The People vs. Al Capone

Full of betrayal, bribery, and bootleggers, explore the events leading up to the tax evasion trial that brought down Al Capone on the 100th anniversary of Prohibition.

By: Albert Allen  /  January 15, 2020

One hundred years ago, the 18th Amendment to the Constitution entered into force, prohibiting the production, sale, and transportation of “intoxicating liquors” in the U.S.* With Prohibition came the rise of bootlegging and other criminal enterprises. One of the most notable figures from this time was Al "Scarface" Capone—who, along with his crime family, was brought down not for his numerous underlying crimes (bootlegging, loan sharking, extortion, prostitution) but for tax evasion on the revenue generated from those crimes.

The story behind the FBI bringing down the legendary Capone and the development of tax law is fascinating, to say the least. Full of betrayal, bribery, and bootleggers, the events leading up to the trial are worth exploring.

Generally, all income is taxable, even when it’s earned illegally

The fact that most income is taxable is widely known, but it may surprise some to learn that the IRS expects taxpayers to report income they’ve earned from illegal activities. Even more surprising is to imagine that one of the most notorious gangsters in American history was brought down by fairly dry and tedious tax laws.

After the 16th Amendment was ratified in 1913, Congress enacted the Revenue Act of 1913 stating that gross income included “gains, profits, and income derived from the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.” In this context, the word “lawful” provided an argument that income gained from an unlawful business was not gross income to be taxed. Congress addressed this issue in 1921 by dropping the word lawful from its definition of gross income. By 1921, there was little doubt that income gained from illegal activities was still subject to taxes. However, a challenge of this law occurred in 1927 that ended up paving the way to taking down Al Capone.

A bootlegger goes to the Supreme Court

Al Capone was born in Brooklyn, New York in 1899 and quit school in the sixth grade to join a notorious street gang headed by Capone’s mentor Johnny Torrio. Capone was successful in moving through the ranks and eventually took over Torrio’s bootlegging operations in Chicago in 1925. Two years later, a bootlegger in South Carolina would challenge the taxability of illegal income and set in motion the eventual takedown of Capone.

In United States v. Sullivan**, a bootlegger out of South Carolina argued before the Supreme Court of the United States that the Fifth Amendment of the Constitution protected him from filing a return to report income from his illegal business. Per the Fifth Amendment, no person shall be compelled in any criminal case to be a witness against himself. Sullivan argued that disclosing illegal income on his tax return would be self-incriminating and thus would violate Sullivan’s constitutional right protected under the Fifth Amendment.

In an opinion delivered by Justice Holmes, the Supreme Court ruled that applying the Fifth Amendment in this way was pressing it too far. Justice Holmes went on to say that it would be an extreme, if not an extravagant, application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. Further, the Supreme Court concluded that Sullivan “could not draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.” In other words, taxpayers can’t just claim that providing information will incriminate them and be done with the matter.

A Treasury Agent builds the case against Capone

The Supreme Court decision striking down the Fifth Amendment argument against reporting illegal income on a tax return opened the door to use this procedure against the other bootleggers in the country. After the Sullivan decision, President Herbert Hoover instructed the Secretary of the Treasury that he wanted Capone in jail. Treasury Agent Frank Wilson was appointed to the job of building the case of tax evasion against Capone. Capone hadn’t claimed any income from his business dealings on his returns for 1924 through 1929 and insisted he earned little or no income, while his crime syndicate grossed an estimated $105 million per year (not adjusted for inflation).

While Agent Wilson was building his tax evasion case out of the Chicago Post Office Building, the Justice Department assigned a small team of Prohibition agents to target illegal breweries. This small team led by Eliot Ness became famous for its efforts and would be later known as “The Untouchables,” with a feature film of the same name released in 1987. While Eliot Ness and his team brought about financial damage to Capone’s operations and around 5,000 indictments under the Volstead Act against Capone in June 1931, it was the tax case Agent Wilson built that ultimately brought down Capone.

Wilson first went after associates of Capone. One associate, who became one of the key informants, was “Easy Eddie” O’Hare.*** Easy Eddie ran dog-racing tracks for Capone in Chicago as well as Florida and Massachusetts. Another informant was Leslie Shumway, the author of seized ledgers of one of Capone’s gambling establishments. And importantly, Fred Reis testified, after four days in solitary confinement, that Reis purchased numerous cashier checks and turned them over to Capone’s employees and that these checks represented Capone’s net profits at his Cicero gambling hall.

The trial of the century

With the witnesses’ testimony in-hand, Agent Wilson told U.S. Attorney George Johnson that they were ready to move forward with charges against Capone. After federal judge Hon. James Wilkerson denied a plea deal, the case went to trial in 1929. Even before the trial began, Capone tried to swing the odds in his favor. The informant O’Hare passed information along to Wilson that Capone had a list of prospective jurors and was already bribing them. Using this information, Judge Wilkerson switched out the entire panel of jurors with the jurors from a different trial on the morning of the first day of the Capone’s trial.

Besides bribing the jury, it was also suspected that Capone brought his personal bodyguard, Philip D’Andrea, to the courtroom to sit behind him and intimidate witnesses as they took the stand. At the beginning of the trial, Judge Wilkerson ordered no guns in the courtroom. Under this order, special agents escorted D’Andrea out of the courtroom during the trial and searched him. They found a loaded revolver and extra cartridges, and D’Andrea was immediately found in contempt of court and placed in jail for the remainder of the Capone trial.

While Capone had tried his best to sway the jury through any means necessary, it was not enough in the end. The government’s evidence of Capone’s illegal income that was not stated on his income tax returns was overwhelming. The jury found Capone guilty of five of the 23 charges against him and Judge Wilkerson sentenced Capone to 11 years, the longest term ever handed down for tax evasion at that point. On his way out of the courtroom, Capone shouted, "I'm not through fighting yet!" But he was finished--Capone’s appeals were unsuccessful, he was in prison for eight years before his release in 1939, and died of a stroke in Palm Island, Florida in 1947.

Conclusion: If crime pays, report the income or face evasion charges

After Capone’s trial, tax evasion became a tried and true method to take down other notorious gangsters. Besides providing the government a safe way to put the nation’s most dangerous criminals behind bars, Capone’s trial brought about another interesting side effect. In 1931, the IRS collected about $1.1 million more in collections from delinquent returns as compared to 1930, due, in part, to the outcome of the Capone trial.

* The 18th Amendment was repealed in 1933.
** U.S. v. Sullivan, 274 U.S 259 (1927)
*** Eddie O’Hare was eventually killed by two gunmen in a passing car years later. His son, Edward, was given the Congressional Medal of Honor for his bravery as a naval aviator in World War II. Chicago’s O’Hare International Airport is named in his honor.

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Albert Allen

Albert Allen is a tax research analyst at The Tax Institute. Albert coordinates a research team focused on real property and cancellation of debt issues.

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