Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42
The Amway distributorship system is well known to respondent and this Court
Friscia Construction, Inc., et al. v. Commissioner, TC Memo 2000-192
I included the Campbell case in one of my group posts. It concerned someone whose Amway activities were considered a hobby by the Tax Court denying them deductions for losses. That portion of the post was picked up by someone who calls himself Joecool and posted on his blog under the title "Do IBO's have a clue about business?". I found that there are quite a few blogs dedicated to pointing out the downside of the Amway experience including Married To An Ambot by Anna Banana :
My story of what its like to be married to an Amway cult follower. I expose the lies that our upline told and what happens at Amway meetings and functions. I leave the explanations of why Amway is a poor business opportunity or the tool scam to other bloggers. This blog mainly exists to curse out my former upline, aka the cult leaders, and to let everyone know what kind of idiots I had to put up with. Feel free to join in or live vicariously.
Come on Anna, stop holding back. Tell us how you really feel.
So I got motivated to look at what was in the database I prowl for my little tax jewels had on Amway. As the above quote from Friscia Construction indicates, there is quite a bit. "The Court" is the Tax Court. "Respondent" is the IRS (In all Tax Court cases the taxpayer is "The Petitioner" and IRS is "The Respondent"). Friscia Construction is unusual among the cases I found. It is about the IRS challenging the deductions of a profitable Amway distributor.
Although originally focused on soap, Amway sells a variety of household products through its multi-level marketing system. In case you have never been invited to an Amway presentation or, more likely, didn't go when you were invited, the emphasis is not so much on the products or even selling the products. It's about getting other people to sell the product, who in turn get other people and so on with you sitting at the top of your pyramid (only they make it real clear its not a pyramid).
Bloggers like Joecool and Anna Banana claim that there are very few people who make money at it. Those that do probably don't make as much as they claim, since those in the "upline" need to paint a glowing picture to motivate the "downline" IBO's (Independent Business Owners). Further, the bloggers claim that most of the soap and other stuff is actually bought by the IBO's themselves. Finally, the "upline Diamonds" make most of their money from selling "tools" (i.e. motivational tapes and the like) to the downline.
The other attraction of Amway to some people is that it might allow them to deduct as business expenses things like cars, part of their home or entertainment that they would have spent anyway. That's probably the aspect of Amway that the IRS finds most interesting. Joecool did a post on how some IBO's think of their income tax refunds (generated by Amway losses sheltering other income) as profit.
To me the most interesting thing that I found in my search is this excerpt from the Internal Revenue Manual for examiners who are doing information requests:
.188.8.131.52 — Amway Corporation
[Last Revised: 12-10-2007]
(1) Amway Corporation has waived the hand delivery requirements of 26 USC §7603 and will accept summonses by personal service, mail, or overnight service at Amway Corporation, 7575 E. Fulton, Ada, MI 49355, Attn.: Director, Legal Division. Direct distributors who further qualify for profit sharing bonuses receive the non-cash part of that bonus through a mutual fund account administered by Amway Mutual Fund, Inc., 7575 E. Fulton, Ada, MI 49355, which requires a separate summons
Now I am subject to the AICPA Statements of Standards on Tax Practice, which among other things forbids me from giving clients advice based on what I believe the audit selection process of a taxing authority is. I wouldn't do it anyway, because I think most people who give that type of advice are guessing. Even if you happen to be one of my clients, I'm speaking to you purely as a reader here when I give you this advice:
You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't take no Schedule C losses from an arrangement with a company that IRS examiners have on speed-dial.
I found 23 cases of IBO's who fought the IRS in Court. (A couple appealed, but I only counted them once)They pretty much all lost. In these type of cases there are really three ways you are denied deductions. The first is substantiation. You didn't prove it. Next is that the expenses are not really ordinary and necessary expenses of the business. When you are talking about cars and business use of the home, those two issues can get blurred together. The third is that there really isn't any business there. Taxpayers fight the IRS and win on that issue frequently even a Vietnamese couple whose "business" was playing slot machines using the principles of Feng Shui. Amway IBO's who take on the IRS on the Section 183 "hobby loss" issue almost always lose.
One of the most common themes is that IBO's seek advice generally only from their "uplines", who of course are not disinterested. They also do not seem to put any energy into trying to control their expenses. I'm going to give you a little snippet from each of the cases and comment a bit on some of them.
LOPEZ v. COMM., Cite as 94 AFTR 2d 2004-7075
Jorge N. Lopez, et ux. v. Commissioner , TC Memo 2003-142
Tax Court properly determined that engineer and wife weren't entitled to business deduction for expenses incurred in connection with their Amway products distribution activity because they didn't engage in activity for profit: although taxpayers showed proof of profit motive, such wasn't sufficient to override govt.'s evidence that included their failure to keep businesslike records, their failure to alter unprofitable methods, their non-dependence on activity income, and their use of activity to socialize with friends and family.
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 performance bonuses. 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 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.
Since the Mr and Mrs Lopez appealed, they got to lose twice.
OGDEN v. COMM., Cite as 87 AFTR 2d 2001-1299
Michael A. Ogden, et ux. v. Commissioner, TC Memo 1999-397
Contrary to the Ogdens' contention, evidence of profit is not determinative of whether a profit motive exists. See id. at 876 (no single tax regulation factor, nor the existence of a majority of factors, is determinative of whether a profit motive exists). There is overwhelming evidence in the record that, if believed, supports a conclusion that the Ogdens maintained their Amway activity for deductions, personal pleasure and to offset wages. The tax court did not abuse its discretion in denying the motion for reconsideration.
Amway does not have a quota for sales, its products do not have to be sold above cost, and its distributors are not required to sponsor downline distributors. An Amway brochure, The Amway Business Review, states that the potential for earning income increases as the number of distributors in a sponsor's group grows and as sales increase. Distributors devote as little or as much of their time to Amway activities as they desire. The eight page Amway Business Review in large blocks on four of its pages highlights the fact that “The Average Monthly Gross Income for “Active” Distributors was $88.”
We believe 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.
ELLIOTT v. COMMISSIONER, 90 TC 960
Deductions denied for business expenses and depreciation connected with Amway distributorship. Activities were conducted in unbusinesslike manner, taxpayers maintained full-time jobs, and little distinction was made between Amway activities and personal social activities. Also, IRS properly imposed penalties for failure to timely file and negligent or intentional disregard of rules.
A further indication of the unbusinesslike fashion in which petitioners conducted their Amway activity was the thin line dividing business activities from personal and [pg. 973]recreational activities. Petitioners offered scant evidence that their Amway activity required them to do anything other than to maintain an active social life. Although they occasionally attended seminars, most of their activity involved giving parties and taking people out to restaurants. While there is no requirement that profit-oriented work be onerous and unpleasant, the evidence presented by petitioners does not indicate activity motivated by a profit objective. On the contrary, the evidence shows that petitioners made some small modifications in their routine social life, kept cursory notes about their activities, and claimed deductions for the cost of nearly everything they owned or did. On this record, we find as a fact that petitioners' activities were motivated by a desire to avoid tax rather than a desire to generate income.
Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42
Activities not for profit—profit objective—distributorship and direct marketing activities. Code Sec. 183 deduction limits applied to expenses pro se married real estate and construction business operators claimed in connection with Amway distributorship activity that they engaged in without requisite profit objective. Lack of profit objective was shown by facts that taxpayers commingled expenses, had no idea if they were making profit for any given year until they filed that year's return, didn't keep complete records, and otherwise didn't conduct activity in businesslike manner. It was also telling that taxpayers didn't have experience in this type of activity, didn't seek out independent advice, used activity losses to offset their real estate and construction business income, and stated that they would continue with activity regardless of whether it ever turned profit. Countervailing facts that they spent significant time on activity and increased gross receipts during years at issue weren't dispositive considering overall record.
Kenneth J. Nissley, et ux. v. Commissioner, TC Memo 2000-178
Activities not for profit—Amway distributorship. Husband and wife/CPAs didn't engage in Amway distributorship activity for profit: taxpayers incurred substantial losses for 8 consecutive years; and didn't conduct activity in business-like manner where they kept separate bank account and records to “guarantee” deductions
Kenneth C. Theisen, et ux. v. Commissioner, TC Memo 1997-539
Full-time IRS agent and travel agent-wife didn't operate Amway distributorship for profit, so weren't entitled to deductions from activity: taxpayers didn't conduct activity in business-like manner where they didn't have business plan, perform break-even analysis or have budget; admitted that benefits included ability to buy discounted products for personal use; testified that distributorship was for financial gain and personal purchases were more than purchases acquired for resale; reported losses for 5 consecutive years; couldn't explain how or when distributorship would become profitable or why auto and telephone expenses increased without corresponding revenue increase; kept income and expense ledger for substantiation purposes only; and intentionally excluded cost of motivational tapes from costs of goods sold to avoid disclosing negative gross income on returns
Generally, no. The way the plan is written is, you're taught to purchase things from yourself for yourself, and you get other people — say, Look. Just change your buying habits. Don't go to HEB. Don't go to Eckerd's. Don't go to Sam's. You get access to all these products. Change your buying habits. Buy things for yourself
Petitioner also conceded that petitioners' personal purchases were more than the purchases they acquired for resale to other customers or downline distributors. Specifically, petitioner admitted that in 1992 he bought $4,500 of products for personal use and $3,262 of products for other purposes. For 1993, he conceded he bought $10,729 of products for personal use and $4,991 of products for other purposes.
Bryan J. Brennan, et ux. v. Commissioner, TC Memo 1997-60
1. Litigation costs—substantial justification for IRS position—distributorship conducted for profit. Taxpayers were denied litigation costs with respect to underlying case challenging IRS's disallowance of their business deductions: IRS was substantially justified in its position that taxpayer didn't conduct household product distributorship with requisite profit objective under Code Sec. 183 . Taxpayers had losses for 7 consecutive years, yet earned substantial income from other sources for 2 of those years, and didn't provide IRS with business plan or profit projection; and similar distributorship-related activities had been found to contain elements of personal pleasure. Also, IRS's concession of the issue within 5 months of filing answer and 2 months of receiving additional information was reasonable.
This is a case of the taxpayer actually settling favorably with the IRS. They were, however, not able to recoup attorneys fees.
William B. Hart, et ux. v. Commissioner, TC Memo 1995-55
Taxpayers weren't entitled to deduct business loss related to Amway distributorship: taxpayers didn't engage in activity for profit. Expenses of distributorship activity related mainly to social functions: taxpayers attended seminars in Colorado and California, and monthly dinners with their “network”; taxpayer-husband took guest who was interested in finding out more about distributorship on fishing trip; and “supplies” expense included groceries bought while taxpayers were away delivering products or visiting clients. Court rejected argument that activity was conducted in businesslike manner because taxpayers kept records, sought expert counseling, and devoted time and effort to distributorship: they didn't utilize records in way to help them make profit; they didn't seek advice on how to cut back on expenses; many of expenses claimed had significant elements of personal pleasure; and due to distributorship's low receipts it appeared that taxpayers used their time spending money on entertainment rather than focusing on earning profit.
Negligence penalty was upheld: despite Tax Court's warning in prior case that taxpayers couldn't translate their Amway business into deduction for personal aspects of their lives, taxpayers again attempted to deduct clearly personal expenses in guise of distributorship activity, which they had failed to show was being operated for profit. But taxpayers weren't liable for penalty for filing late return: recent death of taxpayers' son was reasonable cause for delay in filing return; and there was no willful neglect.
Petitioners do not appear to have heeded our warning, and respondent was not as charitable this time. Again petitioners have attempted to deduct clearly personal expenses in the guise of an Amway activity that they failed to show was being operated for a profit. We sustain respondent on this issue.
Thomas P. Poast, TC Memo 1994-399
IRS proved that taxpayers, full-time automobile workers, lacked requisite profit objective in carrying on their Amway distributorship activity. Taxpayers failed to conduct activity in businesslike manner: taxpayers maintained incomplete sales records, used solely to help to substantiate claimed deductions; they failed to isolate business expenses from personal expenses; and taxpayers kept no realistic and reasonable budget despite incurring substantial net losses in all prior years. Further, taxpayers' claim that they sought expert counseling regarding business techniques was rejected: taxpayers abandoned "ineffective" techniques without performing cost/benefit analysis of techniques; and techniques received from "upliners" (who had financial stake in taxpayers' sales) were never seriously utilized. Also, much of the time taxpayers spent on Amway activity involved substantial pleasurable personal aspects.
Shortly before becoming involved with their Amway activity, petitioners attended a seminar conducted by an insurance agent, Donald Fletcher, who conducted similar seminars nationwide. Fletcher promoted his life insurance product, while suggesting to the participants of the seminars that the premiums be funded by tax savings generated by deducting largely personal expenses through a home based business like Amway. Fletcher offered to prepare participants' tax returns and provide representation in audits for a cost of $125.
We find not only that the techniques were not seriously utilized, but also that, 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. Neither petitioners nor their advisers appeared to be even vaguely interested in the importance of cutting back their expenses.
Gerald Eugene Swaffar, TC Memo 1992-180
IRS failed to prove that taxpayer's Amway activities weren't carried on for profit. Deductions for expenses related to Amway activities were allowed only to extent conceded by IRS: taxpayers failed to substantiate expenses in excess of that amount. Penalties for negligence and substantial understatement were imposed
At trial, respondent contended for the first time that petitioner's Amway activities were not engaged in with the requisite profit objective under section 183. Such new matter requires that the burden of proof be placed on respondent. See Rule 142(a). Respondent further contends that, assuming the Amway activity was entered into with a bona fide profit objective, petitioner has failed to establish that the above expenditures were incurred and were ordinary and necessary in carrying on a trade or business, pursuant to section 1.
An analysis of petitioner's Amway activities requires this Court to conclude, without analyzing in depth all nine factors, that respondent has not carried her burden of showing that petitioner did not engage in the Amway activity with an actual and honest objective to make a profit. We emphasize that we do not affirmatively conclude that petitioners had a profit objective, but only that respondent has failed to prove that petitioners lacked such an objective.
Sometimes it is better to be lucky than good. If in its deficiency notice the IRS asserts that you didn't have a profit motive, it is up to you to prove that you did. In this case, the IRS raised the issue later, which shifted the burden of proof. The IRS couldn't prove that they didn't have a profit motive.
Gerald W. Jordan, TC Memo 1991-50
Amway distributor was allowed to deduct expenses for travel, incentive prizes, and seminars: expenses were ordinary and necessary. Deductions were allowed in part for meal and car expenses, and were denied for gift expenses, because taxpayer didn't fully substantiate claims.
Another win for an IBO. Hooray. Too bad they didn't do a better job on substantiation.
Joseph M. Ransom, TC Memo 1990-381
Taxpayer wasn't engaged in Amway distribution activity with profit objective. Factors tending to indicate lack of profit motive were: absence of separate checking account; failure to cut costs or recruit new distributors; and substantial income from other sources (with attempted Amway deductions that would have almost eliminated tax he would otherwise owe on that income).
Peter S. Rubin, TC Memo 1989-290
Deductions attributable to Amway distributorship activities were disallowed to extent they exceeded gross income from those activities, which weren't engaged in for profit: taxpayers kept records in cursory and sloppy manner, and they engaged in distributorship activities to claim tax deductions for personal expenditures and to purchase Amway products at sizeable discounts for their own use.
Dewitt Talmadge Ferrell, Jr., TC Memo 1987-102
Losses claimed by airline pilot and housewife were limited where their business activities, involving selling of Amway products, sundials, and posters, weren't engaged in with profit objective, but rather were conducted primarily to generate tax deductions and credits for personal expenses. Revenues were of secondary importance to taxpayers who had no sales expertise and made no effort to obtain any, didn't maintain reliable records, and devoted little effort to sales. Burden of proof was on taxpayers since they didn't show that business ever reported profit before years in issue; Sec. 183(d) presumption didn't apply.
J.H. Schroeder, TC Memo 1986-583
As to the Amway distributorship fee, petitioner failed to show that he conducted his Amway affairs in connection with a trade or business or an activity engaged in for profit. Petitioner made no sales of Amway products and had no income from his Amway operations during 1981. He failed to possess the requisite profit objective, since he admittedly became a distributor solely for the purpose of being able to purchase items at discount prices by virtue of his status as a "dealer". See section 183.
Harry Mitchell Goldstein, TC Memo 1986-339
Taxpayers' Amway activities weren't trade or business and weren't engaged in for profit but were undertaken primarily to obtain tax deductions and credits; business expenses, investment credit, and child care credit denied. Taxpayers' (husband and wife) activities weren't carried on in businesslike manner, they both had full-time jobs, and they had very little success in obtaining other distributors or selling products. Taxpayers had become Amway distributors and claimed losses based on business deductions and credits.
Q. How many sales did you make in 1980?
A. Sales—1980—Probably not even $5 worth, because we did not get any new people coming in, you see. We just mostly went in for ourselves and then get the other people coming in with us.
Q. So it is your testimony that your total income from Amway in 1979 and 1980 was less than $5?
Q. Are you still in the Amway business?
A. Yes. We like the products and you can't get them any other way.
John Alcala, TC Memo 1984-664
On this record, there arises the strong suspicion that petitioners became Amway distributors primarily for the purpose of providing themselves with Amway merchandise which they could not otherwise obtain, while, at the same time, providing themselves with considerable tax deductions. Compare Barcus v. Commissioner, T.C. Memo. 1973-138 We make no such finding herein, but we do hold that petitioners have failed to carry their necessary burden of proof to establish that they entered into a bona fide business enterprise with the intention and objective of making a profit. McCormick v. Commissioner, T.C. Memo. 1969-261
Randall B. Ollett, et ux. v. Commissioner, TC Summary Opinion 2004-103
In addition to the travel-related expenses, petitioners also had expenses of $3,571 in 1999 and $710 in 2000 for professional books and other materials that were part of Amway's “training program”. These books were recommended by petitioners' upline network and may be described as general self-motivation books. Petitioners also purchased various audio tapes that included stories told by other Amway distributors of how they built successful networks.
As noted above, petitioners' revenue from the Amway activity for the years in issue was minimal, and even that amount was attributable in part to petitioners' purchases of household goods for their own personal use. When asked about how they intended to turn their losses into profits, Mr. Ollett responded: “The only way I can solve it is to talk to more people. And there, in essence, is the challenge that I have, which is finding those people”.
Petitioners did not have any sales experience prior to becoming Amway distributors. Petitioners relied exclusively on their upline distributors, who stood to benefit from petitioners' participation, for advice and training. They did not seek independent business advice at the beginning of their Amway activity to assess their potential for success, and they did not seek independent business advice for turning around years of operating losses. Petitioners' failure to seek independent business advice strongly suggests that petitioners did not carry on the Amway distributorship in a businesslike manner.
Joe Guadagno, et ux. v. Commissioner, TC Summary Opinion 2003-88
Included with petitioners' timely filed return for each year is a Schedule C, Profit or Loss From Business. Each return was prepared by a certified public account who also was an Amway distributor. Petitioners' Schedules C for 1996 and 1997 list their principal business as “Amway”. For 1998, petitioners' Schedule C lists their principal business as “DistConsumerProduct”. Petitioners reported net losses of $26,264, $24,047, and $19,810 on their Schedules C for 1996, 1997, and 1998, respectively.
Before becoming Amway distributors, petitioners had neither experience with Amway nor experience in running a business. Nevertheless, they did not seek independent business advice at the outset, and they did not seek independent business advice afterwards even though losses were sustained year after year. Instead, they relied upon other Amway distributors whose advice is more accurately characterized as personal motivational advice than strategic business advice.
Larry Minnick, et ux. v. Commissioner, TC Summary Opinion 2002-147
As previously stated, more weight must be given to objective facts indicating a profit objective than to petitioners' statement of intent. Dreicer v. Commissioner, supra. After considering the objective factors detailed above, we find especially relevant the manner in which petitioners carried on the Amway activity and petitioners' history of losses and lack of profits. We find from these and the other objective facts in the record that petitioners did not have an actual and honest intent to profit from the Amway activity in 1996 and 1997.
Broadrick R. Moore, et al. v. Commissioner, TC Summary Opinion 2001-173
Considering the record in its entirety, we are satisfied that petitioners did not have the actual, honest, and bona fide objective of making a profit. It appears that they became Amway distributors simply to deduct expenses for items of a personal nature
Karl Meyer, et ux. v. Commissioner, TC Summary Opinion 2001-157
The Amway “pyramid” incentive system is promoted by Amway in the form of the “9-4-2 plan”. Under the “9-4-2 plan”, each Amway distributor is encouraged to personally recruit 9 “downline” distributors, each of whom in turn is encouraged to recruit at least 4 “downline” distributors, each of whom in turn is encouraged to recruit at least 2 “downline” distributors (for a total of 117 “downline” distributors in the initial distributor's organization). The “9-4-2 plan” is promoted as the theoretical break-even point for a distributorship, assuming that (1) the distributor and each “downline” distributor within the distributor's organization purchases $200 of Amway products per month and that (2) the distributor does not have expenses exceeding $2,000 per month. At least in theory, the potential for profit is enhanced as each of the 117 “downline” distributors in the distributor's network successfully implements the “9-4-2 plan”.
The Amway “9-4-2 plan” does not provide meaningful guidance to distributors regarding how expenses incurred in pursuing an Amway activity may be reduced
Despite their lack of experience with either Amway or an Amway type activity, petitioners never sought meaningful counsel from disinterested third parties. Rather, petitioners relied principally on advice from “upline” distributors and other interested Amway individuals
James R. Landrum, et ux. v. Commissioner, TC Summary Opinion 2001-112
Prior to the years in issue, petitioners had three separate experiences with Amway, beginning in 1974. Mr. Landrum was a corporal in the Marine Corps and was stationed in Hawaii in 1974. His Amway activity consisted of purchasing cases of wax from an Amway distributor at wholesale, selling “a case or two a month to [his] friends,” and keeping the difference between the wholesale and retail prices. He ceased his activities with Amway in 1976 when he was transferred from Hawaii and then released from active duty with the Marine Corps. After their marriage in 1977, petitioners participated in an Amway distributorship. Their experience with Amway was unprofitable, and they terminated it after 2 years. Petitioners became involved with Amway a third time in 1985, while Mr. Landrum was employed at Goodyear. Although petitioners had about 50 persons reporting to them, directly or indirectly, in the pyramid structure of Amway, there were insufficient sales for profit. Petitioners' third Amway venture lasted approximately 2 years, and again, petitioners terminated the activity for lack of profit. In late 1995, petitioners were introduced to Amway a fourth time by friends of Mrs. Landrum. This fourth Amway experience is the subject of the present controversy.
Mr. Landrum estimated that the person who established a successful 6-4-2 grouping would receive $1,800 to $2,200 in monthly commissions and then might proceed to gain even greater benefits as a “direct distributor” who might then triple his organization and receive an “Emerald bonus” and then expand to have six legs and a “Diamond organization”. According to Mr. Landrum, Amway distributors with an emerald organization make $75,000 to $100,000 annually, and those with a diamond organization make $125,000 to $250,000 yearly, “And it goes up from there” as he put it.
23 cases on the same issue is a goodly number, but of course they are over a long period of time. It's clearly not a random sample. If you are say the 20th case like this either you didn't do your homework or you are really stubborn. The other thing that biases this is that the IRS picks the worst cases to contest. Before you get a "90 day letter", which is what allows you to go to Tax Court, you can have an independent appeal in the IRS. Once you file to go to Tax Court, the case will get kicked back to appeals to see if they can settle. At that point appeals can consider "hazards of litigation". So there are probably many people who got decent settlements from the IRS. Of course there are also many who just wrote a check to close out the audit. All in all, though, if the reason you want to start a business is so that you can deduct money you spend anyway (Something I advise you not to do), Amway is probably one of the worst things that you could pick. It's worse than horse breeding, which the IRS seems to have a particular antipathy for, but the Tax Court often allows.
Interestingly, I did not find any cases of people who were using other types of tax shelters to shelter their Amway income. Also, if the Amway dream is really true, you would think I would find a case like that of Peter Morton, who was being challenged on deducting his jet expenses, only with the taxpayer being a Quintuple Diamond Super Duper Amway guy. At the Amway meeting I went to they said that they were glad not everybody took advantage of the Amway opportunity, since they needed pilots for their planes and the like.
All in all, I would say that while not determinative, the record in the tax court is supportive of Joecool and Anna Bannana. At least, there are some more stories for them.