I hаve carefully considered the motions offered on behalf of the defendant to strike out certain testimony in this case. As to most of the testimony referred to, the motions are based on two contentions: (1) That the testimony tends to show the commission of crimes separate and independent from that charged in the indictment and (2) that the testimony does not tend to show the receipt of moneys by the defendant which may properly be regarded as income.
The first cоntention is, I think, untenable because it has been clearly decided by the Supreme Court of the United States that income derived from the proceeds of criminal transactions must nevertheless he reported by the taxpayer and is subject to taxation. It was so held in United States v. Sullivan,
A possibly close question of law is raised by the defendant’s second contention, that is, that the moneys received and alleged to have been retained by the defendant did not constitute reportable or taxable income. It is
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said by defendant’s counsel that tbe income referred to, if tbe Government’s allegations are to be sustained, result from a conspiracy to defraud tbe witness Dean, participated in by tbe defendant and, therefore, the money was obtained by fraud and may of course be recovered from the defendant and therefore cannоt constitute income. As an original proposition for judicial consideration the point undoubtedly has some substance although there are important considerations adverse to it. It may be thought beneath the dignity of the Government tо assess and collect taxes on such illegally gotten gains, but another point of view is certainly equally important for consideration in that there is no just reason why a taxpayer should escape his fair proportion of the burdеn of taxation because his gains are illegally gotten and thus increase the burden of taxation upon other citizens. It is not sound to consider the Government itself as a partial beneficiary of the defendant’s alleged fraud becаuse taxation is a power exercised for the benefit of the nation as a whole. But whatever might have been considered the wiser public policy in dealing with this question as an original one, I reach the conclusion, after study of the important and controlling authorities, that it has been decided adversely to the defendant’s contention. In the Sullivan Case the court was dealing with the taxability of a bootlegger’s profits from the extensive violation of the National Prоhibiton Act. 27 TJSCA. The considerations pro and con and the authorities decided up to that time are very fully reviewed in the opinion of Judge Soper for the Circuit Court of Appeals in
It may be suggested that there is a technical distinction as to the nature of the right of the taxpayer to retain and hold, as against adverse claims, moneys secured from illegal transactions in liquor and gambling and from bribes on the one hapd, and money obtained by a conspiracy to defraud on the other hand, it being contended that the present case falls in the latter category. The distinction is, however, I think, too nаrrow and technical to accomplish a difference in result in view of the very comprehensive definition of income contained in the Sixteenth Amendment and in the law itself which includes gains or profits from any source whatever, and as I read the cases the principle announced is broad enough to cover the particular ease. The consideration that the money involved in this case may be recoverable at suit of the witness Dean is not conclusive. Under the operation of the income tax law the money, if recovered, would presumably be a taxable loss in the year when recovered but this does not destroy the taxability to the taxpayer of the gain or profit for the year in which it was received and held by him, income taxation being on an annual basis. And as a matter of judicial authority it is noteworthy that the Canadian liquor law under consideration in the ease above mentioned provided in section 57 as follows: “Any payment or compensation for liquor furnished in contravention of this act or otherwise, in violation of law, whether made in money or securities for money or in labor or property of any kind, shall be held to have been received without any consideration and against justice and good conscience, and the amount or value thereof may be recovered from the receiver by the party who made the same.” (D. L. R. (1925) vol. 2, page 1139) And in discussing the subject-matter Justice Mignault said: “It is argued that the language of this definition is broad enough to include income derived from a business the carrying on of which is expressly prohibited by law. So would it be wide enough to comprise gains resulting from the commission of crimes, such as burglary or highway robbery, if such crimes, as often happens, be resorted to habitually as a means of making a gain or profit.” Despite these considerations the bootlegger’s income in that ease was held taxable by thе Judicial Committee of the Privy Council and the latter’s decision was cited with approval by Justice Holmes in his opinion in the Sullivan Case.
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The exact technical nature of the defendant’s acquisition and retention of the moneys involved in the motion to strike out testimony is not certainly and definitely clear. Defendant’s counsel argued that the money must be considered to have been embezzled or stolen. As a matter of technical law, as the money was delivered by Deаn to the defendant to be applied to a particular purpose, it could not be embezzlement, as a matter of common or statutory law in Maryland, and presumably the same is true as to the District of Columbia. The tendency of thе testimony is to show that when the money was actually delivered by Dean to the defendant the amount required to be paid for the settlement of the damage claims involved' in the respective cases was still uncertain and therefore unless the defendant was a party to the original conspiracy to defraud it could not be said that the money was obtained by means of either embezzlement, larceny or false pretenses. The defendant denies any fraudulent or criminal participation in the transaction. It seems to me that the most that can be said in support of the defendant’s contention on this motion is that the money received by the defendant as attorney for Dean, to be delivered to a particular person, was misapplied, and thus his offense was that of a breach of trust between attorney and client. For the purpose of ruling on the motion, therefore, I do not think it can be said that the defendant is justified in assuming that the testimony shows that the money was either embezzled or stolen or even obtained by false pretenses in the technical sense. The defendant is a lawyer. The alleged income came through the general practice of his profession. It does not become him, and I think is not admissible for him, to set up his own wrongful professional conduct in obtaining income as a lawful reason for escaping the tax thereon. I have noted that Circuit Judge Manton in Rau v. United States (C. C. A.)
For these reasons I conclude that the testimony should not be stricken out and the defendant’s motions to strike out are overruled and exception noted.
Defendant has also moved to strike out all testimony relating to the check for $4,550 said by the Government to have been received by the defendant as part of his income for 1930, and not returned as taxable. The check if received by the defendant was in payment to him of a bill for miscellaneous fees including some part of professional compensation for services in relation to the four special damage claims embraсed in the testimony. Defendant’s contention is that the whole of the amount of the check must be rejected as income because it includes in part a bill for services in connection with the damage claims and is therefore taintеd with the same imperfection as income which relates to any and all moneys received by the defendant from that source. I am unable to adopt this view of the matter not only for the general reasons heretofore announced but because it seems to me that on other and obvious grounds the item was taxable income if in fact received by the defendant.