By: A.J. Cook


The Mustang Ranch is bust. And the owner of Nevada's oldest, most infamous legal brothel discovered he can't horse around with the Internal Revenue Service.

Joseph Conforte's problems provide proof that everyone -- even bordello operators -- should keep financial records.

Conforte, legally operating the brothel in Nevada, was concerned that his other activities might be considered outside the law. For four years he and his wife, Sally, filed income tax returns showing only their names, address, social security numbers, taxable income and tax. They didn't identify deductions or sources of income. They did pay the taxes they showed they owed. On the returns they explained that additional information might be used against them in criminal investigations. They added that they believed the tax amount was correct, but if the IRS determined a larger amount, they would pay it.

The IRS obliged with a tax bill for $7.3 million.

Computing the tax wasn't easy. Conforte operated on a cash basis -- no bills, no checks. But what made the task especially difficult was the fact he burned his records daily and kept no control books. In short, he left no paper trail for the IRS.

The agency based its figures mainly on one piece of paper -- a "trick" sheet. This showed the earnings of each prostitute for one 24-hour period. It had been rescued from the incinerator by Joe Peri, a former Mustang Ranch employee. Joe worked there while home on school break. He turned the sheet over to his father's attorney, and it eventually got to the IRS.

That piece of paper did the trick. Assuming these were average earnings and reviewing Nevada Health Department records to see how many prostitutes worked at Mustang, the IRS reconstructed total receipts. It allowed 45 percent of gross income for wages to prostitutes. It went to the electric power company for the utility expense and the county assessor for property taxes. It also allowed other business expenses including promotion costs. Conforte had given away free passes, so the IRS estimated what he paid the prostitutes for their time.

Conforte, surprised and mad about the huge tax bill, went to court. He claimed the computation was arbitrary and capricious.

The judge disagreed explaining that without records or cooperation by the taxpayer, any computation would necessarily be "inexact." Tax laws "place the responsibility of maintaining records and substantiating deductions upon the taxpayer," said the judge. "Where a taxpayer deliberately destroys his records, the IRS may compute income by whatever method will, in its opinion, reflect the taxpayer's income."

The judge concluded that Conforte had made his bed and now must lie in it.

The Moral: Cheating the IRS can be tricky.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 10-22-90