Court Opinion

ID: 37412
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:52:47+00
Date Added: 2024-06-11T17:15:41.881881
License: Public Domain

United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
               IN THE UNITED STATES COURT OF APPEALS
                                                            December 3, 2004
                       FOR THE FIFTH CIRCUIT
                       _____________________             Charles R. Fulbruge III
                                                                 Clerk
                            No. 04-60171
                       _____________________

JORGE N. LOPEZ; VIVIAN LOPEZ,
                                         Petitioners - Appellants,

                                versus

COMMISSIONER OF INTERNAL REVENUE,

                                               Respondent - Appellee.

__________________________________________________________________

                    Appeal from the Decision
                of the United States Tax Court
                           No. 8612-01
_________________________________________________________________

Before KING, Chief Judge, JOLLY and DENNIS, Circuit Judges.

PER CURIAM:*

     Jorge N. Lopez and Vivian Lopez appeal, pro se, the United

States Tax Court’s determination of deficiencies in their federal

income taxes for the years 1998 and 1999.   On appeal, the Lopezes

argue:   that the tax court erred in failing to shift the burden of

proof of the deficiency to the Commissioner under 26 U.S.C. §

7491(a); that the tax court erred in holding that the Lopezes did

not have a profit motive sufficient to make their Amway activities

a trade or business under Internal Revenue Code § 162(a); and that

     *
       Pursuant to 5TH CIR. R. 47.5, the Court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
the tax court erred in calculating the amount of the deficiencies,

a point that the Commissioner concedes.

     We find no error in the tax court’s determination that the

Lopezes failed to meet the burden-shifting requirements in §

7491(a), and that the burden of proof properly remained on the

Lopezes.    Neither do we find error in the tax court’s holding that

the Lopezes’ Amway activities were not conducted for profit.

Finally, in accord with the Commissioner’s concession that an error

was made in computing the amount of the deficiencies, we must

remand     to    the   tax    court     for    recalculation   of     the   those

deficiencies.      Otherwise, we affirm the tax court’s decision.

                                          I

     In 1998 and 1999, the Lopezes were distributors for Amway, a

marketer    of    various    personal    and    household   products.       Amway

distributors       purchase     these     products    either    for     personal

consumption or for resale to customers or downline distributors.

For most distributors, gross income from Amway activities is based

on a combination of retail sales and performance bonuses.

     In their own Amway activities, which began in 1996, the

Lopezes sold products at cost to both their downline distributors

and their customers, which practice eliminated retail sales as a

source of gross income.        They chose instead to focus their efforts

on developing a network of downline distributors to generate

                                          2
performance bonuses.1       Relying on Amway brochures, the Lopezes

concluded that they would need to achieve and maintain a monthly

point value of 4,000 for their Amway activities to be profitable.

In 1998 and 1999, the Lopezes’ point value did not exceed 372

points in any month.

     The only advice they sought for their Amway activities was

from upline distributors, and when they received unsolicited advice

from their accountant, they disregarded it.            During the years in

question, Mr. Lopez was employed full-time as a petroleum engineer,

and Mrs. Lopez was a homemaker.

     The Lopezes timely filed federal income tax returns for both

years, citing business losses of $18,388 in 1998 and $18,360 in

1999.    The Commissioner disallowed the deduction of these expenses

after determining that the Lopezes’ Amway activities were not

entered into for profit.      The Commissioner further determined that

the improper deductions resulted in a deficiency in the Lopezes’

federal income taxes for 1998 and 1999. The Lopezes petitioned the

tax court for redetermination of the deficiency.

                                     II

     The tax court noted that the Commissioner’s determinations as

to a tax deficiency are presumptively correct, and the taxpayer

generally    bears   the   burden   of    proving   otherwise.   Welch   v.

     1
      The tax court noted that the Lopezes recruited downline
distributors largely from among their family and friends.

                                     3
Helvering, 290 U.S. 111, 115 (1933). Moreover, because the Lopezes

did not cooperate with the reasonable requests of the Commissioner

for pre-trial meetings and for documents to be used at trial, the

tax court held that the Lopezes did not satisfy the requirements

outlined in 26 U.S.C. § 7491(a), which shifts the burden of proof

to the Commissioner in some cases.

     The tax court ultimately was not persuaded that the Lopezes’

primary motive for conducting their Amway activities was for income

or profit.       It found that the conduct of their Amway activity

“virtually precluded any possibility of realizing a profit.”                    The

Lopezes’ lack of a business plan for recouping losses and achieving

profitable levels of activity indicated the absence of a profit

motive.    In the face of four consecutive years of losses, the

Lopezes still      did   not    change    their     approach   to   increase    the

likelihood of earning a profit.               The tax court further found that

the Lopezes did not conduct market research to help them assess the

potential profitability of their activities.              It also noted that,

although   the    Lopezes      had   no   prior    business    experience,     they

accepted the advice of upline distributors rather than seeking

advice from unbiased, independent business sources.                 The fact that

the Lopezes’ livelihood did not depend on the profitability of

their Amway activities also weighed against a finding of a profit

motive.    Finally, the court concluded that the Lopezes spent much

of their Amway-related time socializing with the family and friends

                                          4
they had recruited as downline distributors.           Finding that the

Lopezes did not meet their burden of proof as to their profit

motive, the tax court sustained the Commissioner’s assessment of

liability for the deficiency.

     The tax court also accepted the Commissioner’s calculation of

the amount of the deficiency.     The Commissioner now concedes that

this calculation was incorrect because it did not subtract the cost

of goods sold from gross receipts in determining the Lopezes’ gross

income.

                                  III

                                   A

     The Lopezes first argue that the tax court erred in failing to

shift the burden of proof to the Commissioner under 26 U.S.C. §

7491(a).   That statute provides for shifting the burden of proof

when the taxpayers have, inter alia, “cooperated with reasonable

requests   by    the   [Commissioner]   for    witnesses,   information,

documents, meetings, and interviews.”         26 U.S.C. § 7491(a)(2)(B).

The tax court refused to shift the burden of proof after finding

that the Lopezes did not cooperate with the Commissioner’s requests

for a pretrial meeting and for information about documents to be

used at trial.

     The Lopezes argue that their failure to cooperate fully was a

good faith mistake because they thought that, for a small tax case,

they were not required to meet with opposing attorneys in order to

                                   5
prepare for trial.   They also claim to have been under the mistaken

impression that, because theirs was a small tax case, they were not

required to provide the Commissioner with the documents they

intended to introduce into evidence before trial.       The record,

however, demonstrates that the Lopezes had ample notice of the

requirement for meeting with the Commissioner’s attorneys before

trial, and for providing documents to be introduced into evidence

to the opposition at least fifteen days before trial.   We thus find

no reversible error in the tax court’s conclusion that the Lopezes’

lack of cooperation with the Commissioner precluded shifting the

burden of proof to the Commissioner.

                                  B

     After determining that the burden of proof properly remained

with the Lopezes, the tax court held that the Lopezes’ Amway

activities were not a trade or business under § 162 of the Internal

Revenue Code (“IRC”) during the years at issue.      On appeal, the

Lopezes argue that this determination was clear error, and that

they did have a profit motive requisite for satisfying § 162(a).

     IRC § 162 allows deductions of ordinary and necessary expenses

if those expenses are incurred in the operation of a trade or

business.   Section 162(a) further notes that to be engaged in a

trade or business a taxpayer “must be involved in the activity with

continuity and regularity and ... the taxpayer’s primary purpose

for engaging in the activity must be for income or profit.”

                                  6
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).           Section 183

of the IRC provides that, in relation to an activity not engaged in

for profit, a taxpayer can take deductions which would be allowed

if the activity were engaged in for profit, but only to the extent

“that gross income derived from such activity for the taxable year

exceeds the deductions allowable.”          26 U.S.C. § 183(a).

     Courts inquiring into whether a profit motive exists usually

consider nine non-exclusive factors in the Treasury Regulations.

These factors are:     1)the extent to which the taxpayer carries out

the activity in a businesslike manner; 2) the expertise of the

taxpayer or his advisors; 3) the time and effort expended by the

taxpayer in carrying on the activity; 4) the expectation that

assets used in the activity may appreciate in value; 5) the success

of the taxpayer in other similar or dissimilar activities; 6) the

taxpayer’s   history    of   income   or     losses   attributable   to   the

activity; 7) the amount of occasional profits, if any, which are

earned; 8) the taxpayer’s financial status; and 9) any elements of

personal pleasure or recreation in the activity.             Treas. Reg. §

1.183-2(b)(1)-(9).     Courts give greater weight to these objective

factors than to the taxpayer’s statements regarding his or her

intent.   Westbrook v. Commissioner, 68 F.3d 868, 875 (5th Cir.

1995).

     Whether a profit motive exists is a finding of fact, which the

court reviews for clear error.            Ogden v. Commissioner, 244 F.3d

                                      7
970, 971 (5th Cir. 2001).       We find clear error when we are “left

with the definite and firm conviction that a mistake has been

made.”    Id.

     Here, the tax court correctly applied the factors set out in

the Treasury Regulations § 1.183-2(b)(1)-(9).           Although the record

shows that the tax court was not compelled by the facts to find

that the Lopezes lacked a profit motive, the Lopezes’ arguments do

not leave us with the “definite and firm conviction that a mistake

has been made.”       At best, the Lopezes have made arguments to show

that their Amway activities possibly had a profit motive.                Their

arguments do not show that the tax court clearly erred in viewing

the evidence differently and finding that their Amway activities

lacked the requisite profit motive.

     Indeed, ample evidence supports the tax court’s conclusion

that the Lopezes lacked a profit motive in conducting their Amway

activities.     The record supports the tax court’s findings that the

Lopezes    maintained     unbusinesslike     records,     continued     in   an

unprofitable endeavor without altering their methods for several

years,    did   not   depend   for   their   livelihood    on   their    Amway

activities, and spent much of their Amway-related time socializing

with family and friends.

     Having reviewed the record and the briefs, we see no clear

error in the tax court’s findings and conclusions and therefore

                                      8
AFFIRM its holding that the Lopezes did not have a profit motive

for their Amway activities as required by IRC § 162.

                                   C

     The Lopezes further argue that the tax court incorrectly

calculated their gross income for the relevant years by failing to

subtract the cost of goods sold from their total income.2          The

Commissioner    concedes   that   this   calculation   was   incorrect.

Accordingly, we will VACATE the calculation of the tax due for the

years 1998 and 1999.

                                  IV

     In sum, we AFFIRM the tax court’s determination that the

burden of proof remained with the Lopezes because the Lopezes did

not satisfy the requirements of 26 U.S.C. § 7491(a).     We AFFIRM the

tax court’s holding that the Lopezes lacked a profit motive in

their Amway activities.    We VACATE the tax court’s calculation of

the Lopezes’ gross income and REMAND this case to the tax court for

the limited purpose of recomputing the Lopezes’ federal income tax

deficiencies.

                   AFFIRMED in part, VACATED in part and REMANDED.

     2
       The Lopezes also argued in their brief that they were
entitled to deductions for charitable contributions. This argument
is precluded by the fact that their total itemized deductions were
less than the standard deduction in 1998 and 1999. Therefore, they
are not entitled to any additional deduction for their charitable
contributions.

                                   9