A Barrister's Blog

Advising on tax deductions and tax law generally is not something that I usually do. However, I recently came across the Full Federal Court case of Commissioner of Taxation v La Rosa [2003] FCAFC 125. In the best traditions of this blog, I was actually looking for the contact details of a suburban accountant with the same name when google decided to give the tax case the number one ranking.

Tax deduction for stolen money

Anyway the issue in the case was whether Mr La Rosa, who hadn’t lodged his tax returns for 7 years was entitled to a deduction of $220,000 for money which had been stolen from his business. There is nothing particularly remarkable about that proposition. In Charles Moore & Co v FCT (1956) 95 CLR 344 money stolen at gunpoint from an employee who was taking money from a retail store to the bank was allowed as a deduction.

What made this  case unusual was that Mr La Rosa’s business was trafficking drugs and he was a convicted heroin and amphetamine dealer. The money had been buried in a suburban backyard and Mr and Mrs Mahoney (the owners of the back yard) were witnesses at the hearing. The money was apparently withdrawn (dug up) in preparation for a drug deal which went awry and the money was stolen. Mr La Rosa represented himself and was serving a prison sentence at the time at the time of the hearing.

The legal position is that when a taxpayer systematically engages in an illegal activity, and the elements of a business such as organisation, repetition, regularity and view to a profit are present, then the proceeds from that activity will be income according to ordinary concepts.

The Judgment

Although Hely J gave the main judgment, Carr J (although agreeing with Hely J) did so with a degree of hesitation. Some extracts from that judgment:

[5] These are transactions at the extreme end of the spectrum of illegality. The older cases which seem to form the foundation for the proposition that the proceeds of crime are taxable started with liquor bootlegging, illegal gambling and the like. When, for the purposes of this appeal, I reviewed those cases, I thought, at first, that they formed too slender a basis upon which to give a literal interpretation to the word “income” so as to include the proceeds of sale of heroin and amphetamines. I thought that this was criminal activity of such a degree of evil as to remove it from the categories of business which might generate “income” according to the common understanding of that term. ….. But I think that the analysis contained in Hely J’s reasons shows that “income” has been accepted as including the proceeds of criminal activities for too long for it to be appropriate for a court at this level to rule otherwise. Furthermore, the appeal was conducted on that assumption. ….

[6] If “income” has to be so interpreted, as I think it must for the reasons just given, I think that s 51(1) must also be interpreted literally and that the usual principles should be applied to allow the loss of cash in the present matter as a deduction. In my opinion, it would be an extraordinary public policy which permitted the Commissioner to bring the retail proceeds of heroin and amphetamine sales into the calculation of assessable income, but to deny the loss here claimed as an allowable deduction. ….

[7] I acknowledge that the two concepts of income and allowable deduction are not always in symmetry….

[8] There is a degree of unreality in a statutory expectation that drug dealers will file returns of their income. Their financial affairs are only likely to come to the Commissioner’s attention following, as in this case, criminal proceedings and convictions….

And also [55] as per Hely J ….”There should not be a higher burden of taxation imposed on those whose business activities are unlawful than that imposed in relation to lawful business activities. Punishment of those who engage in unlawful activities is imposed by the criminal law, and not by laws in relation to income tax“.

Postscripts

There are two interesting postscripts to this case. Firstly, the Income Tax Assessment Act was amended to change the law after this case and secondly, Mr Larosa and his wife were found murdered in 2008!

Creative commons acknowledgment for the photograph.