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Petitioner spent a great amount of time, effort, and money on
developing customers into distributors. For example, petitioner
spent $3,274 in placing newspaper advertisements, and printing
and distributing flyers to find new customers for the companies'
products. Practically every day, petitioner took people to lunch
or dinner so they would become his friends, because "people tend
to buy from their friends."4 Petitioner held meetings in his
home and hotel rooms for customers, and distributors who were not
yet breakaway distributors, to share product result stories and
introduce the people to the products, which he often provided as
samples at no cost. At every opportunity, petitioner would
propose to enthusiastic customers that they become distributors.
If enthusiastic customers agreed to become distributors,
petitioner provided them with application forms on which he was
designated as the sponsor or up-line distributor.
Petitioner has been regularly and continuously engaged in
selling products for multilevel marketing companies since 1982.
All of the multilevel marketing systems with which petitioner is
involved include a royalty payment structure. Furthermore,
petitioner is involved in this business with the primary purpose
4 Petitioner reported that he spent $6,882 on meals and
entertainment in 1994. He took the deduction for this expense on
Form 1040 Schedule C, Profit or Loss From Business.
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Last modified: May 25, 2011