Taxable Talk

I've written in the past that there's something about Escort Services that somehow get their owners in tax trouble. Late last week two other individuals in related industries pleaded guilty to tax evasion charges.

First, from Eugene, Oregon, comes the story of Janine James. Ms. James, also known as Janine Lindemulder, hails from nearby Huntington Beach. Ms. James has appeared in numerous adult films and adult magazines such as Penthouse. Unfortunately for her, she decided that making a down-payment on a new home in Eugene was more important than paying the IRS. The IRS begged to differ, and she pleaded guilty to intentionally failing to pay her income taxes. She'll be sentenced later this year, and will likely need to make restitution and could end up making a short stay at ClubFed.

Meanwhile, in Charlotte, North Carolina, there was a rather high-end prostitution ring called Soft Touch Industries run by husband and wife Donald & Sallie Saxon. This wasn't a small-time ring; revenues were estimated by prosecutors to be around $3 million. Earlier this year a Raleigh cardiologist was charged in the case. On Thursday another individual pleaded guilty. James Smith, owner of Red Clay Industries, used the escort service's services. However, he decided to charge the expenses to Soft Touch Industries as business expenses. What Soft Touch provided were definitely personal in nature....In any case, Mr. Smith has pleaded guilty to tax evasion and is cooperating with federal prosecutors. He'll pay $19,000 in back taxes and prosecutors will ask for a light sentence.

That seems obvious, right? You need to charge sales tax on items that are picked up.

Hopefully it also seems obvious that if you're a liquor store owner you need to include takeout items in your income. There's no exemption for takeout items in the Tax Code...but you knew that.

Well, you know that, I know that, but one carryout (liquor store) owner in Toledo, Ohio apparently didn't know that. Ann Riebe pleaded guilty to one count of Conspiracy to Defrauding the United States. Riebe and another owner took cash that customers paid and allegedly took some of that home with them, or wrote checks and didn't declare the income. Riebe will only serve one day at ClubFed but will spend ten months under house arrest and will have to make restitution with the IRS.

Medical marijuana is a complex subject. California voters passed an initiative legalizing it; the federal government says its still illegal under federal law. I'll let the attorneys battle that one out.

However, whether medical marijuana is legal or illegal doesn't impact the tax situation for a grower. Illegal income is just as taxable in the United States and California as legal income. And that's where our story begins.

Edwin Hoey pleaded no contest last year to possessing and selling "hundreds of pounds of pot." He has now been arrested on five charges of filing a false state income tax return.

Mr. Hoey's attorney, Ben Rice, is quoted by the Central Coast Sentinel, as stating, "This gray area is very gray, very dark and it's hard for people who want to do this exactly the way they're supposed to...It's hard for people to know how to do it... Hoey has paid his taxes and he's prepared to rectify his tax statements but it's really difficult to know how to do that."

I hate to tell Mr. Rice, but I think he's very wrong here. Mr. Hoey was conducting a business. It's pretty simple: add up all your income, subtract your expenses, and you've got your net income. Perhaps it was hard for Mr. Hoey to include his illegal income on his tax return but it's the law.

Mr. Rice also complained that the government is getting a second bite at the apple. But tax charges are different from drug charges—it's not double jeopardy.

And I have even more bad news for Mr. Rice and Mr. Hoey. It's quite possible that the IRS will take a look at this case, too. The IRS and the Franchise Tax Board (California's state income tax agency) share information.

So if you decide to get in a business that's in a gray area (or even one that's over the line) do make sure to file and pay your taxes.

It must be something about the profession. Yet another Escort Service owner is in trouble over taxes. Theresa Faye Hope pleaded guilty to tax fraud charges today. Ms. Hope was the proprietor of Aphrodite Inc., a subchapter S Corporation. There's nothing wrong with that.

Of course, understating her company's income by $267,000 wasn't acceptable. True, that didn't change her corporate tax at all (S Corporations are "flow through" entities; the owners pay the tax). However, it did result in her underpaying her federal income tax by over $50,000. That results in up to three years at ClubFed, a fine of up to $250,000, and possible restitution.

The article notes that her service charged only $125 for a half hour or $175 for an hour, and that she kept just $50 or $75, respectively. While she apparently did listen to her accountant and set up an S-Corp, she missed her accountant telling her to always put aside enough money to pay your taxes.

If you are lucky enough to win the lottery definitely plan on paying your taxes. Indeed, you'll find that the government will be quite helpful in that regard, and that taxes will be withheld from your winnings.

Do remember, though, that even after your lottery winnings cease coming in that you'll have to pay taxes. One Florida woman didn't, and she'll be spending two years at ClubFed because of that.

Rhoda Toth and her late husband won $13 million in the Florida lottery. She and her husband spent it all and then some, and had to declare bankruptcy. They also filed a false tax return. Eventually she and her husband were indicted on various federal tax charges. Her husband passed away before the trial began. Ms. Toth pleaded guilty, and asked to be spared from going to ClubFed because of bad health—she suffers from multiple sclerosis.

The IRS thought she wasn't in as bad health as she said. And they videotaped her walking without help of crutches or a walker. So instead of no jail time the judge elected to send her away for two years.

This is a sad story, and brings up a point that we should all remember: whatever you earn, spend less and save some money for a rainy day.

Wesley Snipes recently got clearance to go overseas to film a movie while waiting for his appeal to be heard. It looks like he'll need some of the money he's making: he just received the bill for his trial.

As Kay Bell reported in Don't Mess With Taxes, Mr. Snipes has been ordered to pay $217,363.75. That represents $2,456.40 for trial transcripts, $138.18 for certifying and copying exhibits, $21,052.19 for witnesses, and $193,716.98 for scanning, printing and numbering documents.

Going to court can be expensive....

It's only my third day back from vacation. Some of the individuals mentioned below will be counting the days at ClubFed very soon.

Let's start in Stillwater, Minnesota. Randy Haugen owned an automobile repair business, and it was apparently quite successful. One of his methods of improving his bottom line was allegedly not remitting sales tax to Minnesota and not filing income tax returns. Those methods really do help the bottom line...until you're caught. The Minnesota Department of Revenue said that Mr. Haugen, "knew this day was going to come and he dreaded it." As a helpful hint, if you find yourself in that situation get an attorney and make a payment plan rather than postponing the inevitable discovery of the tax evasion.

Staying in the Twin Cities, a former co-owner of a roofing business is accused of conspiracy, mail fraud, tax evasion, and filing false tax returns. Amit Sela of Minnetonka, Minnesota, allegedly embezzled over $600,000 from Sela Roofing, and then allegedly filed false tax returns to cover up the theft. On the other hand, Mr. Sela's attorney, Eric Brever, told the Minneapolis Star-Tribune, "We believe a jury will find Mr. Sela innocent of all the charges...[A]ll of the taxes were paid prior to the IRS criminal investigation." That's a big difference of opinion and we won't know the answer until the case comes to trial.

Finally, from Grand Rapids, Michigan, we learn that two former executives of U.S. Signal, a telecommunications firm serving the Great Lakes region, are pleading guilty to tax and mail fraud charges. The two, Barry Raternik, the former president of U.S. Signal, and Tim Hall, who used to be the company's director of operations, teamed with a supplier, Douglas Lautenbach (who also pleaded guilty) to overcharge the company for fiber optics. The three pocketed the difference and used the ill-gotten gains to fund lavish homes, sports cars, RVs, and other expensive items. They also allegedly sold other equipment on the secondary market. Instead of enjoying the luxury items they'll likely get to spend a few years enjoying the not so luxurious insides of various ClubFed facilities.

In the end, most of these "perfect crimes" end up with the same result—the participants enjoying ClubFed and making restitution to the government. Crime just rarely pays.