Income from Illicit Transactions

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.


Income from Illicit Transactions.—In United States v. Sullivan,44 the Court held that gains derived from illicit traffic were taxable income under the act of 1921.45 Justice Holmes wrote, for the unanimous Court: “We see no reason . . . why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.”46 Consistent with that decision, although not without dissent, the Court ruled that Congress has the power to tax as income moneys received by an extortioner,47 and, more recently, that embezzled money is taxable income of an embezzler in the year of embezzlement. “When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, ‘he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.’”48

44 274 U.S. 259 (1927).

45 42 Stat. 227, 250, 268.

46 274 U.S. at 263. Profits from illegal undertakings being taxable as income, expenses in the form of salaries and rentals incurred by bookmakers are deductible. Commissioner v. Sullivan, 356 U.S. 27 (1958).

47 Rutkin v. United States, 343 U.S. 130 (1952). Four Justices—Black, Reed, Frankfurter, and Douglas—dissented.

48 James v. United States, 366 U.S. 213, 219 (1961) (overruling Commissioner v. Wilcox, 327 U.S. 404 (1946)).

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