It’s True: You Must Report Income from Thievery on Your Tax Form
February 9, 2010
The popular FAILblog has an image from what I’m pretty sure is the Internal Revenue Service instructions on the definition of income, which includes this among the things that you must report:
Stolen property. If you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner.
It’s funny but true; thieves must pay income tax on stolen property they keep or face tax evasion charges. (As they say, it’s how they got Capone.) But since the Constitution protects individuals from incriminating themselves, you can tuck it into the “Other Income” line.
In Sullivan v. United States, 274 U.S. 259 (1927), a liquor bootlegger was charged with tax evasion for not reporting his illicit income, and he argued that to do so would be self-incrimination in violation of the Fifth Amendment guarantee.
Justice Holmes, writing for the U.S. Supreme Court majority, first dismisses the idea that illegally acquired income is exempt from income tax:
We see no reason to doubt the interpretation of the Act, or any reason why the fact that a business is unlawful should exempt it from paying the taxes that, if lawful, it would have to pay. (274 U.S. at 263.)
Holmes then turns to the question of self-incrimination:
If the form of return provided called for answers that the defendant was privileged from making he could have raised the objection in the return, but could not on that account refuse to make any return at all…. It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. But if the defendant desired to test that or any other point he should have tested it in the return so that it could be passed upon. He could not draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law. (274 U.S. at 263-64.)
Holmes then punts on the question of deductions:
It is urged that, if a return were made, the defendant would be entitled to deduct illegal expenses, such as bribery. This by no means follows, but it will be time enough to consider the question when a taxpayer has the temerity to raise it. (274 U.S. at 264.)
In law school, one of my more significant papers touched on mob lawyers, particularly Frank Ragano, who represented Santo Trafficante. Trafficante paid his taxes each year on what could only have been primarily illegal income. (Interestingly, it was Ragano who was later convicted of tax evasion.)