Back in the 1970's, Jeffrey Edmondson was a successful drug dealer in the Minneapolis area, selling substantial amounts of marijuana, cocaine and amphetamines. Unfortunately for him, he got caught, convicted and sentenced to jail.
To add insult to injury, the IRS audited him and concluded that he owed over $17,000 in back taxes on his drug earnings, which he never declared on his income taxes. Although, one would have thought that a tax assessment was the least of his problems, Edmondson appealed the audit, claiming that the IRS failed to consider the tax deductible costs he incurred in conducting his "business".
The tax court held that edmondson was self-employed in the business of drugs. Therefore, he was entitled to a home office deduction because he conducted his "business" from home, and could also deduct the cost of good sold from is drug dealings income (Edmondson v. Comm'r., TC Memo 1981- 623)
In 1982, a special rule was added to the tax law barring tax deductions for expenses incurred in the business of drug trafficking. (I.R.C section 280E)
However, people operating different types of illegal businesses, such as prostitution or contract killing, are still permitted to deduct their expenses. But people involved in such illegal endeavors rarely file tax returns.
Hope you find this information helpful?
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