We all know the government expects you to report income from all sources of income, legitimate or not. That’s how they got Al Capone and a lot of other bad guys.
But apparently the IRS does not allow deductions of expenses for illegal businesses.
Has the legality or constitutionality of this position ever been challenged?
It’s part of the Internal Revenue Code, so it’s certainly legal.
And, it’s not the IRS. It’s Congress. Congress passed the law, the IRS just enforces it.
Thanks, but that doesn’t address the question of whether the legality or constitutionality of the position has been challenged.
Commissioner v. Sullivan, 356 U.S. 27 (1958)
Commissioner v. Heininger, 320 U.S. 467 (1943)
Textile Mills Securities Corp. v. Commissioner, 314 U.S. 326 (1941)
Commissioner v. Tellier, 383 U.S. 687 (1966)
Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 (1958)
Why would it be unconstitutional? Are deductions and expenses a right?
It certainly addressed whether or not it’s legal. It’s a actual law (as opposed to a regulation or internal ruling), thus it’s* legal.* True, I didn;t address Constitutional, but I see Alley Dweller has done so.
Since you are allowed to only deduct “legitimate” expenses, presumably expenses to further breaking the law (bribes, wear and tear on getaway cars) are not legitimate.
Fair and legal do not always coincide.
It’s a taking of property. The 5th amendment makes clear that property cannot be taken without due process of law. Not having your property taken without due process of law is a pretty clear and established right in the US, wouldn’t you agree?
And it seems that based on Alley Dweller’s cites (and thank you for those!) it was found legal to deduct legal expenses when defending oneself against claims that one’s business was fraudulent or was otherwise breaking the law, as well as the paying of employees of what was an otherwise illegal gambling operation, but that trucking companies cannot deduct traffic fines or penalties for breaking the law nor can corporations deduct lobbying expenses (at least, they couldn’t in 1941 when TEXTILE MILLS SECURITIES CORP. V. COMMISSIONER, 314 U. S. 326 (1941) was decided.
If I had asked whether or not those those statutes were legal, you might have a point. But I didn’t ask if the statutes were legal. I asked if their legality had been challenged. You appear to be answering a question that wasn’t asked, and then defending your answer to this unasked question.
Pardon the hijack, but: leaving aside the idea of someone trying to deduct expenses for such an undertaking, what happens if a Capone type does report income to the IRS when in fact paying taxes – but doesn’t spell out that he earned $10,000 on a murder-for-hire paycheck and earned $50,000 selling contraband, and so on and so on – but merely relays the (correct) dollar amount?
Good question. I believe that the SCOTUS has held that submitting a tax return that does detail illegal activities does not constitute the government compelling one to incriminate oneself and would thus not be an infringement of one’s 5th amendment rights.
The IRS privacy notice makes clear that the IRS has the authority to share the contents of information submitted to them with the DOJ for the purpose of enforcing tax laws, with the kicker " and to other federal agencies as provided by law."
I have to imagine that a tax return reporting boatloads of income with no deductions would somehow set a red flag for further review… but does the mere presence of a great deal of income with no deductions, and having the taxes paid on the gross, give the IRS cause to dig further? Is one violating any tax laws by not claiming appropriate deductions? Perhaps we’re steering into GD territory?
Has the matter ever even presented itself in practical application?
There is due process of law. Congress passed the law, and the IRS promulgated regulations based on the law. And if the IRS says you owe them more than you think, you can appeal the decision with the IRS. If you’re still not satisfied, you can take the IRS to court. That’s more than adequate due process for constitutional purposes.
Medical marijuana is a perfect practical application.
A medical pot dispensary is legal in many states (including Washington and California) and yet still illegal at the federal level because marijuana is still a controlled substance. There have been many conflicts between these dispensaries and the IRS over whether the costs of the dispensary are deductible and to what extent. For example, is it only the purchase cost of the marijuana that’s not deductible? Are the rent, salaries, office supplies and utilities also not deductible?
Here’s a recent news article that talks about a real case where a few million dollars of tax hangs in the balance: FOX 5 New York | Local News, Weather, and Live Streams | WNYW (Ironically, the IRS’s position - based on law and court precedent - in this case is to permit the deduction for cost of sales - the illegal drug - and to deny everything else.)
I just asked my CPA wife, briefly about this. If a criminal wants to pay taxes on ill-gotten gains, so as not to have tax evasion stacked on top of other charges, if (when) he gets caught, he can easily do that.
There’s no line on the tax form asking if you made your living illegally. Prostitutes, dope dealers, and such can state that they are professional gamblers or consultants. Various independent contractors, such as tree workers, day laborers, sculptors, and such, don’t have to bother with 1099 forms, but there are forms for them.
For legal residents, there’s a need for a Social Security number. Illegal aliens may pay taxes, and many of them do, by means of a special tax number obtained through a tax lawyer.
And you’re given due process. Due process doesn’t mean the government can’t do something. It means the government can’t do something without a hearing.
If you’re charged with not paying your taxes, you’ll be summoned to appear before a tax court. You’ll recognize it by the gold fringe on the flag.
Has anyone suggested there is not due process of law?
The government is taking your property, to wit, your income, when taxing you; naturally a due process of law would have to exist in order for the government to be able to take your property.
And it appears muddy as to whether or not a criminal enterprise has had the chutzpah to challenge the IRS when disallowing business deductions for illegal business enterprises.
In fact the only cite I’ve seen in this thread (COMMISSIONER V. SULLIVAN, 356 U. S. 27 (1958)) so far leads me to believe that the SCOTUS does permit deducting expenses, at least for the illegal gambling enterprise, but it was also made clear in the decision that the government tacitly permitted these operations by levying and collecting an excise tax on the wagers.
But this case also states that TEXTILE MILLS SECURITIES CORP. V. COMMISSIONER, 314 U. S. 326 (1941) held that one could not deduct expenses for condemned activities. Specifically, this case dealt with lobbying fees, which were explicitly disallowed by the Congress as ordinary and necessary business expenses. In retrospect, it seems this case does not really speak to the matter we have before us. I think it’s clear to all that lobbying a politician to get favorable legislation is not illegal.
Actually, a news article by the LA Times (a bastion of journalistic integrity, thorough research and unbiased reporting I know :rolleyes:) indicated that the pots dispensaries that the Feds are going to be going after here in CA are going to have their business expenses disallowed by the IRS because their enterprises are illegal under federal law. Of course the article offered no source or other corroboration that the claim it made was true.
You did: “The 5th amendment makes clear that property cannot be taken without due process of law. Not having your property taken without due process of law is a pretty clear and established right in the US, wouldn’t you agree?”
The due process of law is backwards where the IRS is concerned.
The IRS can take your assets, and if you don’t like it, the burden of proof and filing court papers to fight it falls on you.
So? When the police accuse you of a serious crime and arrest you, they lock you up in jail before your hearing.