In reaching this decision, the Court looked to the seminal case setting forth the tax code's definition of gross income, Commissioner of Internal Revenue v. Glenshaw Glass Co.,[7] in which the Supreme Court held that a taxpayer has gross income when he has "an accession to wealth, clearly realized, and over which the taxpayers have complete dominion".
Therefore, the embezzler had gross income under the tax code, even though the application of another body of law would later force him to return the money.
While embezzlers, thieves, and the like are forced to report their illegally acquired income for tax purposes, they may also take deductions for costs relating to criminal activity.
For example, in Commissioner v. Tellier, a taxpayer was found guilty of engaging in business activities that violated the Securities Act of 1933.
[10] The U.S. Supreme Court held that the taxpayer was allowed to deduct the legal fees from his gross income because they meet the requirements of §162(a),[11] which allows the taxpayer to deduct all the "ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.
[15] Congress may impose specific provisions that prohibit deductions in connection with illegal activity or other violations of law.
"[17] Similarly, no business deduction is allowed "for any payment made, directly or indirectly, to an official or employee of any government [ .
The IRS asserts that it was the intent of Congress to apply the provision to anyone "trafficking" in a controlled substance, as defined under federal law (as stated in the text of the statute).