[SerenityNow]

I have unfortunately studied REG on a couple of different study platforms, namely Becker and Wiley. They both have this question and it amuses me every time I see it.

“Mock operates a retail business selling illegal narcotic substances. Which of the following items may Mock deduct in calculating business income?”

I. cost of merchandise
II. business expenses other than cost of merchandise.

The answer is I. and the explanation is even more amusing : “A gain from an illegal activity is includible in income. To determine the gain, a deduction is permitted for cost of merchandise. Business expenses for operating an illegal business, other than the cost of merchandise, are not permitted as a deduction.

Let’s just take a second to analyze this, because my first reaction has always been “yeah, because the drug lord is filing his 1040 and putting a line item for cost of cocaine on his schedule C.” The best I can make of it though, is an illegal business trying to avoid tax evasion like Al Capone, and fronting it as a different business. But even then, the explanation flies in the face of this. “Oh yeah, you need to report that illegal money you brought in, but only deduct the cost of the illegal drugs.” Thus, this question has never made sense to me, and I don’t know why it is ever asked. I am dying for a different point of view on this.

[Pete]

Yup, I remember this question from a few years ago. Al Capone should have listed his illegal activities. You simply wouldn’t disclose the nature of that income, just a “source of income.” Oddly, the IRS can be worse than most police agencies. Uncle Sam doesn’t care too much about how he makes his money.

B=84 This exam was such a b**** that I thought I failed-don't know how these things work
A=76 Slacker I am, I'll happily take it
R=81 I LOVE taxes
F=80 I don't wanna get banned for an expletive I'm thinking with "yea" proceeding it

[Author]

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