Late last week, news broke that officials with the group ACORN were secretly videotaped allegedly offering advice to folks posing as a pimp and prostitute. While accusations have flown about what was or was not said/meant/intended/edited, it’s clear that at least one of the officials was offering improper tax advice.
Here’s the set up for the video. James O’Keefe, a 25-year-old independent filmmaker, and a young woman paid a visit to an ACORN office in Baltimore. O’Keefe posed as an over the top pimp and the young woman pretended to be a prostitute. They told the officials at ACORN that they were hoping to find housing where the young woman could continue to operate as a prostitute. Both acknowledge and are advised that prostitution is illegal. And that’s where the fun begins.
The young woman is first advised that she should file taxes even if she’s working as a prostitute. This is absolutely true. Gains from illegal activities are still reportable and taxable.
Next, the staffer advises the young woman that she needs a “code” for her occupation for purposes of her tax return. She’s referring to the “Principal Business or Professional Activity Codes” that the IRS requires for Schedule C. The instructions state:
Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.
After the young woman has advised that she’s a prostitute, the ACORN staffer advises her to refer to herself as a freelance performing artist. Hmm… I think I would have suggested “812990 – All other personal services.”
The young woman tells an ACORN tax advisor that she earns about $8,000 per month. The ACORN employee, it has been reported, then advised the young woman that she would report $9,600 per year on her tax return (as opposed to $96,000). It sounded very deliberate when I first read the reports but watching the video made me change my mind. Tax evasion or bad math? I vote bad math on this one.
The staffer goes on to advise (properly) that self-employment income reported on a Schedule C would be subject to self-employment tax unless it could be offset by expenses. The staffer goes on to improperly advise that clothing and grooming would be deductible as expenses (who honestly believes that what a prostitute wears would pass muster with IRS as a uniform?). She also suggests that gifts to clients might be deductible – they are, to a point. But those would be subject to limits. The “pimp” then suggests that condoms could be considered a client gift. I actually think condoms would be considered a legitimate business expense (certainly ordinary and necessary in the trade of prostitution), not a gift.
The “pimp” and the young woman then tell the staffers that they plan to bring in young, illegal immigrants to work as prostitutes. The “pimp” wants to keep them off of the books but the staffer advises that they should issue 1099s, a good idea except for the teensy-weensy detail that they’re illegal. When the “pimp” points this out again, the staffer backtracks and says, “well then, you don’t have to worry about them.” She’s right in that, without a proper tax ID number, you can’t issue a 1099. But that doesn’t mean that you don’t report those workers, it means that you don’t hire them in the first place. That should have been the answer.
The most disturbing part of the video is when the staffer suggests that the girls who are being trafficked for the purpose of prostitution could be claimed as dependents. The IRS defines a dependent as a qualifying child, or a qualifying relative. There’s no way that these girls could be described as a “qualifying child.” They almost fit the definition of “qualifying relative” since the intent is to live with the taxpayer “all year as a member of your household” – however, there is a caveat that the relationship must not violate local law. Clearly, in this situation, it does violate local law on a whole bunch of levels.
So it’s a mixed bag on the advice. Occasionally on the right track. But mostly bad/wrong/illegal.
A lot has been said on both sides about the tape, including noting the holes in the editing. I’m glad that I watched it, though, rather than relying on reports from either side of the debate. Is it scream worthy? You can watch the tape here and judge for yourself what you think:
Reportedly, both staffers have since been fired.
By the way, if you’re wondering about the legality of the video, it likely cannot be admitted as evidence even if a criminal investigation is instigated since the state of Maryland requires the consent of both parties before taping or videotaping conversations. In fact, it may even be criminal (O’Keefe should have had a chat with Linda Tripp about that…).
Nevada legislators got an earful (and an eyeful) on Tuesday during a hearing about whether to tax prostitutes. The tax would be $5 per sex act and would raise more than $2 million per year for the state (I did the math on that one for you, it’s 400,000). Nevada has not collected any direct taxes from the industry since prostitution was made legal more than 30 years ago, though local governments have benefited through fees to the individual brothels.
Sen. Bob Coffin, who chairs the Senate Taxation Committee proposed the tax to help Nevada climb out of its current economic situation. Four of seven committee members oppose the measure. But Coffin got some surprising support at the hearing: prostitutes and brothel owners. Deanne “Air Force Amy” Salinger spoke in favor of the bill, saying “If $5 per person can raise $2 million a year, I’m all for it.”
In response to his critics who have labeled the tax as “blood money” derived from “paid rape,” Coffin said, “Can we be so proud as to refuse money that is offered, that can be levied on a legal business?” Seizing on the legitimacy issue, Dennis Hof, owner of the Moonlite Bunny Ranch agreed, saying that brothels were “looking for respectability and acceptability.”
However, Sister Diane Maguire of the Sisters of the Holy Family in Las Vegas disagreed, noting that the bill “normalizes prostitution and makes it seem like it’s a legitimate occupation.”
Yep, a hearing full of nuns and hookers. There’s a joke in there somewhere.
Despite the flurry of interest in the bill, largely driven by the relative “celebrity” of many of the prostitutes who have recently appeared on a number of HBO productions, it’s likely to go nowhere. Politicians don’t want to be seen as supportive of prostitution in the state, which, while legal, is still considered immoral… like, oh say, cigarettes and alcohol, both of which are legal and taxed?
As fate would have it, Warthen was never charged with prostitution but still found herself subject to criminal charges. Warthen was arrested for tax evasion as a result of her failure to report her illegal income on her tax returns.
If convicted, Warthen could have faced five years in prison and more than $100,000 in fines. However, today she reached a plea agreement in her case that resulted in no jail time. She’ll serve a year of home detention and pay more than $300,000 in back taxes, fines and penalties to the Treasury – a sum she’ll have no trouble producing now that she has married super rich David Warthen, founder of Ask Jeeves.
Warthen also received three years probation which means that she’ll have to keep her, um, nose clean.
In the agreement, Warthen admitted to hiding money from the taxing authorities including stashing cash in an old law school book. As someone who has paid hundreds of dollars to use a law school book for one semester, I personally admire her ingenuity in finding another use for the darn thing. I guess she learned something at Stanford after all.
What’s the difference between a lawyer and a prostitute? A prostitute will stop screwing you when you’re dead.
How often is it that I can post about hookers and lawyers in the same post?
Last week, Cristina Schultz, a 2001 graduate of Stanford Law, was indicted in federal court for allegedly failing to pay income tax on money she earned as a prostitute in 2003. Yes, do the math, that’s after she graduated from law school.
This story is notable for a couple of reasons. One, it’s my favorite provision of the tax code: illegal activities are still subject to taxation. Whether it’s gambling, bribery or prostitution, you still have to pay up on your income.
The indictment alleges that Ms. Schultz worked as a prostitute based in northern California, using the name “Brazil” (how exotic). She also allegedly maintained a website, TouchofBrazil.net, on which she advertised her services, pricing, travel schedule, and other information. Through her web site, Ms. Schultz allegedly provided “services” to clients in Los Angeles, Washington DC, Manhattan, Chicago and Seattle. Ms. Schultz’ expenses for 2003, which included travel, hotel, other expenses totaled $51,920. Subtracting that amount from her income of $133,717, resulted in net income of $81,797.
Two, Ms. Schultz, pictured above, is kind of famous – by marriage. She now goes by her married name, Cristina Warthen. Her husband is David Warthen, co-founder of Ask Jeeves, now known as Ask.com; they married in 2004. He must be so proud.
Interestingly, David Warthen married Schultz after her history as a prostitute was made public. In 2004, the government investigated Schultz and filed a civil forfeiture complaint after finding more than $60,000 in cash in safe deposit boxes and her apartment. Warthen claimed the money was a gift from him (wink, wink) and a closed settlement was reached.
Now, years later, the feds have re-opened their investigation into Schultz’ affairs, resulting in the tax evasion indictment. The total tax which is allegedly owed (though not including penalty and interest) is $25,424. If Ms. Schultz’ husband is as wealthy as you’d imagine, I can’t figure out for the life of me why the two of them would not simply pay up to move this along. Having never actually been a prostitute myself, I would think that it would be an embarrassing career choice to admit to later in life – though I can also attest that I was not netting over $80k per year two years out of law school, nor have I paid off my loans (she claims to have paid off more than $300,000 in student debt from working “in the biz”). Maybe she knows something I don’t.
Ms. Schultz is scheduled to appear in court on October 16. You can follow along if you so inclined at United States v. Warthen, No. CR-08-682; the indictment is available here.
