The Legacy of Al Capone in Tax Law

By: Vern Krishna, CM, QC – Counsel, Tax Chambers LLP (Toronto)

Even in death, Alphonse (Al) Capone’s legacy in tax law thrives in Canada. The Internal Revenue Service of the United States released its papers concerning the investigation and conviction of Al (“Scarface”) Capone for income tax evasion – the only crime for which America’s most notorious criminal was ever convicted. The IRS says that there were no issues of confidentiality and privacy. Since Capone never filed a tax return, no one could claim privacy rights in respect of his financial affairs.

Scarface Al was a legendary gangster. His brief stint – only about seven years – in organized crime supported Hollywood, which recounted his exploits – bootlegging, gambling and prostitution – and made icons of some of Canada’s most famous families. The television series – The Untouchables – and the classic movie – The St. Valentine’s Day Massacre – would not have been possible without Scarface Al’s larger than life exploits in Chicago. Even the phrase “big fellows”, to describe crime bosses, originated in an IRS tax memo describing the principal players in Capone’s exploits.

Mr. Capone ascent to power was in the best American tradition. did not start at the top of his profession. He worked his way up from the bottom. He came to Chicago from New York as an apprentice hoodlum in 1920 – one year after the enactment of the Volstead Act enacted Prohibition – as a protégée of John Torrio, a lieutenant in the family of organized crime. He apprenticed as a bouncer in a notoriously tough joint – the “Four Deuces.”

Following Mr. Torrio’s injuries in a gun battle, “Big Shot” Capone took over his administrative duties. He was renowned for his lavish spending and bribery of city officials. When the authorities arrested Capone on a vagrancy charge, the State Attorney had to dismiss the case because there was not a single policeman in Chicago who could identify Al Capone!

The enactment of Prohibition propelled Capone’s life as a vice overlord. The Volstead Act gave the Commissioner of Internal Revenue the primary responsibility for the law.

Despite all his notoriety and power, Capone’s criminal reign was relatively short: His reign as vice overlord began in 1924 and continued up to the time of his conviction for income tax invasion on October 17, 1931. The United States repealed the Volstead Act in 1933, two years after Capone’s conviction. Capone reigned supreme for only seven of the fourteen years of Prohibition.

Capone was shrewd. He did not trust banks and never had a bank account. He endorsed only one cheque in his entire life. He conducted all of his financial transactions in cash – a lesson that modern day criminals continue to emulate through crypto currencies and that led to the money laundering laws in Canada. The IRS could not find a single transaction where Capone purchased securities.

Capone’s propensity for secrecy and lack of documentation became an insurmountable hurdle for federal agents investigating his crimes. The agents analysed bank accounts, interviewed witnesses and secured every scrap of evidence, all with the objective of eventually prosecuting him. The government made raids, tapped telephone wires, and interviewed hundreds of witnesses to sustain a criminal prosecution against Mr. Capone. They never succeeded.

The income tax prosecution of Capone was quite remarkable. Absent a paper trail, it was exceedingly difficult to secure the proper evidence to convict Capone and his colleagues of income tax evasion. Persons who had knowledge of their financial transactions were reluctant witnesses because of fear of the potential consequences to them and their families.

Philip D’Andrea – ostensibly a personal bodyguard – sat immediately behind Capone in the courtroom during his trial. D’Andrea was more than just a bodyguard. His primary function was to stare down witnesses and intimidate them in the courtroom. He carried a .38 calibre revolver inside his belt and in a vest pocket he carried a supply of extra cartridges. The judge eventually had him removed from the court.

Capone was eventually sentenced for income tax evasion to ten years in a federal penitentiary and one year in the Cook County jail upon completion of his federal sentence. He was fined $50,000.

Following the successful conclusion of the investigations in Chicago in 1931, federal agents instituted an intensive drive against racketeers, who were also evading income taxes on illegal gains in New York City. There were approximately 250 individuals convicted in New York. The Attorney General convicted not only the racketeers, but also various officials of New York City.

The conviction of Al Capone on income tax evasion had important consequences for the income tax system. His conviction inspired colleagues to engage in “voluntary disclosure” of undeclared income to avoid similar prosecutions. Capone’s colleagues paid hundreds of thousands of dollars – in cash of course – to avoid similar prosecution. We see Capone’s legacy in Canada’s current voluntary disclosure program IC00-1R6 Voluntary Disclosures Program.

Vern Krishna, CM, QC, FRSC is Tax Counsel, TaxChambers, LLP (Toronto) and Professor of Common Law at the University of Ottawa. He is a member of the Order of Canada, Queen’s Counsel, a Fellow of the Royal Society of Canada, and a Fellow of the Chartered Professional Accountants of Canada. His practice encompasses tax litigation and dispute resolution, international tax, wealth management, and tax planning. He acts as counsel in income tax matters, representing corporate and individual clients in disputes with Canada Revenue Agency.