_number big_number commuting big_number big_number big_number other big_number big_number big_number total big_number big_number big_number petitioners claimed deductions for the cost of attending amway conventions and seminars on a regular basis in cities such as new york denver atlanta orlando and minneapolis at the time that petitioners were recruited as amway distributors in mid-1991 they had no prior experience with the amway-type of activity since that time they have relied only on advice from one of their upline distributors and other interested amway individuals other than accepting the amway plan petitioners did not maintain a written business plan for their amway activity nor did they maintain a written budget for the activity petitioners did not prepare a break-even analysis for their amway activity nor did they maintain a monthly report of expenses_incurred in pursuing the activity a major reason why many individuals remain committed to amway is the congenial sense of family and the gratifying motivational feeling that they derive from participating in the activity petitioners have no intentions of getting out of amway opinion under sec_183 if an activity is not engaged in for profit then no deduction attributable to the activity shall be allowed except to the extent provided by sec_183 in pertinent part sec_183 allows deductions to the extent of gross_income derived from an activity that is not engaged in for profit sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 or under paragraph or of sec_212 deductions are allowable under sec_162 or under sec_212 or if the taxpayer is engaged in the activity with the actual and honest objective of making a profit 90_tc_74 78_tc_642 affd without opinion 702_f2d_1205 d c cir the existence of the requisite profit objective is a guestion of fact that must be decided on the basis of the entire record see 63_tc_375 in resolving this factual question greater weight is accorded objective facts than a taxpayer's statement of intent see 68_f3d_868 cir affg tcmemo_1993_634 sec_1_183-2 income_tax regs for purposes of deciding whether the taxpayer has the requisite profit objective profit means economic profit independent of tax savings see 81_tc_210 the taxpayer bears the burden of proving that he or she engaged in the activity with the objective of making a profit see rule a 503_us_79 290_us_111 90_tc_960 petitioners bear the burden of proving that they engaged in the amway distributorship with the intent to make a profit affd without published opinion 899_f2d_18 cir the regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists these factors are the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended by the taxpayer in carrying on the activity the expectation that the assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses with respect to the activity the amount of occasional profits if any which are earned the financial status of the taxpayer and any elements indicating personal pleasure or recreation see sec_1_183-2 income_tax regs no single factor nor even the existence of a majority of factors favoring or disfavoring the existence of a profit objective is controlling see id rather the relevant facts and circumstances of the case are determinative see 72_tc_411 affd without published opinion 647_f2d_170 9th cir based on all of the facts and circumstances in the present case we hold that petitioners have failed to prove that they engaged in their amway activity for profit within the meaning of sec_183 see rule a indopco inc v commissioner supra welch v helvering supra elliott v commissioner supra we will not analyze in depth all of the factors enumerated in the regulation but rather focus on some of the more important ones that inform our decision first the history of consistent and substantial losses_incurred by petitioners in their amway activity is indicative of a lack of profit objective see golanty v commissioner supra pincite sec_1_183-2 income_tax regs since the inception of their amway activity in mid-1991 petitioners have never earned a profit but have incurred losses for consecutive years indeed at the time of trial in date petitioners expected to incur another loss for what would be the ninth consecutive year moreover petitioners’ losses have been substantial in amount ranging between dollar_figure and dollar_figure for each of the years during which petitioners have conducted their amway activity for a full months indeed petitioners’ aggregate losses for the 2-year period from mid-1991 through amount to dollar_figure and average over dollar_figure on an adjusted annual basis further there has not been any significant trend discernible in the history of petitioners’ losses for through the taxable years in issue petitioners incurred losses of dollar_figure dollar_figure and dollar_figure respectively while it is true that petitioners’ losses have decreased since it is also true that a comparison of and demonstrates that petitioners’ gross_income decreased at a faster rate percent than did petitioners’ expenses percent the same is true when and are compared also relevant is the fact that the goal must be to realize a profit on the entire operation which presupposes not only future net_earnings but also sufficient net_earnings to recoup the losses which have meanwhile been sustained in the intervening -- - years 45_tc_261 affd 379_f2d_252 2d cir 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 dollar_figure through which have meanwhile been sustained second we are not convinced that petitioners conducted their amway activity in a businesslike manner see sec_1 b income_tax regs 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 in contrast such bank account and records do not appear to have been used as analytic or diagnostic tools in an effort to achieve profitability of petitioners’ amway activity as we have previously stated the keeping of books_and_records may represent nothing more than a conscious attention to detail in this case there has been no showing that books_and_records were kept for the purpose of cutting expenses increasing profits and evaluating the overall performance of the operation the petitioner reviewed her records but she has failed to show that she used them to improve the operation of the enterprise golanty v commissioner supra pincite 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 see ogden v commissioner tcmemo_1999_397 theisen v commissioner tcmemo_1997_ hart v commissioner tcmemo_1995_55 thus petitioners did not maintain any written business plan for their amway activity other than the amway plan further petitioners did not maintain either a written budget or a monthly report of expenses nor did petitioners prepare a break-even analysis also of significance is the fact that petitioners had no experience with the amway-type of activity prior to the time that they were recruited by an amway distributor see sec_1 b income_tax regs since that time petitioners have relied only on advice from one of their upline distributors and other interested amway individuals yet under the amway system the upline distributor’s bonus is not directly affected by the downline distributor’s profitability or lack of profitability rather it is the downline distributor’s volume of sales that 1s important to the upline distributor nevertheless petitioners have steadfastly refused to seek counsel from disinterested third parties regarding means by which their amway activity might be made profitable see poast v commissioner tcmemo_1994_399 for the most part petitioners’ advisers were not experts as much as they were upliners with a financial stake in petitioners’ retail and downline sales ogden v commissioner supra 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 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 also noteworthy is the fact that after her resignation from administar information technologies in mid-1994 mrs nissley was able to generate immediately a net profit as a self-employed business consultant earning dollar_figure based on gross_receipts of dollar_figure and total expenses of dollar_figure for the last months of by contrast in their amway activity petitioners have incurred nothing but substantial losses for consecutive years third sec_1_183-2 income_tax regs provides in part that substantial income from sources other than the activity particularly if the losses from the activity generate substantial tax benefits may indicate that the activity is not engaged in for profit especially if there are personal or -- - recreational elements involved golanty v commissioner t c pincite see ransom v commissioner tcmemo_1990_381 in the present case petitioners are well-educated professional individuals licensed as c p a ’s who earn substantial salaries from their full-time employment as demonstrated by the following table for the years in issue mr nissley s big_number s big_number s big_number mrs nissley big_number big_number total dollar_figure dollar_figure for and petitioners claimed losses from their amway activity in the amounts of dollar_figure dollar_figure and dollar_figure respectively petitioners used those losses to reduce their compensation and other income thereby decreasing their taxable_income and achieving substantial tax savings those tax savings helped to finance everyday expenses such as outlays for car and home for and petitioners deducted car expenses in the amounts of dollar_figure dollar_figure and dollar_figure respectively for each of the first two of those years the amount deducted for just this single expense exceeded petitioners’ reported gross_income from amway for the year for and petitioners also claimed deductions for use of home in the amounts of dollar_figure dollar_figure and dollar_figure respectively for they also claimed a deduction for utilities in the amount of dollar_figure for the sum of just these two deductions exceeded petitioners’ reported gross_income from amway for that year 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 brennan v commissioner tcmemo_1997_60 see also sec_1_183-2 income_tax regs cf sec_1_183-2 income_tax regs regarding the reference to personal or recreational elements quoted above 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 suggests that petitioners enjoy the same congenial sense of family and the same gratifying motivational feeling from participating in their amway activity as do many other individuals who remain committed to amway the record also suggests that amway constitutes an important part of petitioners’ social life in addition during the years in issue petitioners attended amway conventions and seminars on a regular basis in cities such moreover a taxpayer who intends to pursue an activity no matter what cannot be said to pursue the activity ina businesslike manner sec_1_183-2 income_tax regs discussed supra - - as new york denver atlanta orlando and minneapolis for the years in issue petitioners incurred expenses for travel meals and entertainment m e and seminars in the following amounts travel s big_number s big_number s big_number m e gross big_number big_number big_number seminars big_number big_number big_number total s_ big_number dollar_figure dollar_figure for and the total of just these amounts exceeds petitioners’ reported gross_income from amway for those years moreover petitioners received a personal benefit from their amway activity through the ability to purchase amway products for their own use at distributor’s cost without the customary percent markup in and petitioners purchased for their personal_use amway products valued at dollar_figure dollar_figure and dollar_figure respectively see ogden v commissioner tcmemo_1999_397 where the purchase of dollar_figure to dollar_figure worth of amway products per year for the taxpayers’ personal_use was regarded by the court as a factor supporting the conclusion that the taxpayers lacked a profit objective petitioners estimate that they devoted between and hours per week to their amway activity with mrs nissley spending to hours per week and mr nissley spending to hours per week petitioners contend that devoting so much time to their amway activity is indicative of a profit objective see sec_1_183-2 income_tax regs however we regard petitioners’ estimate as excessive see kropp v commissioner tcmemo_2000_148 as a trier of fact it is our duty to listen to the testimony observe the demeanor of the witnesses weigh the evidence and determine what we believe see also 87_tc_74 we are not required to accept the self-serving testimony of petitioner as gospel cf 58_tc_560 in any event many individuals devote considerable time to their hobbies and similar activities 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 however pursuant to the provisions of sec_183 petitioners are entitled to deduct expenses to the extent of gross_income from their amway activity we have carefully considered all of the contentions made by petitioners for a holding contrary to that expressed herein and to the extent not touched on above we find such contentions to be unpersuassive to give effect to the foregoing decision will be entered under to rule