Prostitution and Tax Expenses

Running a call-girl business is an inherently risky venture. The lines frequently blur, and participants end up in what the law would describe as prostitution.

To sort out these complicated legal dilemmas operators frequently have to hire counsel. Should these expenses be reportable for tax purposes?

The now-defunct Exchequer Court examined the issue back in 1964, in Canada (Minister of National Revenue – M.N.R.) v. Eldridge, when several employees of the respondent were arrested on prostitution charges.


The Taxation Division provided Notices of Assessment of $22,046.75 and $19,103.77 for the previous two years. Objections over the government collecting taxes on illegal revenue were dismissed by Mr. Justice Cattanach,

25 … it is abundantly clear from the decided cases that earnings from illegal operations or illicit businesses are subject to tax. The respondent, during her testimony, remarked that she expressed the view to the officers of the Taxation Division that it was incongruous that the government should seek to live on the avails of prostitution. However, the complete answer to such suggestion is to be found in the judgment of Rowlatt, J. in Mann v. Nash ((1929-1932) 16 T.C. 523.) where he said at p. 530:

It is said again: “Is the State coming forward to take a share of unlawful gains?” It is mere rhetoric. The State is doing nothing of the kind; they are taxing the individual with reference to certain facts. They are not partners; they are not principals in the illegality, or sharers in the illegality; they are merely taxing a man in respect of those resources. I think it is only rhetoric to say that they are sharing in his profits, and a piece of rhetoric which is perfectly useless for the solution of the question which I have to decide.

The court was more lenient with some of the substantial business expenses excluded, namely $1,925 legal fees for some of the girls who had been arrested.


The court held that the fees were properly deductible because:

  1. it was for the purpose of income, because the call girl could not earn any income while she was imprisoned
  2. it was part of the arrangement that the operator would assume legal fees in the possibility of legal troubles

Most criminal lawyers would say that $1,925 is not a lot of money for that kind of an operation, even back then. And maybe there’s good reason why they skimped on legal fees. A more sizable deduction for $16,500 was rejected, because it was claimed as “protection fees.” The recipient of the fees was none other than the local law enforcement.

So if prostitutes can claim their legal fees as a tax deduction, can lawyers claim prostitutes as a legitimate tax deduction as well? It’s a disbursement that many Bay St. firms probably wouldn’t flaunt in their recruiting brochures.

Garry Slapper of Times Online suggests that the answer, at least before the U.S. Tax Court, is that they cannot.

William G Halby, a tax lawyer from Brooklyn, claimed $111,364 in 2002 for therapeutic sex. His 2005 claims were more detailed, $5,005 in books, magazines, and videos, and $42,152 for specifically for prostitutes. He cited section 213 of the Internal Revenue Code:

§ 213. Medical, dental, etc., expenses
(a) Allowance of deduction
There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

Brian L. Friedman, Administrative Law Judge, said in the case,

…portions of petitioner’s “sex therapy” were, in fact, sex for a fee, in violation of Penal Law § 230.02. Such expenses were not paid to medical professionals or for activities prescribed by medical professionals but were made to unlicensed providers for legally proscribed services. (See Penal Law § 230.00.)

Additionally, even if it were accepted that sex constitutes medical care, such expenses would be more for petitioner’s general well-being rather than cure, mitigation, treatment or prevention of a specific disease or condition.

…petitioner failed to produce evidence that the claimed expenses were for prescribed activity, and he had little regard for physician’s advice on sexually related matters. As the periodicals cited by petitioner were neither specific towards him nor for a specific illness, they cannot possibly constitute a prescription or medical advice. Because petitioner purchased the videos, books, periodicals, pornographic materials and sexual performance aids without prescription, and they were not medically necessary to treat a specific disease or condition, they are not medical expenses for which an income tax deduction is warranted.

We still have to overcome cases like Nina Baccala of North Providence, cum laude from the New England School of Law and clerk for Superior Court Judge Raymond J. Brassard, one of the many new law graduates who moonlight as an escort. Her case was only revealed after an assault last year while on the “job.”

With a clever title for a Constitutional paper like, “A Guide to Aborting Roe v. Wade and All of Its Bastard Progeny,” I would’ve hoped Baccula could come up with some fundamentally different choices in life.

But at least next time someone cracks, “What’s the difference between a prostitute and a lawyer,” you can give them a different answer:

“Taxes.”

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