## Facts

- Steinberg was prosecuted for federal income-tax crimes arising from alleged profits from illicit liquor transactions during Prohibition.
- A federal grand jury charged six counts: two counts for willful refusal to pay taxes due (1920 and 1921), two counts for willful attempt to evade taxes by filing false returns (1920 and 1921), and two perjury counts corresponding to the sworn returns.
- Before trial, the district court dismissed the two nonpayment counts and proceeded to trial only on the 1921 evasion count and its related perjury count.
- The government alleged Steinberg reported only a corporate salary of about $10,000 for 1921 but actually had far greater net income (alleged as $760,635.43), largely from unlawful liquor dealings.
- At trial, the proof tended to show Steinberg had received more from illicit liquor dealing than he reported, but did not establish a specific amount corresponding to the large figure alleged in the indictment.
- Steinberg was convicted on the counts tried and appealed, arguing (among other points) that unlawful gains are not “income” under the Revenue Act of 1921 and that the government’s proof of amount was inadequate.

## Issues

1. Whether proceeds from unlawful activity constitute “income” taxable under the Revenue Act of 1921, such that failure to report them can support criminal tax-evasion and perjury charges.
2. Whether the indictment’s allegation of a specific large net-income figure required proof of that precise amount, or whether proof of a substantial unreported excess sufficed.

## Decision

- The Second Circuit held that unlawful gains of the type alleged (profits from illicit liquor transactions) constitute “income” within the meaning of the Revenue Act of 1921.
- The court rejected the categorical defense that criminal proceeds are excluded from taxable income on public-policy grounds.
- The court criticized the practice of alleging enormous sums unsupported by proof and noted the absence of evidence establishing the specific amount alleged.
- For purposes of resolving the principal legal question, the court treated the pleaded dollar figure as nonessential and proceeded on the premise that proof of a substantial unreported excess over reported income could be sufficient when the amount is laid under a “to wit” allegation.

## Legal Principles

- “Income” under the federal revenue laws is broadly construed to include gains from unlawful activities unless Congress provides an explicit exclusion.
- Public-policy discomfort with taxing criminal businesses, including the logical implication that “ordinary and necessary” business-expense deductions might follow from recognizing illegal gains as taxable income, does not justify judicially creating an exemption from taxation.
- In criminal tax prosecutions, alleging an inflated, precise income figure without evidence supporting that figure risks unfair prejudice; where the pleaded amount is treated as laid under a videlicet, the government may not be required to prove the exact number alleged so long as a material unreported excess is proven.

## Conclusion

The court sustained the government’s legal theory that illegal profits are taxable “income” under the Revenue Act of 1921 and may support convictions for tax evasion and related perjury, while cautioning against indictments and trials that emphasize large alleged sums not supported by proof.


Steinberg v. United States, 14 F.2d 564 (2d Cir. 1926)