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Discussion
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.
(continued...)
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