Court Opinion

ID: 4339744
Source: CourtListenerOpinion
Date Created: 2018-11-14 07:52:13.258562+00
Date Added: 2024-06-11T14:21:00.412987
License: Public Domain

T.C. Summary Opinion 2014-40

                            UNITED STATES TAX COURT

            SAMER MIKHAIL AND MARIANA MIKHAIL, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 20199-12S.                            Filed April 22, 2014.

      Samer Mikhail and Mariana Mikhail, pro sese.

      William R. Brown, Jr., for respondent.

                                 SUMMARY OPINION

      GUY, Special Trial Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by

      1
          Unless otherwise indicated, section references are to the Internal Revenue
                                                                          (continued...)
                                         -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined a deficiency of $8,286 in petitioners’ Federal

income tax for 2009 and an accuracy-related penalty of $1,657 pursuant to section

6662(a). Petitioners, husband and wife, filed a timely petition for redetermination

with the Court pursuant to section 6213(a).

        The issues for decision are: (1) whether petitioners engaged in sales and

recruiting activities for profit within the meaning of section 183, (2) if so, whether

petitioners substantiated deductions they claimed for vehicle and travel expenses,

and (3) whether petitioners are liable for an accuracy-related penalty under section

6662(a). To the extent not discussed herein, other adjustments are computational

and flow from our decision in this case.

                                     Background

        Some of the facts have been stipulated and are so found. The stipulation of

facts and the accompanying exhibits are incorporated herein by this reference. At

the time the petition was filed, petitioners resided in Florida.

        1
       (...continued)
Code (Code), as amended and in effect for 2009, and Rule references are to the
Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.
                                       -3-

I. Petitioners

      Dr. Mikhail graduated from the New York College of Osteopathic Medicine

in 2004 and completed his medical residency at the University of South Florida in

2007. Since then, he has worked full time as a physician practicing internal

medicine at a hospital operated by the U.S. Department of Veterans Affairs in

Florida.

      The wages that Dr. Mikhail earns as a physician are petitioners’ primary

source of income. During 2007, the final year of his medical residency, Dr.

Mikhail earned $64,097. His wages during 2008, 2009, 2010, and 2011 were

$145,235, $157,621, $165,146, and $168,627, respectively.

      Mrs. Mikhail graduated from Baruch College in New York with a

bachelor’s degree in international marketing in 1999. She worked for Myers

International and later R.J. Reynolds in New York City between 1999 and 2003.

      Petitioners are the parents of two children, a son born in 2003 and a

daughter born in 2009. Since 2004, Mrs. Mikhail has had some short-term, part-

time jobs, but she has primarily been a homemaker.
                                        -4-

II. Amway

      Amway Corp. (Amway) is a supplier of household, cosmetic, and nutritional

products that are sold by individuals (distributors) through direct marketing.

Amway’s compensation of its distributors is based on the volume of the

distributors’ sales to customers and the volume of sales made by “downline”

distributors. Amway distributors are permitted to purchase Amway products for

personal consumption at a discounted price.

      Amway’s compensation system for distributors results in a pyramidlike

network of distributors. Under this system an “upline” or “sponsor” distributor is

encouraged to recruit new “downline” distributors to become part of his or her

organization. “Downline” distributors likewise are encouraged to recruit new

distributors who in turn become “legs” of the original “upline” distributor’s

organization. “Downline” distributors recruited by the same “upline” distributor

are referred to as “crossline” distributors. An “upline” distributor receives bonus

payments from Amway based on the volume of sales (as opposed to profits)

generated by the “downline” distributors who are part of his or her organization.2

      2
       See Nissley v. Commissioner, T.C. Memo. 2000-178, for a more complete
description of Amway’s compensation system.
                                        -5-

III. Petitioners’ Amway Activities

      Dr. Mikhail was recruited as an Amway distributor by his dentist in 2004,

and he began to operate a distributorship under the name “The Logos”. At the

time petitioners had no experience in direct marketing or operating a small

business.

      Dr. Mikhail testified that he conducted independent research to learn more

about Amway. He concluded that negative assessments about the Amway

business model are attributable to individuals “who did not follow the system”.

      Petitioners conducted their Amway activities in accordance with

instructions from their “upline” distributors, educational materials obtained from

an Amway-related educational system known as Leadership Team Development

(LTD),3 and information obtained while attending Amway seminars, workshops,

and conferences. Petitioners did not seek advice from disinterested professionals,

develop a business plan, prepare profit projections, or undertake any type of

market analysis.

      Petitioners attended weekly and monthly Amway meetings held locally and

elsewhere in Florida. During 2009 they attended five national Amway

      3
        LTD sells books and CDs that contain instruction and training for Amway
distributors.
                                        -6-

conferences most of which were held out of State. Petitioners also hosted some

weekly meetings for Amway distributors and recruits in their home. Petitioners

took trips to New York and Texas to discuss Amway with family and friends.

      Dr. Mikhail testified that the time he devotes to Amway activities is largely

directed at recruiting new distributors. He further testified that he usually spends

his lunch hour, as well as an hour or two after work, and approximately three

hours every weekend on Amway activities and that Amway is always “at the

forefront” of his mind. Dr. Mikhail spent more time on Amway activities than

Mrs. Mikhail.

      Mrs. Mikhail testified that she is responsible for bookkeeping, business

management, and organization of Amway parties and events. During 2009 she

maintained records of the couple’s Amway-related expenses including a mileage

log, a spreadsheet listing monthly expenses, and credit card statements.

Petitioners did not use their Amway records to prepare a formal budget or conduct

a break-even analysis.

      Petitioners sold Amway products to family members, close friends, and

coworkers. At the time of trial, petitioners had 22 customers who purchased

Amway products from them sporadically. Petitioners testified that approximately

70-75% of their Amway sales volume was attributable to products and services
                                       -7-

that they purchased for personal consumption such as food, diapers, clothing, and

household products. They also enjoyed Amway-related discounts on products and

services purchased from businesses and retailers such as Disney, Sony, Nike, and

Best Buy.

      Petitioners initially attempted to recruit family members and friends as

“downline” distributors but found that most of them were unable to “overcome

their life circumstances and continue to build Amway with us”. Petitioners later

altered their recruitment strategy by frequenting upscale restaurants and shopping

areas and striking up conversations with people they encountered with the aim of

identifying what they termed “learners”. Petitioners purchased books and CDs

from LTD and gave them to potential recruits.

      Although petitioners testified that they registered some “downline”

distributors along the way, by the end of 2008 they had no “downline”

distributors. Dr. Mikhail acknowledged that he was unable to spend sufficient

time on Amway activities while he was fulfilling his medical residency

requirements between 2004 and 2007. In 2009 petitioners recruited a “downline”

distributor who apparently began to register her own “downline” distributors

(thereby expanding petitioners’ organization).
                                        -8-

IV. Petitioners’ Amway Losses

      Petitioners filed joint Federal income tax returns for the years 2005 through

2011. Petitioners attached to each of those returns a Schedule C, Profit or Loss

From Business, identifying Dr. Mikhail as the “proprietor” of a “sales and

recruiting” business. As of the time of trial petitioners had never reported an

annual profit from their Amway activity. From 2005 to 2011 petitioners reported

cumulative net losses attributable to the Amway activity of $192,427 as follows:

                                     Gross
                     Tax year       receipts      Net loss
                        2005          $613       ($15,943)
                        2006          1,924       (20,136)
                        2007          3,725       (29,298)
                        2008          3,229       (41,598)
                        2009          4,811       (39,919)
                        2010          5,728       (38,825)
                        2011          9,459         (6,708)
                         Total      29,489       (192,427)

      Petitioners testified that they believed that they would eventually earn

profits from the Amway activity over the long run and that the activity would

provide financial benefits to their family for years to come. Petitioners further
                                         -9-

testified that the losses they have incurred will be offset by gains that they expect

to earn in 2014 and the years thereafter.

V. Petitioners’ 2009 Tax Return

      Petitioners timely filed a joint Federal income tax return for 2009 reporting

that Dr. Mikhail and Mrs. Mikhail earned wages of $157,621 and $419,

respectively. Petitioners attached to the return a Schedule C reporting gross

receipts of $4,811, expenses of $44,730, and a net loss of $39,919 in respect of the

Amway activity. Petitioners reported the following Amway-related expenses:

                            Item                     Amount

                    Vehicle                          $17,548
                    Legal/professional services        1,325
                    Office expenses                      248
                    Supplies1                         11,634
                    Travel                             8,003
                    Meals and entertainment               68
                    Other expenses                     5,904
                      Total                           44,730

                       1
                        This item represents the amount petitioners
                    paid to LTD for Amway training materials.

Petitioners reported total tax of $9,994 for 2009.
                                         - 10 -

VI. Notice of Deficiency and Increased Deficiency

      Respondent issued a notice of deficiency to petitioners disallowing the

deductions they claimed on Schedule C for vehicle and travel expenses for lack of

substantiation. Respondent determined a tax deficiency of $8,286 and an

accuracy-related penalty under section 6662(a).

      After filing an initial answer to the petition, respondent filed an amended

answer alleging that petitioners did not engage in the Amway activity with the

intent of earning a profit in 2009 and they are not entitled to deductions (in excess

of their gross receipts from the activity) in accordance with the provisions of

section 183. In conjunction with these allegations, respondent asserted that

petitioners are liable for an additional deficiency and an increased accuracy-related

penalty under section 6662(a).

VII. Tax Return Preparation

      Petitioners delivered their tax records for 2009 to Ron Hienstand, a certified

public accountant (C.P.A.), who has prepared their tax returns since 2008.

Mr. Hienstand prepared the return in accordance with petitioners’ tax records and

filed the return electronically. Petitioners testified that they relied on

Mr. Hienstand to properly prepare their return.
                                        - 11 -

                                     Discussion

      The Commissioner’s determination of a taxpayer’s liability in a notice of

deficiency normally is presumed correct, and the taxpayer bears the burden of

proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933). The Commissioner bears the burden of proof, however, in

respect of an increased deficiency. Rule 142(a)(1). As previously mentioned,

respondent filed an amended answer asserting that petitioners are liable for an

increased deficiency and accuracy-related penalty on the ground they did not

engage in the Amway activity with the requisite profit objective. Consequently,

respondent bears the burden of proof on that issue. See sec. 7491(a)(1) and (2);

Higbee v. Commissioner, 116 T.C. 438, 442-443 (2001).

I. Section 183

      Under section 183(a), if an activity is not engaged in for profit, then no

deduction attributable to that activity is allowed except to the extent provided by

section 183(b). In pertinent part, section 183(b) allows those deductions that

would have been allowable had the activity been engaged in for profit only to the

extent of gross income derived from the activity (reduced by deductions

attributable to the activity that are allowable without regard to whether the activity

was engaged in for profit).
                                        - 12 -

      Section 183(c) 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 section 162 or under paragraph (1) or (2) of section 212.” Deductions are

allowable under section 162 or under section 212(1) or (2) if the taxpayer is

engaged in the activity with the “actual and honest objective of making a profit”.

Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), aff’d without published

opinion, 702 F.2d 1205 (D.C. Cir. 1983); Golanty v. Commissioner, 72 T.C. 411,

426-427 (1979), aff’d without published opinion, 647 F.2d 170 (9th Cir. 1981).

      The existence of the requisite profit objective is a question of fact that must

be decided on the basis of the entire record. Elliott v. Commissioner, 84 T.C. 227,

236 (1985), aff’d without published opinion, 782 F.2d 1027 (3d Cir. 1986);

Dreicer v. Commissioner, 78 T.C. at 645; sec. 1.183-2(b), Income Tax Regs. In

resolving this factual question, greater weight is given to objective facts than to a

taxpayer’s statement of intent. See Westbrook v. Commissioner, 68 F.3d 868,

875-876 (5th Cir. 1995), aff’g T.C. Memo. 1993-634; sec. 1.183-2(a), Income Tax

Regs. For purposes of deciding whether the taxpayer has the requisite profit

objective, profit means economic profit, independent of tax savings. Surloff v.

Commissioner, 81 T.C. 210, 233 (1983).
                                         - 13 -

      The regulations set forth a nonexhaustive list of factors that may be

considered in deciding whether a profit objective exists. These 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 the assets used in the activity may

appreciate in value;4 (5) the taxpayer’s success 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 are earned; (8) the

financial status of the taxpayer; and (9) any elements indicating personal pleasure

or recreation. Sec. 1.183-2(b), Income Tax Regs.

      No single factor, nor even the existence of a majority of factors supporting

or rebutting the existence of a profit objective, is controlling. Id. Rather, all facts

and circumstances with respect to the activity are to be taken into account.

Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b), Income Tax Regs.

      A. Manner in Which Petitioners Carried On the Amway Activity

      If a taxpayer carries on the activity in a businesslike manner and maintains

complete and accurate books and records, it may indicate a profit objective. Sec.

      4
       Petitioners did not identify any assets used in the Amway activity that they
expected to appreciate in value. Thus, this factor is not relevant to our analysis.
                                         - 14 -

1.183-2(b)(1), Income Tax Regs. However, if there is a lack of evidence that the

taxpayer’s records were used to improve the performance of a losing operation,

such records generally do not indicate a profit objective. Golanty v.

Commissioner, 72 T.C. at 430; see Campbell v. Commissioner, T.C. Memo. 2011-

42, 2011 WL 667973, at *5-*6. Keeping records only for purposes of preparing

tax returns is not indicative of a profit objective. See Rowden v. Commissioner,

T.C. Memo. 2009-41; Kinney v. Commissioner, T.C. Memo. 2008-287.

      Although petitioners kept records of their Amway expenses, they did not

use those records to analyze their business performance or to prepare profit

projections, a break-even analysis, or a formal budget. Despite several years of

activity during which they realized cumulative net losses of $192,427, petitioners

failed to make any meaningful change in their strategy or tactics in an effort to

increase the likelihood of earning a profit. On this record, it is a fair inference that

petitioners used their records only to compute the amounts of losses attributable to

the Amway activity when preparing their tax returns. Considering all the facts and

circumstances, we conclude that petitioners did not conduct the Amway activity in

a businesslike manner.
                                        - 15 -

      B. Expertise of Petitioners or Their Advisers

      Preparation for the activity by extensive study of its accepted business

practices, or consultation with those who are expert therein, may indicate a profit

objective where the taxpayer carries on the activity in accordance with such

practices. Sec. 1.183-2(b)(2), Income Tax Regs. Petitioners had no experience in

direct marketing activities or operating a small business before Dr. Mikhail was

recruited as an Amway distributor in 2004. Petitioners obtained advice only from

“upline” distributors--persons who had a direct financial interest in the

maximization of petitioners’ sales volume, without regard to whether they would

realize a profit. See Ogden v. Commissioner, T.C. Memo. 1999-397 (Amway

“upline” distributors’ advice may be biased because of financial interest in

“downline” distributor’s sales volume), aff’d, 244 F.3d 970 (5th Cir. 2001).

Moreover, considering their lack of expertise, we find it noteworthy that

petitioners did not attempt to educate themselves by conducting an independent

market analysis or drafting a business plan for the Amway activity. This factor

weighs against petitioners.
                                        - 16 -

      C. The Time and Effort Expended by Petitioners in Carrying On
         the Activity

       The fact that the taxpayer devotes substantial time and effort to carrying on

an activity may indicate an intention to derive a profit. Sec. 1.183-2(b)(3), Income

Tax Regs. Petitioners attended local Amway meetings weekly and monthly, and

they attended Amway conferences (often out of State) regularly. Nevertheless,

Dr. Mikhail candidly admitted that he was not able to devote sufficient time and

effort to the Amway activity during 2004 to 2007--the period of his medical

residency. As we see it, he likewise was not able to devote sufficient time to the

activity after 2007 taking into account his obligations as a full-time physician.

Petitioners acknowledged that Dr. Mikhail spent more time on the activity than

Mrs. Mikhail. Under the circumstances, we conclude petitioners did not spend a

significant amount of time on the Amway activity. See Kinney v. Commissioner,

T.C. Memo. 2008-287. This factor weighs against petitioners.

      D. Petitioners’ Success in Carrying Out Other Similar or Dissimilar
         Activities

      The fact that the taxpayer has engaged in similar activities in the past and

converted them from unprofitable to profitable enterprises may indicate that the

activity in question was engaged in for profit, even though the activity is presently

unprofitable. Sec. 1.183-2(b)(5), Income Tax Regs. Petitioners had no prior
                                         - 17 -

experience engaging in a direct marketing distributorship or managing a small

business of any sort. This factor weighs against petitioners.

      E. Petitioners’ History of Income or Loss

       A series of losses during the initial or startup stage of an activity may not

necessarily be an indication that the activity is not engaged in for profit. Sec.

1.183-2(b)(6), Income Tax Regs.; see Golanty v. Commissioner, 72 T.C. at 427.

However, where losses continue to be sustained beyond the period which

customarily is necessary to bring the operation to profitable status, such continued

losses, if not explainable, may indicate that the activity is not engaged in for profit.

Sec. 1.183-2(b)(6), Income Tax Regs. 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.” Bessenyey v. Commissioner, 45 T.C. 261, 273-274 (1965),

aff’d, 379 F.2d 252 (2d Cir. 1967); see also Nissley v. Commissioner, T.C. Memo.

2000-178.

      At the time of trial petitioners had never reported an annual profit in respect

of the Amway activity. To the contrary, they reported cumulative net losses of

$192,427 from 2005 through 2011. The modest gross receipts that petitioners

derived from the activity have been eclipsed by the substantial expenses they
                                         - 18 -

incurred over the years. Although petitioners testified that they believe the

Amway activity will eventually generate profits, we cannot discern on this record

any definitive trend to the upside for petitioners, and there certainly is no

indication that they are on their way to the level of profitability that would allow

them to recoup the substantial cumulative losses they have incurred to date. In

sum, petitioners’ history of consistent and substantial losses is indicative of a lack

of profit objective. See Golanty v. Commissioner, 72 T.C. at 427; Ogden v.

Commissioner, T.C. Memo. 1999-397. This factor weighs against petitioners.

      F. Occasional Profits

      The amount of profits in relation to the amount of losses incurred, and in

relation to the amount of the taxpayer’s investment and the value of the assets used

in the activity, may provide useful criteria in determining the taxpayer’s intent.

Sec. 1.183-2(b)(7), Income Tax Regs. As discussed above, petitioners’ Amway

activity has produced little in the way of annual receipts and no profits and

resulted in a sustained pattern of substantial losses. Petitioners’ inability to earn a

profit is indicative of their lack of profit motive. See Golanty v. Commissioner, 72

T.C. at 427; Nissley v. Commissioner, T.C. Memo. 2000-178. This factor weighs

against petitioners.
                                         - 19 -

      G. Petitioners’ Financial Status

      The fact that the taxpayer does not have substantial income or capital from

sources other than the activity may indicate that an activity is engaged in for

profit. Sec. 1.183-2(b)(8), Income Tax Regs. 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.

Id.

      Dr. Mikhail is a successful physician, and his wages are the primary source

of petitioners’ income. During 2007, the final year of his residency, he earned

wages of $64,097. During 2008, 2009, 2010, and 2011 his wages increased to

$145,235, $157,621, $165,146, and $168,627 respectively. The losses that

petitioners have claimed from the Amway activity served to offset substantial

amounts of Dr. Mikhail’s wages, decreasing petitioners’ taxable income and

achieving substantial tax savings. This factor weighs against petitioners.

      H. Elements of Personal Pleasure or Recreation

      The presence of personal motives in carrying on an activity may indicate

that the activity is not engaged in for profit, especially where there are elements of

recreation or personal pleasure. Sec. 1.183-2(b)(9), Income Tax Regs.
                                       - 20 -

      We have previously 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’” Campbell v.

Commissioner, T.C. Memo. 2011-42 (quoting Brennan v. Commissioner, T.C.

Memo. 1997-60).

      The record shows that petitioners used their Amway distributorship as a

means to generate deductions for essentially personal expenditures and to enjoy

discounts on items they purchased for personal consumption. The availability of

consumer product discounts for personal use merchandise is a factor supporting

the conclusion that petitioners lacked a profit objective. See Campbell v.

Commissioner, T.C. Memo. 2011-42; Nissley v. Commissioner, T.C. Memo.

2000-178; Ogden v. Commissioner, T.C. Memo. 1999-397.

      We also note that petitioners (1) traveled together to attend Amway

seminars and conferences in various cities, (2) took trips to New York and Texas

to discuss Amway with family and friends, and (3) hosted meetings that had a

social component. All things considered, we conclude that petitioners derived

personal benefits and pleasure from the Amway activity. This factor weighs

against petitioners.
                                        - 21 -

      I. Conclusion

      Considering all the facts and circumstances, we hold that petitioners did not

conduct the Amway activity in a businesslike manner and respondent has

demonstrated by a preponderance of the evidence that they did not engage in the

activity with the requisite profit objective during the taxable year 2009.

Consequently, we sustain respondent’s assertion, set forth in his amendment to

answer, that petitioners are not entitled to a deduction for the net loss of $39,919

that they reported on Schedule C in respect of the Amway activity for 2009.

II. Accuracy-Related Penalty

      Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of the

amount of any underpayment of tax that is attributable to: (1) negligence or

disregard of rules or regulations or (2) any substantial understatement of income

tax. The term “negligence” includes any failure to make a reasonable attempt to

comply with tax laws, and “disregard” includes any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c). An understatement

means the excess of the amount of the tax required to be shown on the return over

the amount of the tax imposed which is shown on the return, reduced by any

rebate. Sec. 6662(d)(2)(A). An understatement is substantial in the case of an

individual if the amount of the understatement for the taxable year exceeds the
                                       - 22 -

greater of 10% of the tax required to be shown on the return or $5,000. Sec.

6662(d)(1)(A).

      Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty if the taxpayer establishes that there was reasonable cause for, and

the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-

4(a), Income Tax Regs. The determination of whether the taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs. Reliance on a tax professional may demonstrate that the taxpayer had

reasonable cause and acted in good faith where the taxpayer establishes that

(1) the adviser was a competent professional with sufficient expertise to justify the

taxpayer’s reliance, (2) the taxpayer provided the adviser with necessary and

accurate information, and (3) the taxpayer actually relied in good faith on the

adviser’s judgment. 3K Inv. Partners v. Commissioner, 133 T.C. 112, 117 (2009);

DeCleene v. Commissioner, 115 T.C. 457, 477 (2000).

      With respect to an individual taxpayer’s liability for any penalty, section

7491(c) places on the Commissioner the burden of production, thereby requiring

the Commissioner to come forward with sufficient evidence indicating that it is

appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. at 446-447.
                                        - 23 -

Once the Commissioner meets his burden of production, the taxpayer must come

forward with persuasive evidence that the Commissioner’s determination is

incorrect. Id. at 447; see Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

Respondent has discharged his burden of production under section 7491(c) by

showing that petitioners had a substantial understatement of income tax for 2009

within the meaning of section 6662(d)(1)(A).5

      Before filing their tax return for 2009, petitioners had claimed deductions in

respect of losses attributable to the Amway activity for several years without

challenge by the Internal Revenue Service. Petitioners maintained records of their

annual Amway-related expenses and, on this record, we cannot say that those

records were incomplete, inaccurate, or in any way misleading. Petitioners relied

on Mr. Hienstand, a C.P.A., to prepare a complete and correct return for the year

in issue. Considering all the facts and circumstances, we conclude that there was

reasonable cause for, and petitioners acted in good faith with respect to, the

underpayment. Sec. 1.6664-4(a), Income Tax Regs. Consequently, we hold that

petitioners are not liable for an accuracy-related penalty for 2009.

      5
       Respondent originally determined a deficiency of $8,286 for the year in
issue--an amount that exceeds 10% of the tax required to be shown on the return.
The understatement of income tax attributable to the disallowance of a deduction
equal to petitioners’ net loss from the Amway activity for 2009 will exceed the
original deficiency amount.
                            - 24 -

To reflect the foregoing,

                                     Decision will be entered

                            under Rule 155.