8 ms·

Taxation of illegal income in the United States

85 points by bobbiechen 5y ago

jbrot 5y ago
The section on marijuana is particularly interesting. You are apparently allowed to deduct ordinary business expenses, even if the business in question is illegal. However, Congress has explicitly disallowed these deductions in the case of illegal drug trafficking. Since marijuana is illegal federally, the courts have ruled that medical and recreational marijuana businesses that are legal under state law may not deduct any of their ordinary business expenses from their federal taxes.
- mjthrowaway1 5y ago
  Yes, it’s brutal. With the Tax Cut and Jobs Act you can incorporate more expenses in to indirect COGS but sales, marketing, opex, admin are non-deductible.
- vmception 5y ago
  I wonder if that passed the 14th amendment’s equal protection clause. Curious how Congress’ exception is written. Maybe if they tied it to anything on the scheduled substances list then it would pass the 14th amendment. Edit: > if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law Ah yes, they wrote it that way. Ok.
  - KMag 5y ago
    It would be interesting to see this challenged for the case where interstate commerce isn't involved. I know the federal government has regularly asserted jurisdiction under the premise that drugs that don't cross state lines still affect interstate prices. I doubt it would be successfully challenged, but it would still be interesting to see it challenged. (I'm not a lawyer. This is not legal advice.)
    - aaronblohowiak 5y ago
      All commerce is interstate commerce since the constitution got shredded by the courts.
    - vmception 5y ago
      What would be the challenge to affirm, the right to take a tax deduction on purely intrastate commerce? The feds might like that case because it furtheraffirms their ability to tax anyway they seem fit on purely intrastate commerce too. I think it relies on you taking the deductions to begin with and the IRS saying “heyyy waaait a minute, some of these deductions in the trafficking of scheduled substances violate Section 230E, the others good though!” Which .. isnt really that farfetched but aside from the tax court case you could be facing a defrauding the US government criminal charge, and other stuff actual lawyers might be more aware of.
- chiefalchemist 5y ago
  Slight but important correction. These business are not legal at the state level, their products are decriminalized. Since, as you noted, they are illegal federally, the best states can do is decriminalize. They cannot override the fed status.
  - rootusrootus 5y ago
    Has that actually been decided? The businesses are legal under state law, and if they aren't selling across lines then it's starting to get into gray areas on what enforcement power the feds actually have. Which is probably why they haven't really pushed the issue, because they have reason to believe it wouldn't go their way.
    - zdragnar 5y ago
      So long as Wickard v. Filburn remains precedent, it is really quite settled. The only question is if it will be enforced. Since the states had voted to legalize it, it is obviously politically unpopular to clamp down on them, but they will likely continue to make the operational aspects of these business very difficult (banking, credit card processing, etc).
      - rootusrootus 5y ago
        > Wickard v. Filburn At the risk of exposing just how much I am not a lawyer, doesn't that decision rely on the interpretation that the farmer's activities did have a plausible effect on the wider market? Wouldn't that be a tougher sell in the case of cannabis, where there is no national market? > remains precedent The current Supreme Court really seems willing to toss aside precedent. I wonder what direction they'd go on this issue.
        zdragnar 5y ago
        In the case, the farmer was growing wheat for his own personal use. The justification was that by growing his own, he was opting out of the market, and therefore his actions fell under the commerce clause. In the case of cannabis, these are literal businesses engaging in the act of buying and selling. Illinois and probably other states differentiate the amount that can be sold to a customer depending on whether or not they are residents or from a different state. The notion of national market versus not is a red herring; markets are concepts, not tangible things, and the concept exists independent of the government itself. Making something illegal doesn't stop the sale of it, otherwise there would be no point in the DEA existing. As for the supreme court, one can hope.
- peter303 5y ago
  The legal pot industry will have good profit boost once its economic model is legalized. People in Congress have been trying for over a decade and momentum is building.
  - refurb 5y ago
    I'm not sure. In Canada it's legal and so much money was invested prices plummeted in terms of the cost of marijuana. Maybe not surprising since you can easy grow more than demand. Once enough producers and retailers go under then you'll probably find some nice equilibrium, but margins will be very small.
Computeiful 5y ago
In their examples section they mention how a double agent was charged with tax evasion based on $2m of undeclared income from bribes. But if the agent WERE to mention the income on their tax documents, even as "Unspecified due to 5th amendment protection" that surely would be incriminating enough to cause further investigation from the state. (I assume the US government keeps a close eye on their agents papers). I'm just not sure how you're supposed to declare ill-gotten gains without 5th amendment worthy self-incrimination.
- doldols 5y ago
  Presumably investigating someone over that would violate their 5th amendment rights, no?
  - ThePowerOfFuet 5y ago
    > Presumably investigating someone over that would violate their 5th amendment rights, no? You may wish to reread the 5th amendment.
    - doldols 5y ago
      Go on. How is forcing someone to testify against themselves with the threat of criminal charges (tax fraud!) and then using that information in a criminal investigation not a 5th amendment violation. I’m not a lawyer, I don’t know anything. I’m just curious.
      - ThePowerOfFuet 5y ago
        The fifth amendment prevents forcing anyone to testify against themselves, but does not stop investigations. You asserted that the 5th should prevent an investigation, but it will do nothing of the sort: > Presumably investigating someone over that would violate their 5th amendment rights, no?
        doldols 5y ago
chiph 5y ago
At least one state wants their tax money from illegal income. North Carolina has an Unauthorized Substances Tax, where you buy a tax stamp covering your possession of the items (various drugs and/or moonshine). https://www.ncdor.gov/taxes-forms/other-taxes-and-fees/unauthorized-substances/about-unauthorized-substances-tax https://www.ncdor.gov/taxes-forms/other-taxes-and-fees/unaut... From talking to folks I used to know at the Department of Revenue, they have never sold any stamps to people in advance of the cops arriving on the scene. Only to stamp collectors. The tax rate for marijuana is $3.50 for each gram (or fraction thereof) above 42.5 grams. Bulk spirituous liquor is $12.80 per gallon.
- R0b0t1 5y ago
  Other states do this and even the federal government, I think. They're shooting themselves in the foot. If the path to legal possession is tortuous and likely to incriminate you then you're protected from divulging it and your nonpayment of taxes is wholly legal on the grounds attempting to collect makes the state violate the 5th. The widespread use of parallel construction -- and even merely its plausibility -- means that the IRS's current stance on reporting illegal income is likely suspect as well.
  - arcticbull 5y ago
    There have been a number of cases where the legality of requiring tax payment on illicit income hinges on the state tax authorities providing a means of paying said taxes completely anonymously. Of course they do not expect anyone to pay - this is merely so they can Capone people. It's much easier to nail people for tax evasion than for the actual crimes they committed in a lot of cases.
  - gnopgnip 5y ago
    The irs is prohibited from sharing taxpayer info without a warrant. There have been many cases in the past where your fifth amendment rights have not prevented tax liability or criminal charges for illegal income.
    - deleted 5y ago
vmception 5y ago
Your tax exempt entities (retirement accounts, non profits) are exempt from a lot of criminal liability because they dont have a tax reporting dilemma. If only Al Capone used a non profit right? Makes me wonder what might be going on now.
petilon 5y ago
Tax rate for illegal income should be 100%.
_8j50 5y ago
Stupid question: can you report your income as illegal on purpose in order to pay tax on it because you fear the wrath of the IRS more than the police? If you don't specify the exact nature of your crimes but only that you wish to pay them more money, will you get audited or get in trouble with the police/DA?
highwind 5y ago
Joker's take on the issue: https://www.youtube.com/watch?v=QK0UxenfV4Q https://www.youtube.com/watch?v=QK0UxenfV4Q
cat_plus_plus 5y ago
Well, what's the alternative? Income is only illegal after trial and conviction, and that may not be black and white. If you are a gardener driving a truck that fails emission regulations, you may at some point be fined, but otherwise you just pay taxes on your earnings like everyone else?

85 points by bobbiechen 5y ago

The section on marijuana is particularly interesting. You are apparently allowed to deduct ordinary business expenses, even if the business in question is illegal. However, Congress has explicitly disallowed these deductions in the case of illegal drug trafficking. Since marijuana is illegal federally, the courts have ruled that medical and recreational marijuana businesses that are legal under state law may not deduct any of their ordinary business expenses from their federal taxes.

mjthrowaway1 5y ago
Yes, it’s brutal. With the Tax Cut and Jobs Act you can incorporate more expenses in to indirect COGS but sales, marketing, opex, admin are non-deductible.
vmception 5y ago
I wonder if that passed the 14th amendment’s equal protection clause. Curious how Congress’ exception is written. Maybe if they tied it to anything on the scheduled substances list then it would pass the 14th amendment. Edit: > if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law Ah yes, they wrote it that way. Ok.
- KMag 5y ago
  It would be interesting to see this challenged for the case where interstate commerce isn't involved. I know the federal government has regularly asserted jurisdiction under the premise that drugs that don't cross state lines still affect interstate prices. I doubt it would be successfully challenged, but it would still be interesting to see it challenged. (I'm not a lawyer. This is not legal advice.)
  - aaronblohowiak 5y ago
    All commerce is interstate commerce since the constitution got shredded by the courts.
  - vmception 5y ago
    What would be the challenge to affirm, the right to take a tax deduction on purely intrastate commerce? The feds might like that case because it furtheraffirms their ability to tax anyway they seem fit on purely intrastate commerce too. I think it relies on you taking the deductions to begin with and the IRS saying “heyyy waaait a minute, some of these deductions in the trafficking of scheduled substances violate Section 230E, the others good though!” Which .. isnt really that farfetched but aside from the tax court case you could be facing a defrauding the US government criminal charge, and other stuff actual lawyers might be more aware of.
chiefalchemist 5y ago
Slight but important correction. These business are not legal at the state level, their products are decriminalized. Since, as you noted, they are illegal federally, the best states can do is decriminalize. They cannot override the fed status.
- rootusrootus 5y ago
  Has that actually been decided? The businesses are legal under state law, and if they aren't selling across lines then it's starting to get into gray areas on what enforcement power the feds actually have. Which is probably why they haven't really pushed the issue, because they have reason to believe it wouldn't go their way.
  - zdragnar 5y ago
    So long as Wickard v. Filburn remains precedent, it is really quite settled. The only question is if it will be enforced. Since the states had voted to legalize it, it is obviously politically unpopular to clamp down on them, but they will likely continue to make the operational aspects of these business very difficult (banking, credit card processing, etc).
    - rootusrootus 5y ago
      > Wickard v. Filburn At the risk of exposing just how much I am not a lawyer, doesn't that decision rely on the interpretation that the farmer's activities did have a plausible effect on the wider market? Wouldn't that be a tougher sell in the case of cannabis, where there is no national market? > remains precedent The current Supreme Court really seems willing to toss aside precedent. I wonder what direction they'd go on this issue.
      - zdragnar 5y ago
        In the case, the farmer was growing wheat for his own personal use. The justification was that by growing his own, he was opting out of the market, and therefore his actions fell under the commerce clause. In the case of cannabis, these are literal businesses engaging in the act of buying and selling. Illinois and probably other states differentiate the amount that can be sold to a customer depending on whether or not they are residents or from a different state. The notion of national market versus not is a red herring; markets are concepts, not tangible things, and the concept exists independent of the government itself. Making something illegal doesn't stop the sale of it, otherwise there would be no point in the DEA existing. As for the supreme court, one can hope.
peter303 5y ago
The legal pot industry will have good profit boost once its economic model is legalized. People in Congress have been trying for over a decade and momentum is building.
- refurb 5y ago
  I'm not sure. In Canada it's legal and so much money was invested prices plummeted in terms of the cost of marijuana. Maybe not surprising since you can easy grow more than demand. Once enough producers and retailers go under then you'll probably find some nice equilibrium, but margins will be very small.

Computeiful 5y ago

In their examples section they mention how a double agent was charged with tax evasion based on $2m of undeclared income from bribes. But if the agent WERE to mention the income on their tax documents, even as "Unspecified due to 5th amendment protection" that surely would be incriminating enough to cause further investigation from the state. (I assume the US government keeps a close eye on their agents papers). I'm just not sure how you're supposed to declare ill-gotten gains without 5th amendment worthy self-incrimination.

doldols 5y ago
Presumably investigating someone over that would violate their 5th amendment rights, no?
- ThePowerOfFuet 5y ago
  > Presumably investigating someone over that would violate their 5th amendment rights, no? You may wish to reread the 5th amendment.
  - doldols 5y ago
    Go on. How is forcing someone to testify against themselves with the threat of criminal charges (tax fraud!) and then using that information in a criminal investigation not a 5th amendment violation. I’m not a lawyer, I don’t know anything. I’m just curious.
    - ThePowerOfFuet 5y ago
      The fifth amendment prevents forcing anyone to testify against themselves, but does not stop investigations. You asserted that the 5th should prevent an investigation, but it will do nothing of the sort: > Presumably investigating someone over that would violate their 5th amendment rights, no?
      - doldols 5y ago

chiph 5y ago

At least one state wants their tax money from illegal income. North Carolina has an Unauthorized Substances Tax, where you buy a tax stamp covering your possession of the items (various drugs and/or moonshine). https://www.ncdor.gov/taxes-forms/other-taxes-and-fees/unauthorized-substances/about-unauthorized-substances-tax https://www.ncdor.gov/taxes-forms/other-taxes-and-fees/unaut... From talking to folks I used to know at the Department of Revenue, they have never sold any stamps to people in advance of the cops arriving on the scene. Only to stamp collectors. The tax rate for marijuana is $3.50 for each gram (or fraction thereof) above 42.5 grams. Bulk spirituous liquor is $12.80 per gallon.

R0b0t1 5y ago
Other states do this and even the federal government, I think. They're shooting themselves in the foot. If the path to legal possession is tortuous and likely to incriminate you then you're protected from divulging it and your nonpayment of taxes is wholly legal on the grounds attempting to collect makes the state violate the 5th. The widespread use of parallel construction -- and even merely its plausibility -- means that the IRS's current stance on reporting illegal income is likely suspect as well.
- arcticbull 5y ago
  There have been a number of cases where the legality of requiring tax payment on illicit income hinges on the state tax authorities providing a means of paying said taxes completely anonymously. Of course they do not expect anyone to pay - this is merely so they can Capone people. It's much easier to nail people for tax evasion than for the actual crimes they committed in a lot of cases.
- gnopgnip 5y ago
  The irs is prohibited from sharing taxpayer info without a warrant. There have been many cases in the past where your fifth amendment rights have not prevented tax liability or criminal charges for illegal income.
  - deleted 5y ago

vmception 5y ago

Your tax exempt entities (retirement accounts, non profits) are exempt from a lot of criminal liability because they dont have a tax reporting dilemma. If only Al Capone used a non profit right? Makes me wonder what might be going on now.

petilon 5y ago

Tax rate for illegal income should be 100%.

_8j50 5y ago

Stupid question: can you report your income as illegal on purpose in order to pay tax on it because you fear the wrath of the IRS more than the police? If you don't specify the exact nature of your crimes but only that you wish to pay them more money, will you get audited or get in trouble with the police/DA?

highwind 5y ago

Joker's take on the issue: https://www.youtube.com/watch?v=QK0UxenfV4Q https://www.youtube.com/watch?v=QK0UxenfV4Q

cat_plus_plus 5y ago

Well, what's the alternative? Income is only illegal after trial and conviction, and that may not be black and white. If you are a gardener driving a truck that fails emission regulations, you may at some point be fined, but otherwise you just pay taxes on your earnings like everyone else?