Illegal Transactions and the Income Tax
![handle is hein.journals/uclalr5 and id is 28 raw text is: Illegal Transactions and the Income Tax
FRANK M. KEESLING*
The application of the federal income tax to illegal businesses, activi.
ties and transactions has received an enormous amount of judicial and
administrative attention. The decisions and rulings are conflicting on many
points. For the most part, the problems presented have been accorded
superficial consideration with aphorisms and dogmatic assertions serving
as substitutes for insight.1 In the great majority of instances, the con-
clusions reached reflect emotional antagonism to the illegal nature of the
activities involved rather than impartial and competent reasoning.
For the purpose of discussion, the problems will be divided into two
groups: Those relating to the inclusion of receipts from illegal sources
in the computation of gross income, and those relating to the deduction of
expenses, losses and other items.
INCLUSION OF RECEIPTS IN GROSS INCOME
The 1913 Income Tax Act defined gross income as including gains,
profits and income derived from . . . the transaction of any lawful
business.2 Subsequent acts omitted the word lawful. This omission has
been referred to as indicating an intention on the part of Congress to tax
income irrespective of the legal or illegal nature of the activities from
which derived.3 In United States v. Stajofl,4 the Supreme Court intimated
that the omission was part of a plan to make federal tax laws, including
the income tax, and the penalties for the violation of such laws, applicable
to illegal traffic in intoxicating liquors following the adoption of national
prohibition. In the court's opinion, Justice Holmes stated ... of course,
Congress may tax what it also forbids.6
In United States v. Sullivan, an individual was convicted of fraud-
ulently failing to file an income tax return reporting income from illegal
activities. He urged that such income should not be considered taxable
and, further, to require the filing of a return reporting such income would
* Member of the California and Los Angeles Bars.
1 The statement is particularly true of the cases relating to deductions most of
which repeat shopworn expressions to the effect that deductions are a matter of
legislative grace and that the allowance of a deduction for illegal expenses and
other items will frustrate public policy. See text, infra at n. 50.
2 38 Stat. 167 (1913). (Emphasis added.)
8 United States v. Stafoff, U.S. 477, 479 (1922) ; dissenting opinion of Justice
Burton in Comm'r v. Wilcox, 327 U.S. 404, 410 (1946) ; Rutkin v. United States,
343 U.S. 130, 138 (1952).
4 260 U.S. 477 (1922).
5 260 U.S. at 480.
6 274 U.S. 259 (1927).
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Illegal Transactions and the Income Tax
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