It’s tax season in America. For law-abiding citizens and residents, that means meticulously counting income and deductions. For the crooks out there, the IRS wants you to know: If you received a bribe, you need to report it as income.
Under the “Other Income” section in the IRS tax code is a surprise:
Bribes. If you receive a bribe, include it in your income.
So the U.S. Government requires you to pay taxes on illegal activity. Where’d this idea come from?
During prohibition, it was nearly impossible to prosecute mobsters. Witness intimidation and lack of a paper trail meant most mafiosos walked around with impunity.
Assistant Attorney General Mabel Walker Willebrandt came up with a new theory. What if the feds could turn one crime that couldn’t be prosecuted into two crimes that could?
If a mobster received a bribe or other fruits of a crime, they could intimidate witnesses all day. But if they failed to report it on their taxes, the IRS could nail them on tax evasion — no witnesses from outside the government are needed. And they’d still be on the hook for taking the bribe or other illicit gains.
Willebrandt tested her theory with a case that went to the U.S. Supreme Court.
In 1927, Sullivan v. United States, a prohibition-era bootlegger was charged with tax evasion for not reporting his illegal income. Sullivan argued that to do so would be self-incrimination in violation of the Fifth Amendment.
Justice Oliver Wendell Holmes dismissed the idea that illegal income is exempt from being reported and taxed. Writing for the majority at the time:
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 rejected the Fifth Amendment argument. He said a defendant who believed information required on the tax form would incriminate him could raise that issue on the form. But the defendant could not simply refuse to file the tax form altogether.
The Sullivan decision brought open season on bootleggers and racketeers.
The new power of the IRS was put on full display in 1931 by the successful prosecution of America’s most infamous mobster, Al Capone (pictured above).
He was indicted by a federal grand jury on 22 counts of income tax evasion, convicted at trial, and sentenced to 11 years in federal prison.
For bribe payers, what about the deductibility of bribes? No go.
Section 162 of the Internal Revenue Code sets out an exclusion from deductions for bribes, kickbacks, or other illegal payments. Payments that violate the FCPA are expressly non-deductible, along with other payments illegal under U.S. law.
Holmes also talked about the deductibility of bribe payments and included a warning to crooks:
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.
In its 2021 Strategy on Countering Corruption, the White House said while “tax crimes are thought to be different than corruption, the two are often interconnected. For example, a World Bank study of 25,000 firms in 57 countries found that firms that pay more bribes also evade more taxes.”
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