Sears v. Commissioner, T.C. Summ. Op. 2006-47 (4/3/06), offers a fascinating look at "multi-level" marketing of bogus tax reduction schemes.

The taxpayer, who earned $46,100 at a full-time job at a computer software company, began selling “The Tax Relief System.”  The pitch was that by establishing a “home-based business” activity, a taxpayer could convert personal expenses into business expenses. The taxpayer sold written materials for $400 as a "downline distributor" and earned commissions as an "upline distributor" by ensnaring others in the "multi-level" marketing of the system. (In 2000, the state of Kansas enjoined the lead purveyors from marketing products and services under the Kansas Consumer Protection Act.)

To generate sales and recruit downline distributors of his own, the taxpayer frequently went to coffee shops or doughnut shops and initiated conversations with other patrons about taxes. He also invited acquaintances to dinner to discuss the system.The taxpayer reported gross income of $2,713 and expenses of $17,464 from thus activity, for a loss of $14,751.  The Tax Court denied the deduction under the § 183 hobby loss rules.