Taxable Talk

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....