Rubin v. Commissioner
This text of 1989 T.C. Memo. 290 (Rubin v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS,
| Taxable Year | Deficiency |
| 1981 | $ 2,627.66 |
| 1982 | 3,121.68 |
| 1983 | 2,632.00 |
| 1984 | 1,008.00 |
By motion to amend the answer to conform to the proof at trial, respondent seeks additional deficiencies in petitioners' Federal income taxes as follows:
| Additional | Total Original and | |
| Taxable Year | Deficiency | Additional Deficiency |
| 1981 | $ 395.00 | $ 3,022.66 |
| 1982 | 291.00 | 3,412.68 |
| 1983 | 4,257.91 | 6,889.91 |
| 1984 | 5,040.25 | 6,048.25 |
*292 After concessions, the issues for decision are (1) whether petitioners' Amway products distributorship activity constituted a trade or business or an "activity not engaged in for profit" within the meaning of
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by reference.
Petitioners, Peter S. Rubin ("Mr. Rubin") and Gail A. Rubin ("Mrs. Rubin"), are husband and wife who resided in Cherry Hill, New Jersey, when their petition was filed.
On their tax returns for the taxable years in issue, Mr. Rubin's occupation was reported as "sales" or "sales management," and Mrs. Rubin's occupation was reported as "real estate broker."
Throughout all of taxable years 1981 and*293 1982 and during part of taxable year 1983, Mr. Rubin was employed by various transportation equipment leasing companies. From May 1983 through February 1985, he was not employed full-time by any one of those companies, but he earned substantial brokerage fees and finders fees from Interstate Truck Sales. During that period, he also began installing security alarm systems. In February 1985, Mr. Rubin became a new and used car sales manager at Charles Oldsmobile. Mrs. Rubin maintained full-time employment as a broker for Maffucci Realty, Inc., during the years in issue.
For each of the taxable years in issue, petitioners filed with their Federal income tax return a Schedule C bearing the name "GPR Associates." From taxable year 1981 through taxable year 1984, petitioners claimed losses from GPR Associates on the Schedules C as follows:
| Taxable Year | Loss |
| 1981 | $ 8,276.00 |
| 1982 | 7,595.05 |
| 1983 | 8,588.00 |
| 1984 | 3,204.00 |
The "Main Business Activity" and "Product" spaces on the GPR Associates Schedule C for the taxable years in issue were filled in as follows:
| Taxable Year | Main Business Activity | Product | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1981 | Distributor | Amway | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1982 | Distributor | Varied-Amway | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1983 | Marketing and Motivation | Free access — add to your briefcase to read the full text and ask questions with AI PETER S. RUBIN AND GAIL A. RUBIN, Petitioners Rubin v. Commissioner Docket No. 17490-86. T.C. Memo 1989-290; 1989 Tax Ct. Memo LEXIS 290; 57 T.C.M. (CCH) 706; T.C.M. (RIA) 89290; Peter S. Rubin, pro se. WELLS MEMORANDUM FINDINGS OF FACT AND OPINION WELLS,
By motion to amend the answer to conform to the proof at trial, respondent seeks additional deficiencies in petitioners' Federal income taxes as follows:
*292 After concessions, the issues for decision are (1) whether petitioners' Amway products distributorship activity constituted a trade or business or an "activity not engaged in for profit" within the meaning of FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by reference. Petitioners, Peter S. Rubin ("Mr. Rubin") and Gail A. Rubin ("Mrs. Rubin"), are husband and wife who resided in Cherry Hill, New Jersey, when their petition was filed. On their tax returns for the taxable years in issue, Mr. Rubin's occupation was reported as "sales" or "sales management," and Mrs. Rubin's occupation was reported as "real estate broker." Throughout all of taxable years 1981 and*293 1982 and during part of taxable year 1983, Mr. Rubin was employed by various transportation equipment leasing companies. From May 1983 through February 1985, he was not employed full-time by any one of those companies, but he earned substantial brokerage fees and finders fees from Interstate Truck Sales. During that period, he also began installing security alarm systems. In February 1985, Mr. Rubin became a new and used car sales manager at Charles Oldsmobile. Mrs. Rubin maintained full-time employment as a broker for Maffucci Realty, Inc., during the years in issue. For each of the taxable years in issue, petitioners filed with their Federal income tax return a Schedule C bearing the name "GPR Associates." From taxable year 1981 through taxable year 1984, petitioners claimed losses from GPR Associates on the Schedules C as follows:
The "Main Business Activity" and "Product" spaces on the GPR Associates Schedule C for the taxable years in issue were filled in as follows:
*294 Mrs. Rubin had become an Amway distributor in July 1981. Mr. Rubin became an Amway distributor in May or June of 1984. For the taxable years in issue, petitioners' combined gross incomes, excluding unemployment compensation, unearned income, and the Amway products distributorship activity, were as follows:
Mr. Rubin also collected unemployment compensation in the amounts of $ 5,116 and $ 1,414 during taxable years 1983 and 1984, respectively. For taxable years 1981 through 1984, petitioners' Amway products distributorship activity, distinguishing between alarm and non-alarm sales, is summarized as follows:
Petitioners maintained no ledgers in connection with their Amway product distributorship activity during the taxable years in issue. At the end of each of the years in issue, petitioners merely added the amounts of their checks, invoices, receipts, and Amway order forms for purposes of reporting income and expenses on the Schedule C of their tax return. Petitioners' expenditures for their Amway products distributorship activity were made from their personal checking accounts until 1984, when they opened a separate checking account for such expenditures. Petitioners maintained diaries showing the names of individuals with whom petitioners shared the Amway sales and marketing plan. Petitioners' diaries generally, however, do not include entries which reflect the time, place, or business purpose of any meetings with or entertainment of individuals named in the diaries. Furthermore, the diaries do not reflect the business relationship of any of those individuals to petitioners. Petitioners deducted $ 2,686*296 for cash payments made to their children during 1981, and reflected those amounts as "commissions" on their GPR Associates Schedule C for 1981. Petitioners maintained no records in support of that deduction. Petitioners claimed deductions on their Schedules C for telephone expenses. Petitioners computed their telephone expenses by subtracting the basic monthly charge for telephone service from their telephone bill and claiming the balance as a deduction. Petitioners made no further computations to account for long distance charges relating to any personal usage. Petitioners claimed deductions for storage and a home office on their Schedules C for the years in issue. The amounts claimed by petitioners represent the expenses associated with one room, or approximately one-eighth, of their personal residence during the years in issue. Petitioners claimed travel and entertainment deductions for the cost paid for numerous meals during the taxable years in issue. Such expenditures included the cost of food when Mr. Rubin dined alone in local restaurants and fast food establishments. During taxable years 1981 through 1983 and part of taxable year 1984, petitioners maintained little*297 or no inventory of Amway products, but they did maintain Amway pamphlets and tapes. Petitioners made no written projections for profit, loss, or break-even with regard to the Amway products distributorship activity during the taxable years in issue. Petitioners measured their profit potential by the number of individuals recruited as distributors. Petitioners often gave complimentary Amway products to individuals with whom they discussed Amway, but they kept no record of the items given away or to whom they were given. Petitioners sponsored 13 individuals who became Amway distributors from 1981 through the date of trial. Promotional literature provided to prospective Amway distributors states that an individual does not need special skills to engage in an Amway products distributorship activity and that a distributor could achieve financial independence in two to five years. In addition, Mr. Rubin told prospective distributors that it takes ten to fifteen hours per week over a three to five year period to become successful in an Amway products distribution activity. The Amway promotional literature claims that distributors potentially could save $ 1,500 or $ 2,000 per year*298 on items used personally. Amway distributors are able to purchase products from their "up-line distributors" with an average discount of about 30 percent from the suggested retail price. Gross income for Amway distributors is based on retail sales and performance bonuses. Points leading to performance bonuses are based on both retail sales and personal consumption of the Amway products. During the years in issue, petitioners sold $ 2,988 of Amway non-alarm products at retail and used $ 9,477 of Amway products for personal use. According to surveys performed for Amway, the average monthly gross income (retail margin plus performance bonus) for "active" distributors was $ 67 for the period surveyed February 1980 through January 1981, and $ 76 for the period surveyed May 1984 through April 1985. An "active" Amway distributor is defined in those surveys as one who has paid his annual $ 15 renewal fee and attempted to make a retail sale, presented the Sales and Marketing Plan, received bonus money, or attended a company or distributorship meeting in the month surveyed. During the periods of those surveys, 38 to 40 percent of all Amway distributors were defined as "active." Respondent*299 filed a motion subsequent to the trial of the instant case to amend his answer to conform to the proof. Respondent's motion states that he was misled by petitioner's presentation of all income and expenses from three separate activities in one combined GPR Associates Schedule C for taxable years 1983 and 1984. Respondent asserts that such a presentation led to the erroneous disallowance of only the net combined losses of the three activities, instead of disallowance of the loss from each unprofitable activity without offset for the amount of profits from each profitable activity. Respondent also alleges that the notices of deficiency for taxable years 1981 and 1982 erroneously disallowed only the expenses portion of petitioners' net Schedule C losses for those years, without disallowing the excess of cost of goods sold over gross receipts. Accordingly, respondent asserts that the full amount of the claimed losses for the years 1981 through 1984 ($ 8,276.00, $ 7,595.05, $ 18,555.00, and $ 15,099.00, respectively) should be disallowed under OPINION Respondent contends that Petitioners contend that they commenced and continued their Amway products distributorship activity with the requisite profit objective. Thus, petitioners argue, *301 We must decide whether Thus, Whether petitioners had the requisite intent is an issue of fact to be resolved on the basis of all of the facts and circumstances. Petitioners bear the burden of proof. Rule 142(a); *303 The expertise of petitioners and their advisors is a factor in deciding whether profit objective is present. Petitioners were experienced sales persons, and we normally might consider such expertise a factor in petitioners' favor. Mr. Rubin, however, testified that such skills are actually detrimental to a successful Amway products distributorship. In either event, we do not consider petitioners' other sales expertise as a significant factor in our decision. We also consider the time and effort expended by petitioners in carrying on the activity. The financial status of petitioners is also relevant. Further, petitioners offered no evidence that any assets used in the activity were expected to*306 appreciate ( Another factor listed in the regulations is the element of personal pleasure or recreation involved in the activity. The manner in which petitioners carried on their Amway products distributorship activity ( In the instant case, petitioners' records consisted primarily of cancelled checks from their personal checking account, loose invoices, credit card receipts, Amway order forms, and entries in diaries, none of which ever was recorded in ledgers. Those documents were summarized only at the end of each year for the purpose of transcribing the information onto petitioners' tax return for that taxable year. During the taxable years at issue, petitioners kept no record of how much product was sold, *309 given away, or used personally. Moreover, petitioners had no summaries or reports to evaluate the success or failure of their efforts during the year. Although Mr. Rubin testified that he had numerous meetings with prospective customers or distributors, petitioners kept no written account of the nature and results of their meetings, the strategies and sales methods used during these meetings, or whether any methods implemented had been successful. Petitioners' diaries contain little more than names of individuals whose association with petitioners generally cannot be determined from the evidence contained in the record. Further, petitioners offered no corroborating evidence that would show the purpose and nature of the numerous out-of-town seminars which they attended. As an excuse for the manner in which their Amway products distributorship activity was conducted, petitioners assert that they lacked the necessary knowledge during the early years of their distributorship activity. They argue that as their experience progressed over the years, they kept better records. While we accept that petitioners lacked knowledge of Amway procedures when they first became involved with*310 Amway, we do not believe they lacked the level of business sophistication necessary to keep proper records. Because petitioners were experienced salespersons when they first entered into the Amway products distributorship activity, we decline to accept petitioners' excuse. Their experience with their other businesses should have taught petitioners the importance of recordkeeping. The regulations also state that "a change of operating methods * * * or abandonment of unprofitable methods in a manner consistent with an intent to improve profitability may also indicate a profit motive." In short, we agree with respondent that "petitioners maintained records in much the same fashion as that described by the Court as 'cursory and sloppy' in Based upon the foregoing, we find that petitioners have failed to prove that their Amway products distribution activity was entered into with the requisite objective of making a profit. We hold that petitioners therefore are liable for the deficiencies determined by respondent in the notices of deficiency. *312 We next must decide whether respondent may amend his answer in the instant case to seek increased deficiencies. Respondent first raised the issue of the increased deficiencies in his motion to amend the answer to conform to the proof at trial. Respondent contends that petitioners, on their tax returns, offset the deductions from their Amway product distributorship activity against substantial other income not related to that activity. Respondent argues that he has raised no new theory of liability in the instant case, but merely seeks additional deficiencies from petitioners because income allegedly unrelated to the Amway products distributorship activity was combined with and erroneously offset by deductions from the Amway products distributorship activity that otherwise would not be allowable under In response to respondent's motion, petitioners argue that they would be prejudiced if respondent were allowed to amend his answer after the trial because they would not have the opportunity to offer evidence on the issue of whether the income shown and deductions taken on the Schedules C were related to not just one, but a number of activities. Respondent replies*313 that there is no element of surprise with respect to the amendment because much of the evidence upon which he relies in his motion is contained in the stipulation of facts, which was "the product of conferences between the parties." We do not agree with respondent's argument. It is evident that respondent possessed the evidence prior to trial, given his assertion that the stipulations upon which he now relies were the product of pre-trial conferences between the parties. We believe that the proper time for respondent to have moved to amend the answer was before the trial. Inasmuch as respondent's trial memorandum and opening statement make no mention of the additional deficiencies, it is clear that he did not raise the matter before trial, even though the evidence upon which respondent relies was in his possession. Respondent also relies on Because petitioners were not given notice of respondent's new theory, they were denied the opportunity to prepare their case for trial on that theory. We conclude that to allow respondent's amendment would prejudice petitioners and violate fundamental fairness. Footnotes
RelatedWelch v. Helvering 290 U.S. 111 (Supreme Court, 1933) E.A. Brannen and Frances K. Brannen v. Commissioner of Internal Revenue 722 F.2d 695 (Eleventh Circuit, 1984) Ross Glove Co. v. Commissioner 60 T.C. No. 63 (U.S. Tax Court, 1973) Benz v. Commissioner 63 T.C. 375 (U.S. Tax Court, 1974) Estate of Mandels v. Commissioner 64 T.C. 61 (U.S. Tax Court, 1975) Markwardt v. Commissioner 64 T.C. 989 (U.S. Tax Court, 1975) Allen v. Commissioner 72 T.C. 28 (U.S. Tax Court, 1979) Golanty v. Commissioner 72 T.C. 411 (U.S. Tax Court, 1979) Engdahl v. Commissioner 72 T.C. 659 (U.S. Tax Court, 1979) Brannen v. Commissioner 78 T.C. No. 33 (U.S. Tax Court, 1982) Dreicer v. Commissioner 78 T.C. No. 44 (U.S. Tax Court, 1982) Elliott v. Commissioner 84 T.C. No. 18 (U.S. Tax Court, 1985) Abramson v. Commissioner 86 T.C. No. 23 (U.S. Tax Court, 1986) Elliott v. Commissioner 90 T.C. No. 63 (U.S. Tax Court, 1988)
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