1

INTRODUCTION
In the 1930s Al Capone was prosecuted, convicted and sentenced to 11 years in prison
for income tax evasion.1 The Italian-American gangster who led a Prohibition-era crime
syndicate argued that governments should not benefit from the proceeds of crime as
States prohibited their citizens from engaging in criminal activity.2 The prosecution of AI
Capone became the subject of intense examination by the different legal systems of the
world in later years: Do the fruits of criminal activity constitute taxable "income"?
Income is the consumption and savings opportunity gained by an entity within a
specified timeframe, which is generally expressed in monetary terms. 3 In accordance
with Zambian statute, income is defined under section 17 of the Income Tax Act
Chapter 323 of the Laws of Zambia.
Income Tax is a tax that governments impose on financial income generated by all
entities within their jurisdiction.4 It is also defined as the tax on profits made by Limited
Companies, Partnerships and Self-Employed individuals as well as on emoluments
earned by employees.5 All profit making organizations and individuals in employment
are under legal obligation to pay income tax. Income tax is a key source of funds that
the government uses to fund its activities and serve the public.
This paper seeks to critically discuss Al Capones statement, Income tax is a lot of
bunk. The government cannot collect legal taxes from illegal money. In short, this paper
will discuss the issue of whether or not the government can collect taxes from income
derived from illegal activities.
1 J. Kobler, Capone: The Life and World of Al Capone (1971)
2 Douglas O. Linder, Al Capone Trial (1931): An Account (2011)
3 Barr N, Problems and Definition of Measurement. In Economics of the Welfare
State. Page 121
4 www.investopedia.com/terms/i/incometax.asp (accessed on 14/09/2014)
5 www.zra.org.zm/commonHomePage.htm?viewName=incomeTax (accessed on
14/09/2014)

THE INCOME TAX

Income Tax is a direct tax. This means that it is a government levy on the income,
property, or wealth of people or companies. A direct tax is borne entirely by the entity
that pays it, and cannot be passed on to another entity.6
The Government of the Republic of Zambia, like many other governments in the world,
significantly relies on tax revenue to finance both its key infrastructure development and
social services.7 No government in the world can run its administrative office without
funds and it has no such system incorporated in itself to generate profit from its
functioning.8 Collecting revenue is the number one purpose for income tax.
An income has been defined (in economics) as the consumption and savings
opportunity gained by an entity within a specified timeframe, which is generally
expressed in monetary terms. However, section 17 of the Income Tax Act does not
define income but merely states what amounts to income. In fact in almost every
regime around the world tax law does not define income. 9 In an economics view income
has been clearly defined, but in a legal sense it has not. A questions may be posed in
order to further continue this discussion: If legal income is not defined how do we know
what illegal income is?

6 www.businessdictionary.com/definition/direct-tax.html (accessed on 14/09/2014)

7 Shebo Nalishebo, Albert Haalwampa, Uncovering the Unknown: An Analysis of Tax
Evasion in Zambia (2014)
8 www.business.mapsofindia.com/india-tax/concepts/purpose-taxation.html
(accessed on 15/09/2014)
9 www.caricom.org/jsp/community/cota/genral assembly/19cota tax admin
underground economy.jsp?null&prnf=1 (accessed on 15/09/2014)

The Income Tax Act of Zambia does not define the term illegal income nor does it
mention what amounts to it. It can be argued that the reason statute does not define
income is to eliminate any discrimination between legal income and illegal income.
However many have attempted to define this concept and some have succeeded in a
way. Therefore, illegal income is Income derived from illegal activities. 10 These illegal
activities (Indictable offences) are activities that are punishable by imprisonment and
include offences such as drug trafficking, tax evasion, extortion, illegal gambling, people
smuggling, forgery, piracy and many more.11 Regardless of the source of the income,
the income is still considered taxable.12However, not all indictable offences will have
taxation ramifications. Only illegal activity that directly relates to the earning of taxable
income.13

TAXATION OF ILLEGAL INCOME

Generally, all income is considered taxable unless it is specifically exempted by law. Income that
is taxable must be included on your income tax return in order to avoid potential penalties for tax
evasion. Al Capone and many people, then and today, were surprised to learn that

income from illegal activities could be taxed as well. It however appears to tax
authorities that proceeds of crime and of other unlawful activities should be subject to
taxation in the same manner as income derived from lawful enterprises. Even Michael
Pampallis,14 who appears to question the morality of taxing earnings derived illegally
10 www.businessdictionary.com/definition/illegal-income.html (accessed on
15/09/2014)
11www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-orloss/Income-from-illegal-activities--losses-and-outgoings/ (accessed on 15/09/2014)
12 www.businessdictionary.com/definition/illegal-income.html (accessed on
15/09/2014)
13 www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-orloss/Income-from-illegal-activities--losses-and-outgoings/ (accessed on 15/09/2014)
14 M Pampallis, Whats Good for the Goose Earnings from Prostitution (1990)
page 122

from prostitution, agrees that such earnings qualify as income and because they do,
they are subject to taxation.
To further address this issue, I shall look at the legal standing of two jurisdictions. The
United States of America and the United Kingdom.
1. The United States of America
The sixteenth amendment authorizes Congress to tax "incomes, from whatever source
derived." 15 In1913, when Congress first exercised its authority under the sixteenth
amendment, it imposed a tax on net income from a variety of sources, including "any
lawful business carried on for gain or profit. Years later, Congress eliminated the
qualifying word "lawful" from the statute. 16
In the case of United States v. Stafoff,17 the Supreme Court intimated that the omission
was part of a plan to make federal laws, including the income tax, and the penalties for
violating such laws, applicable to illegal traffic in intoxicating liquors following the
adoption of national prohibition. In the courts opinion, Justice Holmes stated, Of
course, Congress may tax what it also forbids.
Consequently, the American tax law contains an all-inclusive definition of gross income
whereby earnings (illegal) can only be excluded from gross income if the Internal
Revenue Code (IRC) has specifically provided for such exclusion. In James v United
States,18 the Supreme Court held that an embezzler was required to include his illgotten gains in his gross income for Federal income tax purposes. The Court was
divided between several different rationales. The majority opinion was written by Chief
Justice Earl Warren, joined by Justices Brennan and Stewart. That opinion held that if a

15www.law.cornell.edu/constitution/amendmentxvi (accessed on 15/09/2014)

16 Boris I. Bittker, Taxing Income from Unlawful Activities, Yale Law School Faculty
Scholarship (1974)
17 260 U.S 477 (1922)
18 366 U.S 213 (1961)

taxpayer receives income legally or illegally without consensual recognition of

obligation to repay, that income is taxable.
In United States v Mueller,19 the court restated the position that gain, whether lawful or
unlawful, constitutes taxable income when its recipient has such control over it that,
practically he derives readily realizable economic value from it.
In the USA persons engaged in illegal activities are compelled to report their ill-gotten
gains as income for tax purposes. Failing to file income or misrepresenting

the source of the income can result in severe penalties for tax
evasion. Tax evasion, which includes knowingly misrepresenting
information on your tax return to get out of paying taxes, is a felony
offense.20

2. The United Kingdom

The United Kingdom practices the common law system. Common law is an effect legal
precedent that is made by judges sitting in court. Unlike statutory provisions, which are
laws that are codified as Acts of Parliament, the common law is constantly changing. 21
In the United Kingdom, income derived from unlawful activities is taxable just like it is in
the United States of America.22 In the case of Partridge v Mallandaine,23 the court came
19 113 U.S. 153 (1885)
20 www.taxationlawfirms.com/legal-advice/tax/tax-penalties/can-i-taxed-illegalactivities-what-i-report-the-illegal-income-c (accessed on 16/09/2014)
21 www.courtroomadvice.co.uk/common-law-england.html (accessed on
16/09/2014)
22 Samkelo Callaway Mtwana, Taxation Of Illegal Income: The Duty To Disclose
Income Derived From Illegal Activity and the Constitutional Right Against SelfIncrimination (2011)

up with a bold ruling that the taxation is not affected by the legality or illegality of the
business through which income has been derived.
Years later, the position of Common Law over this matter seems to be the same. It
seems generally it has now been accepted that liability to tax depends primarily on
statutory construction and that moral issues have no part to play.24
Thus, a profit made by carrying on a criminal activity is liable to UK tax insofar as the
illegal activity in question can be shown to fall within one of the taxing provisions and
the courts have resisted any attempts to restrict the application of these provisions to
the profits derived from lawful activity. In the case of Mann v. Nash,25 the Court held that
the revenue authorities, representing the state, only look at an accomplished fact, and
not condone it or partake in it. They merely find profit made from what appears to be a
trade, and the revenue laws say that profits from a trade are to be taxed. Illegal income
that can be taxed should be of revenue nature as income from the sale of an asset is
normally not taxable as it is capital in nature.26
In the United Kingdom income will be taxed as long as it arises or accrues from a trade,
regardless of the legality of that trade. This rule by Rowlatt J in Mann v. Nash has now
become the test as to whether or not an illegal activity is taxable as a trade. 27

SHOULD ILLEGAL INCOME BE TAXED?

Is it right or wrong for the government to collect taxes from illegal income? Is the
government secretly promoting illegal activities so it can gain from the proceedings?
Generally two cases can be argued over this matter:
23 2 TC 179 (1886)
24 www.lawiscool.com/tag/mann-v-nash/ (accessed on 16/09/2014)
25 16 TC 523 (1932)
26 www.caricom.org/jsp/community/cota/genral assembly/19cota tax admin
underground economy.jsp?null&prnf=1 (accessed on 15/09/2014)
27 www.hmrc.gov.uk/manuals/bimmanual/bim22010.htm (accessed on 17/09/2014)

Firstly income from unlawful activity is never accurately reported by its recipients, no
matter what the law provides. They conceal or destroy all records of their income and
assets. As a result, the taxing body will have to get into costly investigations in an effort
to enforce the law, with no assurance that the taxes actually collected will exceed its
expenses.28 Because one of the principles of collecting taxes is that it should be a
process that is cheap and easy,29 it can be argued that government should find other
means of punishing wrong doers.
Secondly, assuming that it is both fair and profitable to tax the profits of unlawful
activities, is it degrading for the government to do so? Judge Manton in the case of
Steinberg v. United States30 argued that it was. Opinions will differ, but I find the Manton
theory farfetched to the point of absurdity. The notion that the government is a "silent
partner" in all profitable activities because it taxes their income is a familiar and
sometimes useful figure of speech, but the relationship entails no moral responsibility
for the behavior of the private member of this fictional partnership.
In my legal opinion, the government should collect taxes from illegal income. The illegal
businesses make a lot of money and thus the government could possibly gain plenty in
order to sustain development in the economy. This in no way promotes illegal activities,
but actually helps fight it because the wrong doer will realize there is not benefit from his
illegal actions. Another way that has been proposed as a solution is to legalize certain
offences for governments tax gain. The most common of these proposed solutions is
the legalizing of marijuana.

CONCLUSION
In conclusion collection of income taxes serves a great purpose for any government in
the world. The collection of these taxes is a primary source of revenue for governments
28 Boris I. Bittker, Taxing Income from Unlawful Activities, Yale Law School Faculty
Scholarship (1974)
29 www.legal.answers.com/taxes/why-does-the-government-collect-taxrs-from-thepeople (accessed on 17/09/2014)
30 162 F.2d 120 (1947)

to accomplish their social and developmental goals. However, the source of the income
is not considered.
In the United States of America any form of income, illegal or legal is taxed according to
their sixteenth Amendment. In the United Kingdom on the other hand, any source of
income that derives from a form of trade is considered to be a taxable income whether
that particular trade business is legal or illegal.
In my view, government can and should collect taxes from illegal income. This removes
the element of discrimination on income and it also discourages illegal activities in a
way.