This transcript has been edited for clarity.

David D. Stewart: Happy holidays from Tax Notes. I'm David Stewart, editor in chief of Tax Notes Today International.

As 2025 comes to an end, we're continuing our annual tradition of ending the year with a few short stories that may be a little odd or otherwise don't work as a full episode. As our gift to you this holiday season, here's our year-end collection 2025.

Joining me now is Tax Notes legal reporter Trevor Sikes. Trevor, what do you have for me?

Trevor Sikes: Thanks for having me. Well, Supreme Court Justice [Potter] Stewart famously said about what constitutes pornography: He'll know it when he sees it. So this year, it has us wondering: Will the IRS know pornography when it sees it?

David D. Stewart: Well, to paraphrase the Talking Heads, how did we get here?

Trevor Sikes: That is a great question, Dave. It all started with the One Big Beautiful Bill Act passed this summer, OB3 as we call it. And among that, notably, was enacted a deduction for workers who receive tips.

Now, about a few months ago, some proposed regs were introduced on those tips. Not all of the tips under those proposed regs are qualified for the deduction, and the Treasury and the IRS specifically excluded a few tips. Importantly, those are tips received from illegal activities or prostitution. But then, interestingly, it also mentions any tips received from "pornographic activities."

David D. Stewart: So is this a matter of the law that they had to add these restrictions in?

Trevor Sikes: No. It really was not a matter of the law. In fact, the proposed regs don't provide a definition of what pornographic activity means. And further, there is no historic precedent for Treasury or the IRS targeting pornographic activity. Many commenters have talked about this, noting that this is a legal activity, this is a legal profession, and First Amendment rights may come into play with this activity.

David D. Stewart: Excusing some level of ignorance about tipping culture, where does this really come into play?

Trevor Sikes: Well, that's a good question. And I did have some feedback from readers and see other discourse about that exact question. Where does tipping come into the pornographic activity disallowance? And really, that comes in with digital content creators.

We've seen a rise in sites like OnlyFans that market themselves, I believe, as they say, as an 18+ platform for content creators to upload videos or content and allow subscribers to view that content. Notably, on OnlyFans, a subscriber can tip the content creator. And so a lot of content creators on OnlyFans receive their wages in the form of tips.

David D. Stewart: OK, so we have this policy that's being set out by regs. What are people saying about this? How's this being received?

Trevor Sikes: Yeah, it's been a really mixed reaction. I would say the disqualification has really stirred up a lot of controversy in the tax world. It is a very salacious topic, so it's no surprise there that it really has kind of riled people up.

Procedurally, I think the big question that people are asking is, how will the IRS actually enforce this? There has been a lot of discourse over the substantial reduction in IRS workforce this past year. And with the onus being on the taxpayer to identify whether they qualify for the tip or not, how is the IRS going about checking and determining whether those tips came from pornographic activity? And further, where are they going to draw the line? What activity is pornographic enough to disqualify it from this tips deduction?

But in a more moral or personal sense, the reception has really been polarizing, I would say. I've received responses and heard through the grapevine after writing this piece about practitioners in the field, and just other readers in general, really being ambivalent or actually supportive of this disallowance for the exclusion, whether that's through a moral stance against pornography itself or even the kind of more problematic allegations that have come with the professional practices of pornography.

But I've also heard a lot of consternation against this disallowance, specifically again with public comments or other practitioners asking why are they disallowing tips from what is otherwise a legal profession and a legal activity. OnlyFans has more than 4.6 million content creators on its platform, for example, and has more than 377 million subscribers, I believe, and is reported, I believe last year, it's $7.2 billion in gross payments by subscribers. Now, not all of that is tipped income, right? But again, I think it highlights the question that a lot of people are having about why the IRS is disallowing that deduction for such a large chunk of taxpayers earning their wages lawfully.

David D. Stewart: Yeah. And this sort of brings to my mind, I think that we've actually done on this episode of the year in previous years, of how difficult it is for tax administrations to define food when it comes to VAT or sales tax. And so now, we have a problem of definitions that stray into First Amendment questions, and it seems that this is going to be even more tricky than all the previous attempts to define things for tax purposes.

Trevor Sikes: Yeah. There really is very little, if not any, and I don't like to say absolutes when it comes to legal precedent, but really there is no legal definition of what pornography is. And again, the IRS and the Treasury have not released a definition, nor have they historically had one for pornography. I mean, Justice Stewart's quote about knowing it when he'll see it still kind of stands as the pinnacle legally of what is and is not pornographic activity. So again, that question is important and, I think, an interesting one about how the IRS is going to actually administer this disallowance to the deduction.

David D. Stewart: So let's zoom out a bit. Tell me about the big picture of this general tax on tips policy.

Trevor Sikes: Right. So this was a policy that President Trump had campaigned for and was relatively popular and even received bipartisan support. And what this deduction is, as enacted by OB3 or the One Big Beautiful Bill [Act], is a deduction that allows for taxpayers to deduct up to $25,000 in qualified tipped income. And that $25,000, by the way, is the same for single or married filing jointly taxpayers. Now, not all tips are qualified for the deductions, and hence where we get into this mire of controversy.

David D. Stewart: So there's this term that I've heard, the SSTB. Could you tell me about what that is?

Trevor Sikes: Right. So SSTB is short for specified service, trade, or business. And that is important in this conversation because the proposed regulations and the statute itself, the tips deduction statute itself, disqualifies tips from the deduction that are received pursuant to a specified service, trade, or business.

Where that ties in here is that one of the definitions of an SSTB is any trade or business where the "principal asset" is the reputation or skill of one or more of its employees or owners. Now, under that definition, that would on its face seem to preclude adult content creators or pornographic actors from ever receiving this tips deduction.

So a few questions have come from this, which ties back to, one, why specifically single out pornographic activity when it's already covered by the SSTB disallowance? But also of note, there's this proposed eligible jobs list contained in the regs. The Treasury created this jobs list that they say are jobs that they consider to be jobs that customarily and ordinarily receive tips and ones that they view as generally being eligible for the tips deduction.

However, there's tension in this, because a fair amount of the jobs on that list can also be defined as SSTB jobs, so there's crossover. And where we get back into the pornographic activity conversation is that one of the jobs specifically listed by the Treasury on its proposed eligible jobs list is digital content creators. And if you are an OnlyFans, an adult content creator online, in theory, you would fit the mold perfectly. I mean, your job name is right there on that proposed eligible jobs list.

Now this has caused quite a bit of upheaval in some tax professional circles, especially again with the onus being on the taxpayer to determine whether or not they qualify for the tip. So a recent notice that was released by the IRS kind of acknowledged this in a way and actually gave relief to taxpayers for 2025 claiming the credit, saying that, "Hey, if your job is listed on this proposed eligible jobs list, we'll allow you to claim the deduction for 2025 regardless of whether or not your job is an SSTB."

Where that ties back in, again, is adult content creators, right? It's this big question that again brings us back to if they technically qualify under the proposed eligible jobs list but don't qualify because the money, the income, or the tips that they're receiving are from pornographic activity, how will the IRS determine that? How will they draw the line, and who at the IRS is determining that?

David D. Stewart: Well, this will definitely be an interesting issue to keep an eye on and see how the IRS works through it. Trevor, thank you so much for being here.

Trevor Sikes: Thank you so much for having me.

David D. Stewart: Joining me now is Tax Notes senior legal reporter Nathan Richman. Nate, welcome back to the podcast.

Nathan J. Richman: Thanks for having me.

David D. Stewart: What do you have for me?

Nathan J. Richman: 2025 has been an interesting year for the devotees of various cryptocurrencies. On the one hand, we had Roger "Bitcoin Jesus" Ver settle his criminal tax case. And what I have for you today is the criminal tax appeal for one Ian Freeman and his Crypto Church of New Hampshire.

David D. Stewart: Well, let's get spiritual. Tell me about it.

Nathan J. Richman: So Freeman was an early cryptocurrency guy, and while he was hosting a radio show in 2014, he started a business dealing various cryptocurrencies, and he would make his money by paying a sub-1 percent commission and then [selling] them for commissions as high as 10 percent. He used various kiosks and messaging apps to arrange all of these sales.

Eventually, the government came knocking and said, "This sounds like a money services business. These are supposed to be licensed. You do not seem to have a license. Oh, and by the way, where are your tax returns for the past 10 years?"

So he ends up charged with money laundering, running an unlicensed money service business, and tax evasion. He gets convicted. The trial court throws out one of the money laundering charges and then calculates his sentencing range at 210 to 262 months, varies downward, gives him just eight years. Cue what happened this year, he appealed.

David D. Stewart: All right, so what happened when he got to the appeals court?

Nathan J. Richman: First, on the nontax charges, his main argument appeared to be: See this major questions doctrine that the Supreme Court has been invoking lately? Isn't the regulation of cryptocurrency, including whether or not I have to have a licensed money service business, one of those major questions? The First Circuit was not terribly impressed with this, saying [that] under scrutiny, it bears little resemblance to the line of cases the Supreme Court held triggers the major question doctrine.

Moving on to his criminal tax appeal, he attacks some of the general elements of tax evasion in his case. How much of a deficiency did he have, if any? The government has to prove a tax due and owing to convict you of tax evasion, and he also challenges the traditional willfulness requirement for just about any tax crime.

When he challenged the tax due and owing, he says, "Yeah, I didn't file my taxes, but I got all these deductions. You can't really prove I owed tax." The panel was not persuaded, saying, "They proved you probably owed tax. The requirement is not to disprove any hypothetical, and also everything you're citing looks like itemized deductions, which you can only take if you actually filed your returns and you didn't file your returns."

Turning to willfulness, which has long been defined as a voluntary and intentional violation of a known legal duty, he just says, "I wasn't willful." The panel goes through some of the evidence proving his willfulness. Most of the time when the government has to prove willfulness, it's through some indirect evidence. We often refer to big chunks of that as badges of fraud.

One invoked for Freeman is the way in which he used some entities. He had his customers sometimes send their payments not to him in his name, but to some of these entities, four of which were the aforementioned Crypto Church of New Hampshire, Shire Free Church, Church of the Invisible Hand, and the New Hampshire Peace Church.

David D. Stewart: All right, so this is the rare occasion of the temple and the money changer basically here.

Nathan J. Richman: Pretty close. But it turns out these weren't so much temples according to the court, they were nominees. And then there was some of the evidence about his political opinions, shall we say.

For example, he ran in 2016 for governor of New Hampshire with a platform of decriminalizing marijuana and making all taxes voluntary. He also ran for a few other New Hampshire elections since then. The appeals court cited evidence that he had a "Stop paying taxes" sign on his porch. He said stuff like, "Only suckers pay tax on crypto," and other frivolous tax rhetoric.

David D. Stewart: It doesn't sound like he did himself any favors here. So how did the court ultimately decide on it?

Nathan J. Richman: The court found sufficient evidence of willfulness. He argued, "But the jury could have found me innocent." And the court said, "That's true. They could have believed you. But on appeal, it's not could you have been found innocent, but could a rational jury have found you guilty based on the evidence that was introduced, and a rational jury could have."

When I wrote the story initially, I talked to one of his defense attorneys who said that Freeman was considering asking the whole First Circuit to rehear his case or filing a cert petition. Since the decision, he has moved for the full court consideration, the court rejected that, and he has not yet, as of early December, filed a petition to the Supreme Court.

David D. Stewart: Well, Nate, I thank you so much for coming here and sharing the good news.

Nathan J. Richman: Thanks for having me.

David D. Stewart: Joining me now is Tax Notes chief correspondent Amanda Athanasiou. Amanda, welcome back to the podcast.

Amanda Athanasiou: Thanks for having me, Dave. It's great to be here.

David D. Stewart: What do you have for me?

Amanda Athanasiou: Well, I've got a case about a guy who's trying to convince a court that he had a good reason for his failures to report his foreign account, and that was that he was really trying to hide the account from his wife and not the government.

David D. Stewart: All right. Why don't you tell me about it?

Amanda Athanasiou: Well, there seems to be a small but sort of ever-growing population of taxpayers who have ended up in court in connection with their failures to report offshore accounts to the IRS. And they've tried to defend themselves by insisting that their intent was not to hide money from the IRS, but to hide it from their own family, and spouses usually in particular.

The latest taxpayer in this category is involved in an FBAR litigation, so foreign bank account reporting litigation, and that's going on right now in a district court in California.

David D. Stewart: So what's happening in this case?

Amanda Athanasiou: Well, the case is United States v. Salam Mahmood, and the taxpayer who lives in San Diego was sued in January 2024 by the United States, which is asking for a $1 million judgment against him for willful FBAR failures and late payment penalties.

So in July the government moved for summary judgment, and the taxpayer filed a brief opposing that motion in August, and Mahmood made the argument in that brief that his divorce proceedings actually negated a finding of willful failure to file in his case. So he had set up the account with UBS in 1997 and said that at that time he was having serious marriage problems that continued for over a decade until 2010.

And the taxpayer said the whole point of setting up this UBS account was to hide funds from his wife and that he was relentless about making sure she didn't know about it, and that included not having the name UBS on any documents that she might see. He insisted that he wasn't trying to hide the account from the IRS. And in fact, he reported interest income from the account on his tax returns, but he claimed he had never heard about FBARs.

David D. Stewart: Well, that's a bit of a bold strategy. How did that work out for him?

Amanda Athanasiou: Well, as you can imagine, the government was not moved by these arguments. In the government's reply brief, which was also filed in August, they argued that in the FBAR compliance context, basically, there's no carveout from willfulness findings for taxpayers intending to mislead spouses. They said, and I quote, "Willfulness does not require specific intent or a bad purpose."

And in fact, it argued that the taxpayer's admission that he was intentionally hiding his foreign accounts, including on joint tax returns, weighed in the government's favor because it shows that he acted knowingly and thus willfully.

David D. Stewart: How did the court come down on this?

Amanda Athanasiou: Well, the court hasn't ruled on the government's summary judgment motion. This was a case that was stayed for the government shutdown and there have been some delays since the summer, but there are dates set to take the issues back up again. So it will be interesting to see if the court addresses the marital discord defense and how it deals with that.

David D. Stewart: So you mentioned that this is one of a number of cases. What else is out there?

Amanda Athanasiou: Yes. So in Mahmood's brief, he mentioned a case involving a taxpayer named Annette DeMauro who was also on the hook for willful failure to file FBARs and had also set up a UBS account to protect assets during a contentious divorce. Hers was set up in 2000, which was the year she finalized her divorce.

DeMauro had some pretty sympathetic facts. She had a lot of reasons to have opened this foreign account to protect her assets that didn't have anything to do with the government. She testified that her husband engaged in harassment and threats during the divorce, that he had ties to local banks and tried to gain access to her U.S. accounts. He didn't comply with a divorce decree to pay her $35 million. He threatened that she wouldn't receive anything unless she agreed to his preferences for alimony and property division. And he said he would use his considerable financial resources to keep himself out of court and out of jail.

David D. Stewart: Well, this sounds like a far more compelling case. Did it help her in the final decision?

Amanda Athanasiou: The court said in that case in 2020, and this was a New Hampshire District Court, that the government had failed to prove by a preponderance of the evidence that DeMauro knowingly violated the FBAR reporting statute, but that it did prove by that standard that she acted with reckless disregard, if not willful blindness towards tax reporting obligations, which was enough for a willful violation finding.

So essentially, the evidence was enough to show that DeMauro took steps to hide her foreign income and transactions, but not necessarily enough to show that she did it to avoid a known tax obligation at Fed. Of course, the government in Mahmood's case has argued that DeMauro's case doesn't help him since DeMauro was still found liable for willful FBAR penalties. So again, we'll have to wait to see how that case shakes out. I believe the next hearing for that one is set for January.

David D. Stewart: Well, it's definitely something to keep an eye on. Amanda, thank you for being here.

Amanda Athanasiou: Thanks so much for having me.

David D. Stewart: Joining me now is Tax Notes reporter Emily Hollingsworth. Emily, what do you have for me?

Emily Hollingsworth: Thanks, Dave. By the way, are you more of a Monopoly or a Game of Life type of guy?

David D. Stewart: I'll have to say Monopoly. I do like to be the race car.

Emily Hollingsworth: The race car is great. Monopoly person myself too. The reason why I ask is that it leads into this tax story that I wanted to discuss.

David D. Stewart: All right, so what's going on?

Emily Hollingsworth: Hasbro Inc., the toy and games giant behind everything from Monopoly to Connect 4 and Twister, My Little Pony, and Transformers in September officially announced that it would be moving its headquarters from Pawtucket, Rhode Island to Boston, Massachusetts by the end of 2026.

This is a significant move for several reasons. One, Hasbro has been located in Rhode Island since its founding in 1923 through its evolution to the ubiquitous toy and game company we know today. That's more than 100 years.

Second, and this is where the tax angle comes in, Massachusetts Economic Assistance Coordinating Council also approved $14 million in tax credits to Hasbro. The tax credit, and this is from Massachusetts Economic Development Incentive Program, will be equal to $20,000 for each full-time employee that moves to Boston. And Hasbro has said that it expects that 700 full-time employees are expected to make the move to the new headquarters.

David D. Stewart: So is tax the primary issue for the move, or is it more about free parking?

Emily Hollingsworth: Hasbro has indicated that tax credits weren't the only reason for the move. In a copy of Hasbro's Massachusetts tax credit application that I obtained, Hasbro said that locating to Boston would put the company in proximity to Massachusetts universities, major airports, and technology experts.

This would, to paraphrase using a game term, level up the company's access to strategic brand partnerships and employees. When we last spoke to Boston in September, a city spokesperson said that there weren't any city-level tax incentives or property abatements in connection with Hasbro's move.

David D. Stewart: So now that Hasbro has passed go, have we heard from officials in Rhode Island about the loss of Hasbro?

Emily Hollingsworth: Yes, we have, particularly from Rhode Island's governor, Dan McKee. He said in a statement back in September once this move was announced that he believes that Rhode Island is the best place for Hasbro to call home.

However, McKee also pointed out that the move wouldn't impact Rhode Island's economic success, and he pointed to more than 36,000 jobs created under his administration, some of the biggest employers being Amazon and Fidelity Investments. Hasbro has also indicated that it's going to continue to support the Rhode Island-based Hasbro Children's Hospital through annual donations and continue recruiting efforts at Rhode Island colleges and universities.

David D. Stewart: So what do we know about Hasbro's process of buying property in Massachusetts?

Emily Hollingsworth: According to a Massachusetts official, Hasbro and the administration of Gov. Maura Healey have been discussing the company potentially locating to Boston since 2024. In a tax credit application, Hasbro refers to a presentation from Rhode Island state leaders in November of 2024 that we also obtained.

Hasbro says that Rhode Island leaders pitched tax incentives valued at close to $100 million, a lucrative land parcel that would only cost the company $1, and other benefits. The presentation also compares Rhode Island's relatively lower income in corporate tax rates with Massachusetts higher rates and also said there's no millionaire tax in Rhode Island. And they're of course referring here to Massachusetts's 4 percent tax on individual income that exceeds $1 million.

Hasbro also mentions in its application that Boston has a more expensive real estate and labor market and that the support of Massachusetts through these tax credits would help mitigate some of these costs. Hasbro is slated to move to its new headquarters by the end of next year. We'll be following the story and the developments around the tax credits in the meantime.

David D. Stewart: Well, with Hasbro taking a chance on Massachusetts, it'll be an interesting story to follow. Emily, thank you for being here.

Emily Hollingsworth: Thanks, Dave.

David D. Stewart: Before we go, I'd like to thank our producers, Jordan Parrish and Peyton Rhodes, Acquisitions and Engagement Editor in Chief Paige Jones, Executive Editor for Commentary Jéanne Rauch-Zender, Associate Acquisitions Editor Alexis Hart, and all the reporters and contributors who make this show possible. And thank you to all the listeners out there. We couldn't do this without your continued support. Happy holidays, and we wish you a happy and healthy new year.

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