Do you have any suggestions to help curb aggressive income claims?

In exchange for your email address, I’m providing an advance copy of my ebook on the BurnLounge decision. I summarized the core elements of the case and put it in an easy-to-read format. I hope you find it informative.

In a nutshell, the takeaways are as follows:

• Business expenses are deductible when they are both “ordinary and necessary”;
• Keep good records. When the IRS knocks, they’ll want to see substantiation all deductions;
• Maintain separate bank accounts separating personal from business expenses;
• When the line is blurred between recreational and business travel, keep all expenses separate and maintain records;
• Purchases for personal use are not deductible;
• Not all training expenses are deductible. Be sure there’s a specific purpose for the training;
• If there’s a long history of loss in the activity, it could weight against you when claiming a deduction;
• Personal competency matters. The more seasoned you are in the endeavor, the less flexibility.

See the slides below. There’s not much additional information; however, it’s a good summary.

IRS Tax Advice for Direct Sellers

Burnlounge was held to be an illegal pyramid scheme by the U.S. District Court in California. (See below for the full decision or click here).

There’s an incredible amount of information to learn from this case. The judge, after sitting on this case for over two years, illustrated a number of factors he used while analyzing the Burnlounge model. In yet another case, the court held that the participants inside the program (distributors) cannot be counted as “customers” for purposes of pyramid scheme analysis. It’s imperative for companies to have solid customer numbers from people outside the program. The judge spent a lot of time in this opinion discussing the marketability of the Burnlounge offering. At the end of the day, the true test for marketability is customer usage. In Burnlounge’s case, they only had 3% of their revenue come from customer sales. Burnlounge tried arguing that their sales force should count as customers and that their service was legitimate and well worth the price. The judge was not persuaded by either arguments. In the video below, I do my best to discuss the highlights. If you like this story, “Like” it or +1 it! Enjoy.

FTC v. Burnlounge – Final Decision

If you’re an entrepreneur looking to launch a MLM startup in the state of California, or if you’re a distributor there, this is very important information.  There’s currently a bill on the floor in California titled “Senate Bill 459.”  It’s also been referred to as the “Worker Classification Bill” (click here for the actual proposed bill…pertinent info on page 4, section 2).  The bill is stupid government bureaucracy, plain and simple.  Basically, MLM companies with distributors in California would need to require their distributors to provide additional forms to new people.  If a distributor fails to provide these forms and/or fails to maintain them for a two year period, they could be prosecuted for a misdemeanor if the state requests the forms.  Essentially, the California government is trying to keep its finger on all independent contractors so they can keep better tabs for state taxes.  It’s burdensome, unnecessary and it would dramatically inhibit a company’s ability to grow in California.  If you’re a distributor in California or a business owner, the below letter is a draft letter.  It’s time to go grassroots.  Use the text below as a template.

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2.3.4 Sale of Competing Goods or Services.  While a Distributor, you shall not sell, or attempt to sell, any programs, products, or services to MonaVie Customers or Distributors that compete with our Products.  Any program, product, service, or Network Marketing opportunity in the same generic categories as our Product is deemed to be competing, regardless of differences in cost, quality or other distinguishing factors.. . .

Rick Gutman, unless he’s wildly soliciting everyone in his database, appears to be in the clear.

One thing about MonaVie, love ‘em or hate ‘em, is that when the distributors leave, there’s not much litigation.  This is surprising given their itchy trigger finger when they made a legal threat at Ted Nuyten.  In August of 2010, they threatened Ted with litigation after reporting on their decline in revenue in 2010.  Specifically, they accused him of knowingly publishing false information with an intent to defame and disparage.  In August of 2010, Ted projected a 25% decline in 2010 revenue from 2009 numbers.  They demanded that he retract his statements and write “that such statements and figures were and are false and unsupported by fact.”  Ted put the legal threat on his site here.  In the original article that got him trouble, he literally provided two numbers: $785 million in 2009 and he projected $600 million in 2010.  MonaVie alleged that a $600 million projection was “defamatory” and harmful to their reputation.  In this month’s Direct Selling News magazine, they publish MonaVie’s revenue for 2009 and 2010: $785 million for 2009 and $600 million for 2010.  The man was spot on the money…to the digit.  ”False and unsupported by fact…”  Really?

Direct Selling Industry in Wall Street Journal

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Here are some tips that consumers and business might find helpful.

1. Beware of any plan that makes exaggerated earnings claims, especially when there seems to be no real underlying product sales or investment profits. The plan could be a Ponzi scheme where money from later recruits pays off earlier ones. Eventually this program will collapse, causing substantial injury to most participants.

2. Beware of any plan that offers commissions for recruiting new distributors, particularly when there is no product involved or when there is a separate, up-front membership fee. At the same time, do not assume that the presence of a purported product or service removes all danger. The Commission has seen pyramids operating behind the apparent offer of investment opportunities, charity benefits, off-shore credit cards, jewelry, women’s underwear, cosmetics, cleaning supplies, and even electricity.

3. If a plan purports to sell a product or service, check to see whether its price is inflated, whether new members must buy costly inventory, or whether members make most “sales” to other members rather than the general public. If any of these conditions exist, the purported “sale” of the product or service may just mask a pyramid scheme that promotes an endless chain of recruiting and inventory loading.

4. Beware of any program that claims to have a secret plan, overseas connection or special relationship that is difficult to verify. Charles Ponzi claimed that he had a secret method of trading and redeeming millions of postal reply coupons. The real secret was that he stopped redeeming them. Likewise, CDI allegedly represented that it had the backing of a special overseas bank when no such relationship existed.

5. Beware of any plan that delays meeting its commitments while asking members to “keep the faith.” Many pyramid schemes advertise that they are in the “pre-launch” stage, yet they never can and never do launch. By definition pyramid schemes can never fulfill their obligations to a majority of their participants. To survive, pyramids need to keep and attract as many members as possible. Thus, promoters try to appeal to a sense of community or solidarity, while chastising outsiders or skeptics. Often the government is the target of the pyramid’s collective wrath, particularly when the scheme is about to be dismantled. Commission attorneys now know to expect picketers and a packed courtroom when they file suit to halt a pyramid scheme. Half of the pyramid’s recruits may see themselves as victims of a scam that we took too long to stop; the other half may view themselves as victims of government meddling that ruined their chance to make millions. Government officials in Albania have also experienced this reaction in the recent past.

6. Finally, beware of programs that attempt to capitalize on the public’s interest in hi-tech or newly deregulated markets. Every investor fantasizes about becoming wealthy overnight, but in fact, most hi-tech ventures are risky and yield substantial profits only after years of hard work. Similarly, deregulated markets can offer substantial benefits to investors and consumers, but deregulation seldom means that “everything goes,” that no rules apply, and that pyramid or Ponzi schemes are suddenly legitimate.

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