The opinion
T.C. Summary Opinion 2005-187
UNITED STATES TAX COURT
LANG HER AND KA MOUA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 636-04S. Filed December 27, 2005.
Lang Her and Ka Moua, pro se.
George W. Bezold and Mark J. Miller, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 of the Internal Revenue Code
in effect at the time the petition was filed. The decision to be
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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entered is not reviewable by any other court, and this opinion
should not be cited as authority.
Respondent determined deficiencies of $10,696 and $9,657 in
petitioners’ 2000 and 2001 Federal income taxes, respectively.
After concessions by the parties,2 the issue is whether
petitioners are entitled to deduct certain business expenses on
Schedule C, Profit or Loss From Business, for an activity
participated in by petitioner Lang Her (petitioner) for the years
in issue. At the time the petition was filed petitioners resided
in Brown Deer, Wisconsin.
Background
In 1995, Michael C. Cooper (Mr. Cooper) founded and
incorporated a multilevel marketing company called Renaissance,
The Tax People, Inc.3 (Renaissance) in the State of Nevada, which
was operated out of Topeka, Kansas. At its core, Renaissance was
a pyramid scheme.4 Its only product, the “Tax Advantage System”
2
In a stipulation of settled issues, respondent conceded
that petitioners are entitled to a Schedule C expense for
supplies of $1,330 for the 2001 taxable year. In a stipulation
of facts, petitioners conceded that they are not entitled to a
dependency exemption deduction for petitioner Lang Her’s father
for either the 2000 or 2001 taxable year.
3
Also known as RTTP; TheTaxPeople.net; Advantage
International Marketing; AIM; and Renaissance Designer Gallery
Products, Inc.
4
A pyramid scheme is an investment program designed such
that early investors are paid off with money paid into the
program by later investors to encourage yet more and bigger
(continued...)
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or “The Tax Relief System”, was a fraudulent “home-based”
business package designed to sell tax deductions of personal
expenses through misleading representations regarding tax return
preparation, tax advice, and alleged audit protection. Those who
purchased this product were called Independent Marketing
Associates (IMA). IMAs earned commissions by recruiting others
to join Renaissance.
Renaissance was an illegal pyramid scheme and in 2001 was
permanently enjoined from conducting business and selling its
product. Mr. Cooper and other Renaissance leaders currently face
Federal criminal charges including conspiracy to defraud the
Internal Revenue Service, assisting in the preparation of false
tax returns, mail fraud, wire fraud, and money laundering, all
stemming from their involvement in Renaissance. Petitioner does
not dispute these facts.
Petitioner operated his own insurance business as a sole
proprietor, and petitioner Ka Moua worked as a secretary for a
healthcare corporation.5 Petitioner became involved with
Renaissance as an IMA in 1999, and continued his relationship
4
(...continued)
investments. The plan will succeed until the amount of money
going out of the program to payoff early investors exceeds the
amount of funds coming into the program from later investors, at
which time the entire program will collapse.
5
Petitioner Ka Moua was not involved with the
Renaissance activity.
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with Renaissance in 2000 and 2001. His involvement in
Renaissance ended sometime in November 2001.
During his first year with Renaissance, petitioner drove his
personal automobile to St. Paul, Minnesota, twice a month for
training. By the second year, he traveled to Minnesota once a
month. As he began to recruit new members, petitioner had
meetings once every 2 weeks in his home.6 The meetings were held
in the basement of petitioners’ home which was furnished with a
conference table, a telephone, a computer, and a freestanding
chart board. The basement was not used by petitioners for
anything other than Renaissance meetings.
On Schedules C petitioners claimed deductions for business
expenses totaling $79,676 and $54,182 for 2000 and 2001,
respectively, for petitioner’s insurance business activity. No
Schedule C for either year was filed for expenses relating to the
Renaissance activities, rather the expenses for Renaissance were
commingled with the insurance business expenses. Both returns
were prepared by a tax return preparer referred to petitioners by
Renaissance.
6
Petitioner claims to have had approximately 33 of his
own Renaissance recruits.
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Respondent determined that various expenses were not
substantiated, were not shown to be ordinary and necessary to
petitioner’s business, or were personal in nature and therefore
not deductible.
Discussion
Section 162 allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business if
the taxpayer maintains records or other proof sufficient to
substantiate the expenses.7 Secs. 162(a), 6001; sec. 1.6001-
1(a), Income Tax Regs. To be engaged in a trade or business the
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. Sec. 162; see
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987); Antonides v.
Commissioner, 893 F.2d 656, 659 (4th Cir. 1990), affg. 91 T.C.
686 (1988).
Renaissance has been found to be an illegal pyramid scheme
that offered no product or service other than the dissemination
of fraudulent tax advice. The parties have stipulated the
deductions claimed with regard to the Renaissance activity;
however, respondent contends that the Renaissance activity was
not a trade or business.
7
Sec. 7491(a), concerning burden of proof, is not
applicable here because petitioners have not satisfied the
substantiation requirements. Sec. 7491(a)(2)(A).
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It is dubious at best to say that petitioner’s participation
in this pyramid scheme was conducted with the continuity and
regularity of a trade or business, and that the claimed expenses
were ordinary and necessary for the production of income. His
Renaissance activities did not go beyond attending a meeting once
a month and holding a meeting once every 2 weeks at his home.
There is nothing in the record that provides a connection between
the deductions claimed and a trade or business.
But, even if the Renaissance activity was a trade or
business, petitioners face other problems. First, many of
petitioner’s claimed business expenses included family medical
bills, clothing, and home mortgage interest.8 “It is a
fundamental policy of Federal income tax law that a taxpayer
should not be entitled to a deduction for ‘personal’ expenses,
such as the ordinary expenses of everyday living.” Dobra v.
Commissioner, 111 T.C. 339, 348 (1998); see sec. 262(a). The
introductory materials of Renaissance’s The Tax Relief System
blatantly state that the taxpayer can convert “former ordinary
home expenses into substantial business tax deductions
immediately.”9
8
Deductions for home mortgage interest were allowed as
itemized deductions on Schedule A, Itemized Deductions.
9
In Rev. Rul. 2004-32, 2004-12 I.R.B. 621, the Internal
Revenue Service addressed home-based business schemes similar to
Renaissance:
(continued...)
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Second, we note that irrespective whether the Renaissance
activity was a trade or business, the disallowed travel and car
expenses were not substantiated as required by sections 274(d)
and 280F(d)(4) applicable to so-called listed property including
passenger automobiles. See sec. 1.274-5T, Temporary Income Tax
Regs., 50 Fed. Reg. 46037 (Nov. 6, 1985). Petitioner’s travel
and car expenses were related to the use of his personal
automobile. Petitioner has no records pertaining to the use of
his automobile for the Renaissance activity.
Third, with respect to the disallowed expenses relating to
the insurance business activity, petitioner lacked substantiation
9
(...continued)
Taxpayers participating in home-based business
schemes invariably do not have a bona fide home-based
business and are not using any portion of their
residences exclusively and regularly for a work-related
use. These schemes will not convert otherwise
nondeductible personal, living or family expenses into
legitimate deductions. Moreover, detailed
recordkeeping cannot create a permissible deduction
unless the expenses at issue are legitimate business
expenses. Although deductions must be substantiated in
order to be allowable, a taxpayer also must establish
entitlement to the deduction, e.g., that the claimed
expenses were ordinary and necessary for the production
of income in a trade or business.
Revenue rulings do not have the force of law and are merely
statements of the Commissioner’s litigating and administrative
position. Dixon v. United States, 381 U.S. 68, 73 (1965).
They are not binding on courts, see, e.g., Stubbs, Overbeck &
Associates v. United States, 445 F.2d 1142, 1146-1147 (5th Cir.
1971), but may be helpful and persuasive, Twin Oaks Cmty., Inc.
v. Commissioner, 87 T.C. 1233, 1252 (1986).
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and had difficulty explaining how various items appearing on the
Schedules C were incurred. For example, on the 2000 and 2001 tax
returns petitioner deducted $12,864 and $6,000, respectively, for
wages, but he had no evidence to substantiate these expenses. Of
the total disallowed expenses relating to the insurance business
activity, the parties stipulated that petitioner was entitled to
a deduction of $1,330 for supplies for 2001. With the exception
of the agreed item, respondent’s disallowance of the claimed
expenses on both the 2000 and 2001 Schedule C is sustained.
Furthermore, generally no deductions are allowed with
respect to the use of a dwelling unit which is used by the
taxpayer as a residence. Sec. 280A(a). A taxpayer may be
excepted from this general rule if a portion of the dwelling unit
is exclusively used on a regular basis “as the principal place of
business for any trade or business of the taxpayer”. Sec.
280A(c)(1)(A).
Even assuming that petitioner’s Renaissance activities were
those of a trade or business and that petitioner’s basement was
used as the principal place of business, expenses incurred for
incidental or occasional use of a home office are not deductible.
See, e.g., Cally v. Commissioner, T.C. Memo. 1983-203; Roth v.
Commissioner, T.C. Memo. 1981-699. Petitioners’ basement was
allegedly used for meetings only once every 2 weeks during the
second year of petitioner’s involvement with Renaissance. From
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this record, it does not appear that petitioner devoted
substantial time and energy to any business activity that
involved the regular use of his basement. Petitioners have not
established that the exception to section 280A(a) applies, and
respondent’s disallowance of the deductions for utilities and
other expenses claimed for the home office is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.