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Petitioners were recruited in 1994 as “downline”
distributors of Amway Corp. (Amway) consumer products by an
“upline” distributor, and they registered as Amway independent
business owners (IBO). The originating distributor is an
“upline” distributor in relation to his recruit, who is a
“downline” distributor. An upline distributor receives points or
commissions and, therefore, profits, based on a downline
distributor’s sale of the Amway products and on the downline
distributor’s success in developing his own downline distribution
network. Additionally, a distributor profits from the sale of
the Amway products to third-party clients. See Elliott v.
Commissioner, 90 T.C. 960 (1988), affd. without published opinion
899 F.2d 18 (9th Cir. 1990), for a general discussion of the
operation of an Amway activity.
Petitioners “counseled upline”, that is, they sought
direction and training from their upline distributors.
Petitioners purchased motivational tapes and a marketing plan
from Amway. In addition, they attended weekend training seminars
with educational groups that work in conjunction with Amway.
Because their only previous business experience had been
petitioner’s involvement in a partnership that bought and sold
real estate, petitioners hired a certified public accountant
(C.P.A.) in 1994. Upon the C.P.A.’s advice, petitioners
purchased a computer-based accounting program, Peachtree, which
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