Taxable Talk

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.

After ranting on health care, it’s time for the lighter side of taxes. That means a visit to that old standby, the escort service, where tax trouble is apparently second nature.

Let’s head to Salt Lake City where companionship appeared to have problems. Jodi Hoskins and her then husband, Roy Hoskins, ran an escort service to help with those issues. Companions was its name, and it did quite well. However, you wouldn’t know it if you looked at the Hoskins’ tax return.

They reported income of just over $70,000 in 2002. Their math skills, though, weren’t as good as their ability to live quite well. It seems that they understated their income by just a bit. The actual gross receipts in 2002 were $1,204,354 higher than what they claimed on their return. A “missed it by that much” moment to be sure. That’s an understatement of $485,443 in tax.

Unfortunately for the Hoskinses, the IRS and the Department of Justice discovered the evasion. Roy Hoskins pleaded guilty earlier this year; he’ll be sentenced on April 15th (how appropriate). Last week, Jodi Hoskins was found guilty of one count of tax evasion. Besides the restitution that will undoubtedly be ordered Ms. Hoskins is likely looking at a visit to ClubFed.

So if you run an escort service, be mindful that the IRS is well aware that it’s a cash business. Just report the cash, pay your tax, and live a somewhat less lavish lifestyle.

Over the past few days there’s been plenty of good stuff in the tax blogosphere. Here are some highlights:

Joe Kristan wrote about William Benson. Mr. Benson wrote The Law That Never Was alleging that the 16th Amendment wasn’t ratified. He didn’t fare better with his appeal in an attempt to keep his tax reduction business alive. It’s as dead as the 16th Amendment is alive.

Mr. Kristan also wrote about yet another Renaissance, the Tax People, Inc. employee who will soon be residing at ClubFed. This time it’s the Tax Director, a definite misnomer for a business that practiced tax fraud.

It’s almost certain that 2010 will be the year of the Roth IRA Conversion. That said, Robert Flach has an excellent post about a pitfall that may hit some individuals who have IRAs with basis.

Strip clubs are a favorite of mine…er, that’s a favorite subject of mine when it comes to taxes. The TaxProf Blog reported on how the estate of a New York businessman was excused from paying $4 million in back taxes because the Mob thoroughly infiltrated the business.

Staying in the same area, the TaxGirl reported on a wise Madam who sent her help 1099-MISCs each year and paid her taxes. Yes, illegal income is taxable.

The Tax Lawyer’s Blog had 12 IRS Non-Filer Enforcement Stories. A couple of the stories highlighted had previously made Taxable Talk.

A busy week in the tax blogosphere as we head into the Christmas season. So whether you’re naughty or nice, remember to pay Uncle Sam.

Somehow, strip clubs and taxes seem to follow each other. Usually I report on strip club owners who somehow forget that cash income is just as taxable as any other income. Today, however, it’s time to head to Utah and look at the application of taxes on strip clubs and escort services.

Back in 2004 the Utah legislature voted to impose a 10% tax on strip clubs and escort services; the tax would fund sex offender treatment for some incarcerated sex offenders and fund the Utah Attorney General’s task force looking at crimes against children. The tax is imposed on businesses where there’s nudity for more than 30 days, and impact admissions, user fees, food and beverages, and Utah-produced merchandise that is sold in the businesses.

The tax was upheld on the strip clubs:

In this case, the tax is triggered by nudity, which the (U.S.) Supreme Court has specifically declared ‘is not an inherently expressive condition. We find nothing in the record before us — either (in) the tax’s legislative history or in the text of the tax itself — establishing that the tax was enacted with the predominant purpose of suppressing protected expression.

However, the tax was ruled unconstitutional as far as escort services. The statute doesn’t relate escort to nudity, and so it was ruled too broad:

The tax defines an ‘escort’ as anyone who accompanies another for compensated companionship…Therefore, according to the plain terms of the statute, individuals who are paid for providing care for the elderly as well as those who are paid as tour guides would fall within the definition of an ‘escort,’ and any person or business who employs them would be subject to the tax.

So good news for escort services, for now, but bad news for strip clubs. Unless the nudity vanishes—and that would, one assumes, defeat the purpose—Utah’s strip club tax is constitutional.

I’m heading to Florida tomorrow, so posting will be light to non-existent until the weekend. Until then, here’s yet another story of someone who got into tax trouble from a strip club. And, yes, the name of the individual did grab my attention.

Matthew Fox (no relation) was a bouncer at an Atlantic City, New Jersey strip club beginning in 1998. Later he was the manager of the club. Last week a jury convicted him of five counts of tax evasion for not reporting the approximately $400,000 he earned from the club (and evading about $110,000 in taxes according to this story). Mr. Fox and his wife were acquitted on a count of criminal conspiracy.

The indictment alleged that Mr. Fox was paid in cash for his work, but didn’t report the cash as income on his tax returns. Whether you are paid in cash, checks, or casino chips is irrelevant—in general, all wage income is taxable.

So if you do end up working at a strip club, do yourself a favor and report your income. It’s a lot easier and cheaper to pay the taxes now then it is to find yourself in court on trial for tax evasion.

Democrats in Sacramento lack nothing in chutzpah. Democratic Assemblyman Charles Calderon is proposing an 8% tax on sexually explicit nightclub acts, sexually explicit pay-per-view movies, X-rated acts in public locations, and sales of sex toys.

Forgetting the dubious constitutionality of the proposed legislation, it is unlikely to go anywhere in Sacramento. Assembly Republicans, according to the story in the Sacramento Bee, vow to kill any new tax increase. Given the 2/3 vote required for an increase, this measure will die.

It would be nice to see our legislators in Sacramento looking at killing various government programs, so that instead of increasing revenues to cover a budget shortfall, they would be decreasing expenses. But that idea is, I think, over the head of the Democrats in Sacramento.

“Billy, Billy don’t you lose my number
Cos you’re not anywhere
That I can find you
Oh now Billy, Billy don’t you lose my number
Cos you’re not anywhere that I can find you, oh no”
(Don’t Lose My Number, by Phil Collins)

There are a lot of people hoping that one person did lose their phone number. Remember Deborah Palfrey, the alleged D.C. madam who wanted to sell her phone list of clients? Well, her phone records have now been released to the public. You can go to this website and attempt to get the records. I say “attempt” because so many people have gone to the site that the website is currently down! A judge last week lifted the injunction against Ms. Palfrey posting her list.

Already, one Senator has found his name on the list. Senator David Vitter (R-LA) said in a statement, “This was a very serious sin in my past for which I am, of course, completely responsible.” His name won’t be the only one found on the list.

Meanwhile, Congress continues to look more like a “do-nothing” Congress as far as tax legislation and pressing issues such as AMT relief. Perhaps our representatives will look at fixing real problems rather than covering their past transgressions…though I doubt that’s going to happen.

I’ve reported several times about strip club owners evading taxes (and getting caught). I guess there are a lot of temptations out there…and if you’re going to offer one, you get to thinking about another.

In any case, yet another ex-strip club owner has been convicted of tax evasion. From Jackson, Mississippi comes the story of Jon Adams. Adams used to own the Stardust Cabaret. Back in 1999 Adams attempted to get the zoning changed for his club. And the (then) Jackson City Council President, Louis Armstrong, found his way to prison for accepting a $25,000 bribe.

Adams’ troubles related to understating his income on his tax returns. The government alleged that Adams earned over $500,000 in 1999 and $466,000 in 2000 but that he reported $344,000 less. Oops. And allegedly making a $75,000 down-payment on some property while in bankruptcy didn’t sit well with the jury either.

While Adams faces six years at ClubFed and a maximum of $200,000 in fines, his stay will likely be significantly less. His sentencing is scheduled for October 9th.

There’s something about strip clubs that brings out the worst in taxpayers. They’re a mecca for tax fraud. In January I brought you the story of Dangerous Curves, a Philadelphia area strip club whose owners were accused of tax fraud. Today comes word that one of the owners, Bishop Krabsz, will plead guilty tomorrow to hiding $800,000 of income and paying employees under the table.

The investigation began as an offshoot of a corruption probe of former Philadelphia Councilman Richard Mariano. Also accused are Dangerous Curves’ accountant, Enrico Nardini, and the other co-owner, Kevin Rankin. Both Nardini and Rankin have pleaded not guilty.

Pity the poor madam escort service operator accused of being a madam. She has but one tangible asset, or so she says, a phone list of her well-to-do clients in Washington, DC. Why not sell the list to finance her defense?

The government, which alleges that Deborah Palfrey is really a madam, and accuses her of money laundering and racketeering (RICO), says that could damage their case. No sale, said Judge Gladys Kessler in Washington. And further, you can’t start lawsuits against potential witnesses. Ms. Palfrey had filed one suit against one of her “escorts,” and sued 15 other unnamed escorts. That lawsuit has been effectively stopped.

Meanwhile, Ms. Palfrey still plans to have an unnamed media group look at the 46 pounds of phone records (10,000 pages). Thankfully, it’s not me. I’m seeing too many numbers in my day job as is.

The next hearing on the case is set for April 12th.

News Story: San Francisco Chronicle