Most taxpayers have at least a vague understanding of the principle that gifts do not constitute taxable income, while payments for services are taxable. Unfortunately for exotic dancer and professional adult entertainer Veronica Fairchild, there is no middle ground which would allow her to include in income some of the money she received from a client as payment for her services, while she characterized the bulk of what she received as gifts.

In 2010, Fairchild filed joint returns with her husband for the years 2005 to 2008, reporting income of approximately $120,000 for the first three years, and $150,000 for 2008. The total income reported, $513,670, was significantly less than the $1,153,647 she received from two clients during that time period.

At trial, she testified that she considered the money she received from one of the clients, a Mr. Karlen, to be a gift, but that she had reported some of it as income to take some of the tax burden off of him. She also maintained that her meetings outside of the club were simply for private dances and did not involve sex. However, Karlen testified at the trial. He said all of their meetings outside of the club were for sex.

When asked whether the 37 payments were all for sexual services, Karlen replied, “every one of those.” He later confirmed that “the whole $1.1 million was for sex.”

The jury found her guilty on four counts of making and subscribing a false tax return. The district court sentenced her to 33 months in prison on each count, to run concurrently. The Eighth Circuit affirmed the decision in U.S. v. Fairchild (March 17, 2016).

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