Illegal income and other thoughts

[powerage]

I have a hard time understanding this.

The IRS says that illegal income is taxable. Fair enough, I have no problems with that.

But at the same time, an illegal product that a legit doctor in good standing prescribes as a pain medication, in say, California, is not deductible. It does not matter that this product should be at least legal for medical use. And this product is legal for medical use in the state, though illegal by federal law.

Based on how the IRS treats illegal income, the expense for this legit medical use product should be fully tax deductible with no questions asked. And especially on the state return. Of course, provided they had accurate records.

Just something I always thought about and finally wrote down.

Am I right or wrong?

[veritas]

Income and deductions

are based on what laws the state and federal government decide.

[thomtax]

I don't know if fairness, justice or right ever had anything to do with tax law and enforcement.
:-(

LT

[Bees Knees]

Wrong

Based on how the IRS treats illegal income, the expense for this legit medical use product should be fully tax deductible with no questions asked.

The Internal Revenue Code (written by Congress, not IRS) says in Section 61 that all income is taxable from whatever source, unless the code says otherwise. The code says nothing about illegal income. Thus, it is taxable.

The Internal Revenue Code (written by Congress, not IRS) says in Section 162 that illegal expenses are not deductible.

Thus, Congress (not the IRS) says you must pay tax on illegal income, but you get no deduction for illegal expenses. The same applies to personal gains or losses. If I sell my personal use car, or personal use vacation home, or personal use Rockem Sockem Robots game at a gain, I pay tax on the gain. If I sell any personal use items at a loss, I get no deduction.

What is fair, right, or wrong, is defined by what Congress says is fair, right, or wrong. You don’t like it? Elect someone else to Congress.

[FEDUKE404]

Creative taxation

Reminds me of what one state (NC?) did for drug problems.

You had to purchase a "tax stamp" for each unit (weight/dosage unit/whatever) of illegal substances. Supposedly no one kept track of the purchasers.

If the police raided your house, and the tax stamps were not on the product, you faced tax issues totally separate from any drug laws. A huge tax bill was assessed on the spot, and things could get dicey....such as seizing assets to pay the tax bill. There were instances where folks were found (in court) innocent of the drug charges, but still owed the tax bill.

I think the courts finally put an end to this, but the stamps might be a nice collector's item!

FE

[Bees Knees]

Al Capone is credited with the 1929 Saint Valentine’s Day Massacre in Chicago where seven of his rival gangsters were gunned down. Yet, Al Capone’s career as a gangster came to an end when he failed to report his illegal income on his tax return, and was convicted for tax evasion. The purpose of the tax law requiring you to report illegal income while at the same time deny deductions for illegal expenses is so that the federal government has multiple ways of putting bad people behind bars. If they can’t get you for murder, at least they can get you for failing to pay tax on the money you got for murdering someone.

[taxea]

The reason is that federal law supersedes state law. If the state or county passes a law that is more lenient that federal law the federal law stands.

This is why medical marijuana is not deductible. Possession, sale, use, or growing is not legal by federal law. This holds true with a city or county passing a similar law. It is still a criminal act by state law so the police can still enforce it on a state or federal basis. taxea

[Gary]

Bees Knees said

"What is fair, right, or wrong, is defined by what Congress says is fair, right, or wrong. You don’t like it? Elect someone else to Congress."

Minnesota just did!!!!

[taxea]

Yeah! And heaven help them if Coleman's suit doesn't work. taxea

[OtisMozzetti]

Tax Laws designed to motivate behavior

Based on how the IRS treats illegal income, the expense for this legit medical use product should be fully tax deductible with no questions asked.
...
Am I right or wrong?

Everyone has reminded us that there is no "should" in taxes. Another thing to note is that Congress puts in tax laws where at least part of the purpose is to encourage, or to discourage, various types of behavior.