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Is Usana selling vitamins, a pyramid scheme or an illegal tax shelter?

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Usana Health Sciences (NASDAQ: USNA) claims to be a vitamin company that distributes its products through a multi-level marketing business model. But a report released by Barry Minkow and his Fraud Discovery Institute in March suggested that the vitamins were merely incidental to the illicit pyramid scheme that Usana was operating, and the stock plunged.

But here's something new to consider: Based on my investigation, it appears that some Usana distributors are marketing the Usana "business opportunity" as something else entirely: a tax shelter. For example, a New Zealand Usana distributor with the URL uniquehealth.usana.com writes, "... the fact is a USANA business can save you up to $6,000 plus in a tax return every year. This is not just $6,000 in extra deductions, but an extra $6,000 in YOUR pocket each year - regardless if part-time or full-time." The distributor also gives a list of the potential deductions including automobile expenses, a portion of your mortgage, phone accounts, child care, "pay your kids to work for you, and write it off," and 100% of initial start-up costs.

Uniquehealth is not alone. My investigation of the websites of dozens of Usana distributors found claims of too-good-to-be-true tax savings were widespread. Usana doesn't make these claims on its own website, but the fact that numerous distributors do raises questions about the real reason that people become Usana distributors.

Of course, entrepreneurs are allowed to deduct related expenses for home-based businesses, but according to New Zealand's tax guide for direct selling, following some of the suggestions would appear to be fraudulent. For instance, "You can't claim private living expenses, nor can you claim the cost of purchasing most assets such as motor vehicles and computers." U.S. tax laws are similar in this regard.

The tax pitch also raises a larger question: Are Usana distributors really entrepreneurs? In a recent conference call, Usana CFO Gil Fuller told investors that only 12% of distributors sign up to make money. If that's the case, why all this emphasis on tax savings?

The New Zealand distributor is part of a larger USANA distributor group called TeamXcell. Uniquehealth's site goes on to ask the reader "Where else can you use 'Health Supplements, Skin and Personal care products, even hair care products & toothpaste all (Patent) Paraben & Chemical FREE, (see below News report) and claim them against your 'TAXES'. Well you can with Usana Health Science as a Home Business."

What about deducting products you use? According to the New Zealand tax guide, "You must make an adjustment for any goods from your opening stock that are used privately. Keep full records of the value of goods you take for personal use, or for family and friends. Show the cost of these goods as drawings, and don't include them in your purchases or sales figures."

Another USANA distributor site, HealthtoFreedom.com, tells prospects that "... the potential tax advantages alone are strong enough for many to consider joining USANA as an Independent Associate with the Health to Freedom team. Even in the beginning stages while you are building up your business, the potential tax advantages are still there for you to use."

The idea of embarking on a business venture for the tax benefit is, almost by definition, illegal. "If the sole purpose of a business is to avoid taxes, that would be tax evasion," says Doug Carmichael, former chief auditor for Public Company Accounting Oversight Board. He was also instrumental in the FTC's successful effort to shut down Equinox International, a multi-level marketing program with over $200 million in sales.

According to the IRS's examination techniques, "The test to determine whether a taxpayer conducted an activity for profit is whether they engaged in that activity with an objective of earning a profit. Although a reasonable expectation of profit is not required, the profit objective must be bona fide, as determined from a consideration of all the facts and circumstances."

It sounds like only 12% of distributors (the ones Fuller said want to make money) would be able to claim tax write-offs as a results of their USANA businesses. The IRS also says "that an activity is presumed to be engaged in for profit if the gross income derived from the activity exceeds the deductions attributable to the activity for three or more of five consecutive taxable years." Data from the Fraud Discovery Institute has shown that very few Usana distributors generate much, if any, gross income. Usana can't have it both ways. If the vast majority of distributors don't make money, Usana doesn't really offer tax advantages for all but a few people.

Usana claims that it's selling vitamins. Then a bunch of people said it was really selling a pyramid scheme. Now we find out that some distributors are marketing the company as a tax shelter. What's next? Usana Health Sciences as the way to heaven?


More USANA Health and Sciences news

Kevin Kelly:
"Heard on the Street" knocks USANA
Zac Bissonnette: Oh snap! Barry Minkow fires back at Usana Health Sciences
Zac Bissonnette: Forbes slams Usana Health Sciences (USNA)
Zac Bissonnette: NZ National Business Review slams USANA Health Sciences (USNA)
Zac Bissonnette: USANA has a product, so it's not a pyramid scheme?
Zac Bissonnette: Is Baghdad Bob working for USANA Health Sciences?

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Last updated: November 25, 2009: 12:58 PM

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