sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

Under section 162 just because an activity is illegal
doesn't mean costs related to it are not deductible. The
payment itself must be illegal. So if you pay rent to
maintain an illegal brothel, the payment or rent itself is
legal, so it is deductible, even though the activity for
which it is rented is illegal.

The text of 162(c)(2) is:

"No deduction shall be allowed under subsection (a) for any
payment (other than a payment described in paragraph (1))
made, directly or indirectly, to any person, if the payment
constitutes an illegal bribe, illegal kickback, or other
illegal payment under any law of the United States, or under
any law of a State (but only if such State law is generally
enforced), which subjects the payor to a criminal penalty or
the loss of license or privilege to engage in a trade or
business. For purposes of this paragraph, a kickback
includes a payment in consideration of the referral of a
client, patient, or customer. The burden of proof in respect
of the issue, for purposes of this paragraph, as to whether
a payment constitutes an illegal bribe, illegal kickback, or
other illegal payment shall be upon the Secretary to the
same extent as he bears the burden of proof under section
7454 (concerning the burden of proof when the issue relates
to fraud)."

Stu

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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

No, I was thinking of the rule that expenses against public
policy weren't deductible, but I can't find it now.
However, Section 162(c)(2) says that no deduction shall be
allowed for any payment which is illegal; is participating
in a pyramid scheme illegal?

Seth

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David Woods <davidwoods[at]verizon.net> wrote:
- quote -

Maybe he's thinking of fines and penalties for illegal
conduct, which are not deductible.

Stu

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"Seth Breidbart" <sethb[at]panix.com> wrote:
- quote -

Since when? Expenses incurred in the production of income
from illegal activities are deductible as they are for a
legal activity with the exception of certain drug related
expenses.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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mmm <gcollect1[at]sbcglobal.net> wrote:
- quote -

I'm not sure that the expenditures are deductible, even
against income; in one sense, it's gambling, but it might
well be illegal for all participants, in which case expenses
are not deductible.

Seth

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<kylesurv[at]gmail.com> wrote:

- quote -

If you're doing this as a trade or business, then create a
schedule C for these activities. If the amounts are
relatively small, you can probably net it down and if you
result in a profit, include on the "Other Income" line of
page 1 of Form 1040.

Be sure and keep meticulous records of your expenditures and
income regardless of which method you use to report. If you
end up in a net loss position, I would probably take my
lumps and leave it off the return entirely because it would
be hard to justify this type of arrangement as a true
business entered into for profit rather than fall into the
hobby loss rules which effectively say it you make money,
its taxable income, if you loss money, it's a personal
expenditure.

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Hopefully someone has an answer for this.

I've done some small "high risk investing" in HYIPs
(high-yeild investment programs; essentially ponzis).
Essentially I send $5 via paypal to a website, wait four
days and get $7.50 back via paypal.

I have no idea how to report this to the IRS. Perhaps it's
interest earned on something, but I'm not certain.

Any help would be greatly appreciated.

Thanks, Kyle

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