Taxable Talk

I need to thank Judge Mark Holmes of the Tax Court. Judge Holmes wrote an opinion today that is wonderful and has expanded my vocabulary. It’s also a great case.

Robert Willson bought a bar in Des Moines, Iowa. His bar burned down in 1994, but he persevered and rebuilt. However, Des Moines condemned his bar to expand the city’s airport. The IRS claimed that there was a large capital gain when the city condemned his bar. Mr. Willson disputed that, and the case ended up in Tax Court.

Mr. Willson’s bar catered to hair bands until one of the bands misused a smoke machine and caused the place to burn down. He rebuilt the bar, and rather than my paraphrasing the decision, here’s what Judge Holmes wrote:

He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously–and paronomastically–called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression…He also used $169,000 of his $200,000 insurance proceeds to rebuild the bar.

Two things happened around 1999: Des Moines condemned his property and the petitioner visited ClubFed. Mr. Willson did file his 2000 tax return, and the IRS did audit the return. The issue that had to be determined was Mr. Willson’s basis in the bar.

One key issue in the case is the fact that it is a small Tax Court case — an “S case.”

Rule 174(b) allows a taxpayer like Willson to introduce evidence in an S case that would otherwise not be admissible, and it lets us conduct the trial as informally as possible (consistent with orderly procedure) and to admit any evidence we decide has “probative value”–a fancy way of saying any evidence that helps or hurts Willson’s case. This looser rule is important here, because Willson presented his case quite credibly through his own testimony and that of others who worked at the bar or lived nearby during its heyday. Despite the raffish pasts of Willson and some of his witnesses, we found their testimony on his investment in the bar entirely credible.

Basis is always a troubling issue to explain, and this case is messy because of the fire. This case includes both ACRS and MACRS, boot, a fire, and other adjustments. The rest of the case goes into the formula that must be used to determine Mr. Willson’s capital gain. While “there are computations that still need to be made,” it appears that Mr. Willson will likely not owe as much as the IRS claimed.

Case: Willson v. Commissioner, T.C. Summary 2011-132

Late last year, I reported on Brenda Stewart. Ms. Stewart owned Denver Sugar and Denver Players, a prostitution ring that, per the Denver Post, catered to the high-end of Denver society.

The problem for Ms. Stewart wasn’t the call-girl ring; rather, it was what she did not do with the profits. She forgot that you do need to pay taxes on all income, even income from being a call girl.

This past week Ms. Stewart changed her plea. In a plea bargain, she pleaded guilty to one count of tax evasion; in return, the government dropped 69 other charges (racketeering, money laundering, and witness tampering). She also agreed to make restitution of $45,000 in back taxes and penalties.While Ms. Stewart could receive up to five years at ClubFed, it’s far more likely she’s looking at one year at ClubFed.

There’s something about strip clubs that make them go hand-in-hand with tax evasion. Michael Wellek owned three such clubs in the Chicagoland area. Back in 2003, the IRS seized $12 million from a warehouse owned by Mr. Wellek. And that’s where the story stayed, more-or-less, in 2005 when I first reported on it.

Sometimes, though, there’s a reason that the story goes on ice. In this case, Mr. Wellek began cooperating with the IRS. Five years later, it was announced that he would soon plead guilty; one month later, he did.

Last week, Mr. Wellek found out his sentence. He received one year at ClubFed, and must pay $363,000 in restitution above the $5.5 million he’s already paid. If he hadn’t cooperated its almost certain he would have received years at ClubFed rather than a year.

If you become the owner of a business–especially an owner of a strip club–remember that cash income is just as taxable as checks and credit cards. If you decide to stash the cash you’re likely to find yourself stashed at ClubFed.

Somehow tax evasion goes hand-in-hand with strip clubs and escort services. And if the government is correct in its allegations, a Denver madam will soon have plenty of time at ClubFed to reflect on this.

Brenda Stewart apparently owned Denver Sugar/Denver Players. Ms. Stewart began as an employee and then bought the business. Unfortunately, if the indictment is accurate, her business methods were both unusual and illegal.

Ms. Stewart allegedly didn’t bother sending most of her employees 1099s or W-2s. She also allegedly didn’t bother filing a 2006 tax return and understated her 2005 income on that return. Ms. Stewart allegedly created a second company, Phoenix Media and Consulting, LLC. There’s nothing wrong with that. However, she’s alleged to have used that company to shield some of her income from her businesses and not report it. There’s a lot wrong with that (if proved).

As I keep saying, there’s something about strip club owners (and escort service owners) and tax evasion. They go together very well. As usual, it’s a whole lot easier to just pay your taxes…even if you’re an escort service owner.

It’s one thing to sell accounting software such as QuickBooks. That product, when used properly, helps companies accurately report their income.

Theodore Kramer sold a very different software product. His Journal Sales Remover made income magically vanish from a company’s books. As the DOJ noted,

In 2001, the owner of two Detroit-area strip clubs requested that Kramer load the JSR program onto his clubs’ computer systems so that the club owner could report less income to the IRS. From about 2001 to about 2004, Kramer periodically visited the clubs to run the JSR program to remove a substantial amount of the clubs’ sales from their computers. The club owner then provided the reduced sales figures to his accountant. With Kramer’s assistance, the club owner understated his clubs’ gross receipts by more than $500,000.

Shock of shocks, a strip club owner wanted to cheat on his taxes. And more shocking is that the IRS would be looking at a strip club’s income (that was sarcasm, of course).

Joe Kristan has more.

In October I noted that Michael Wellek, the owner of three strip clubs in the Chicago area, would soon plead guilty to tax evasion. He did so last week.

Mr. Wellek admitted he didn’t file a tax return for years where he made more than $2 million. Of course, he made that in cash, and we all know that cash isn’t taxable unless you get caught, right? Well, no, all income is taxable, even cash.

Mr. Wellek also admitted he paid $2.3 million in cash to employees of his strip clubs and didn’t issue reports (either 1099s or W-2s). The report notes that Mr. Wellek plans on cooperating with the IRS. If you were one of his employees, I hope you included that cash on your tax return or you might be getting a knock on your door from the IRS.

One of my first ever blog posts (back in 2005) was short and succinct: “Cops Moonlighting as Strip Club Bouncers Charged with Tax Fraud.” Back in April, 2005, Michael Wellek, the owner of an Elk Grove Village (Illinois) strip club called “Heavenly Bodies” and his policemen workers found themselves in trouble.

It all began when $12 million in cash was seized from a warehouse owned by Mr. Wellek in 2003. The government accused Mr. Wellek of owing $11 million in taxes, penalties and interest. The civil case drags on to this day.

However, after five years there is an update. This past week Mr. Wellek was indicted on tax charges for not filing tax returns from 1989 to 1999 while maintaining that $12 million in a warehouse. The two-count indictment alleges that Mr. Wellek obstructed the IRS and filed a false tax return in 2000. Mr. Wellek’s attorney told both the Chicago Sun-Times and the Chicago Tribune that he expects Mr. Wellek to plead guilty to both charges this week.

Sometimes the wheels of justice turn very, very slowly.

News Stories: Chicago Sun-Times, Chicago Tribune

When I think of sugar, I think of the sweetener you put into a cup of coffee. Or perhaps this song:

But this is a tax blog, so we’re going to deal with something different…something very different. The Sugar House Lounge describes itself as “Denver’s most unique premium lounge and night club.” I’ll say that’s true.

It appears that the Sugar House Lounge was once a brothel, “where customers paid $300 for sex.” The former owner of the business, Scottie Ewing, sold the business back in 2005. Mr. Ewing received $150,000 plus a share of future revenues. Mr. Ewing then instructed the new owner for some time on how to run the business. That all seems normal (except for the prostitution).

I’m guessing, though, that Mr. Ewing left out to the new owners instructions on the necessity of filing tax returns. I say that because he didn’t. He did instruct the new owners on it being a good idea to use a “front company” to own the business.

In any case, last week Mr. Ewing pleaded guilty to one count of tax evasion in what appears to be a plea deal. (Both news stories emphasize the prostitution over the tax evasion.) He’ll be sentenced in late December.

News Stories: Here and Here

After a hectic Sunday, there’s nothing like that old standby, the Escort Service, to lighten an evening. I reported on Companions earlier this year. The owners of this Salt Lake City club did quite well but somehow forgot to report all of their income on their tax return. When the unreported gross receipts total $1.2 million and the IRS finds out, ClubFed is in your future.

Jodi Hoskins was found guilty earlier this year. Last week she was sentenced. Besides restitution of over $736,000, she’ll spend two years at ClubFed. Her then husband, Roy Hoskins, was sentenced to five years at ClubFed earlier this year.

As usual, it’s a whole lot easier to just pay the tax in the first place…but that rarely occurs to Bozo tax offenders.

I’ve made plenty of posts on strip clubs and how some owners of these clubs manage to “forget” to report all of their cash income. Well, I’m heading to Las Vegas next week for the annual California Society of Enrolled Agents’ SuperSeminar. There’s a battle shaping up in Las Vegas: the IRS versus strip clubs, doormen, and taxi drivers.

There are many strip clubs in Las Vegas. Suppose you own one of these clubs; how could you draw more customers? While advertising, signage, and word-of-mouth will clearly help, there are obvious limits to this given the nature of your business. So strip clubs pay out “finders’ fees” to doormen and taxi drivers.

Of course, that cash being paid out is taxable (all income is taxable unless exempted by Congress). But how much of it actually gets reported? If you guessed “about zero,” you’d be correct. And the IRS isn’t happy about this.

Doug Elfman of the Las Vegas Review-Journal reported on this last week. The IRS discovered how much cash was being thrown around (at least $100 per person brought to a club) and read club owners the riot act: Start following the law and issue 1099s or find yourselves at ClubFed.

Mr. Elfman noted that there’s one industry in Nevada that scrupulously follows the law: brothels. The oldest profession in the world knows to be smart with the IRS. We’ll see if the clubs follow suit or end up in trouble with the IRS.