Calculation of Taxable Income
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Income from Illegal Sources is Taxable
In the 1946 case, Commissioner v. Wilcox, (327 U.S. 404), the U.S. Supreme Court ruled that embezzled money does not constitute income to the embezzler. In 1952, the Supreme Court ruled that extorted money was taxable income to the extortionist in Rutkin v. United States, 343 U.S. 130. Curiously, the Supreme Court refused to overrule their Wilcox decision but instead chose to distinguish the cases based on the difference of their facts.
In 1961, the Supreme Court considered this issue one last time. In James v. United States, 366 U.S. 213, the Court ruled that the IRC Section 61(a) definition of gross income includes income from illegal sources. In essence, the U.S. Supreme Court finally recognized that the Tax Code does not distinguish between legal or illegal income.
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Al Capone was one of the most notorious American gangsters during the Prohibition era. Initially, the federal authorities were not able to convict “Public Enemy #1” of any criminal activity. However, they took note of his lavish lifestyle, and were finally able to convict Scarface of tax evasion. Ultimately, he was sent to the Alcatraz Federal Penitentiary off the coast of San Francisco.
At the Federal level, the entire cannabis industry – whether regulated or unregulated at the State level – is considered an illegal source of income.