AL CAPONE’S INCOME TAX EVASION CASE AND THE TAXATION OF ILLEGAL INCOME
"The income tax law is a lot of bunk. The government can't collect legal taxes from
illegal money." Al Capone
Al Capone, the world’s best known gangster and public enemy number one, was allegedly
head of a crime organization that netted huge profits from the illegal liquor trade
during the Prohibition era. In 1931 Capone was found guilty of tax evasion and was
sentenced to jail.
The conviction of Capone was based on the 1927 U.S. Supreme Court ruling in the United
States v. Sullivan case. In that particular case, the defendant did not pay income
tax on his gains from illicit traffic in liquor. The defense was based on the fact
that according to the Fifth Amendment to the Constitution of the United States of
America, no person shall be compelled in any criminal case to be a witness against
himself. The U.S. Supreme Court decided the following:
“1. Gains from illicit traffic in liquor are subject to the income tax.”
“2. The Fifth Amendment does not protect the recipient of such income from prosecution
for willful refusal to make any return under the income tax law.”
“3. If disclosures called for by the return are privileged by the Amendment, the
privilege should be claimed in the return.”
This means that persons who earn income by illegal means are required to report unlawful
gains as income when filing tax returns, but they are entitled to invoke the Fifth
Amendment if any more details are required concerning their illegal income.
However, the system of income taxation is based on the self-assessment method, which
means that tax liability is not calculated by the tax authority but by the taxpayer
himself. The payment of tax must be preceded by the filing of a return declaring
the actual amount of tax due. The amount declared in the return is to be checked
by the tax authority, which means that the authority assesses the correctness of
the type and calculated amount of income declared, therefore the taxpayer is obliged
to possess records and documents that prove the amount and type of income. In the
absence of a legal type of income, however, the tax authority can report the suspicion
of crime to criminal authorities. Furthermore, in the case of a prosecution, the
declared income without a legal source can be used as evidence against the defendant
in court. For instance, in the case Garner v. United States, the income tax returns
in which Garner revealed himself to be a gambler were introduced in evidence as proof
of the federal gambling conspiracy offense with which he was charged.
In consequence, in the author’s opinion, the obligation to declare illegally earned
income is indirect self-incrimination and therefore contrary to the Fifth Amendment.
If there are no obligation to declare the income, however, the crime of tax evasion
cannot be committed.
As a general rule, countries have had a long standing difficulty to seize their fair
share of illegal income. Instead of proving the crime and confiscating the proceeds,
or when the proceeds are spent imposing a fine, the states in many cases attempt
to tax the earnings, because proving the existence of income or wealth is often much
easier. In addition, taxation can be used to imprison people who commit a crime that
is hard to prove.