Taxing Income from Unlawful Activities

Abstract

In a series of cases dating back to the 1920s, the Supreme Court has considered whether earnings derived from unlawful activities constitute taxable income. After tracing the development of this case law, Professor Bittker asserts that the federal income tax statutes have contained no clear congressional mandate on this issue and that therefore the question may appropriately be resolved from a policy standpoint. Professor Bittker admits that some of the arguments against taxability, such as the potential for discriminatory enforcement and the possibility of prejudice to the defendant at trial, have merit, but he contends that these problems can be solved short of immunizing from tax all illegal profits and concludes that the optimal rule is to tax the net income from any unlawful activity.