opinions please

What is the name of your state? NA for the purposes of this thread

A bunch of us were sitting around the office quizzing each other on bizarre tax scenarios and we came up with one that stumped us.

Per the tax code all income must be reported, even illegal income or income from crime. However, no expenses can be taken against illegal income or income from crime.

So here is the scenario:

A prostitute with two children. She has 15,000 in gross income from prostitution, she may not deduct any expenses against it because its illegal income. Does she qualify for EIC?

Sure. The tax code specifies that EIC is based on earned income, not on legal earned income. If the prostitute claims any operating expenses, the return is fraudulent & she can't legally sign it.

The IRS says you have to claim operating expenses on Sch C if you have EIC, but it can't make you file a fraudulent tax return claiming illegal expenses just to reduce EIC. I believe this is a case of the IRS being hoist on its own petard.

Here's another fun one for you:
A taxable nonprofit hospice association in California provides medical services, counseling & medical marijuana to very ill people (MS, AIDS, cancer, etc.). Patients pay a fee to join the organization, which covers their services & pot. The foundation buys marijuana seedling & cultivates the plants, then harvests & distributes the pot to members with valid prescriptions. Can the association deduct the costs of producing & distributing the marijuana?

HELD: The cost of producing the pot is a cost of goods sold & is allowed as an expense because sec. 280E says the IRS gets to tax gross income, not gross receipts. A portion of the operating expenses were disallowed as being related to distributing the pot. Californians Helping Alleviate Medical Problems, Inc. v. Comm'r., 128 T.C. No. 14 (May 15, 2007).

Gotta love those wacky Californians!

you tax people are WEIRD! (and i say this with love as my father and brother in law are both accountants)

Prostitution

What are your thoughts on a protitute that lives in a state where prostitution is illegal but commutes to a county in Nevada where it is legal?

Well, I doubt she has a qualifying home office, so the commuting miles are not deductible. Her tax home is Nevada. She'd have to pay Nevada nonresident taxes & would probably get some kind of credit/discount on her home state's return. The NV taxes would be legally owed, and thus eligible for credit.

Psst. Nevada doesn't have state income tax.

Snipes5 said:

Psst. Nevada doesn't have state income tax.

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Hey Snipes....nice to see you back.