Eddie Lee Williams - Page 5

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               The first issue for decision is whether petitioner received            
          unreported income from cocaine sales in the amounts determined by           
          respondent and, if so, whether this income is subject to Federal            
          income taxation.                                                            
               Section 1 of the Internal Revenue Code imposes a Federal tax           
          on the taxable income of every individual.  Section 61(a) defines           
          gross income for purposes of calculating taxable income as “all             
          income from whatever source derived.”  This broad definition                
          includes income obtained from illegal sources.  James v. United             
          States, 366 U.S. 213, 218 (1961); sec. 1.61-14(a), Income Tax               
          Regs.  Separately, section 1401 imposes a tax “on the self-                 
          employment income of every individual”.  Self-employment income             
          is defined generally as “net earnings from self-employment”,                
          which in turn means “the gross income derived by an individual              
          from any trade or business carried on by such individual, less              
          the deductions allowable by this subtitle which are attributable            
          to such trade or business”.  Sec. 1402(a) and (b).  “Trade or               
          business” as used in this context has been construed to encompass           
          not only legal but also illegal business activities.  Peyton v.             
          Commissioner, T.C. Memo. 2003-146.2                                         

          2  The provisions of secs. 1401 and 1402 differed                           
          significantly from 1989 to 1990.  We have reviewed respondent’s             
          calculations in both years and find them to be correct under the            
          applicable provisions of the Code.  We note that the sec.                   

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