Tax Legal Services · Primary-source case analysis

Sullivan: Rent and Wages of an Illegal Gambling Business Were Deductible

By Aneeta Mishra and Timothy Chan

Published May 17, 2026

Commissioner v. Sullivan considered whether a bookmaker could deduct rent and employee wages incurred in operating a business prohibited by state law.

Illegal income remained taxable

The federal income-tax system included the gambling operation’s receipts despite state-law prohibition.

Rent and wages were ordinary operating costs

The expenses were directly connected to producing the taxable business income.

The Code did not then disallow these categories

The Court declined to create a broad public-policy exception that Congress had not enacted for the specific rent and wage payments.

Other unlawful payments could be treated differently

Fines, bribes, kickbacks, and specifically prohibited expenditures raise distinct statutory and public-policy rules.

Key takeaways

• Report income regardless of the activity’s legality.
• Trace each expense to the income-producing operation.
• Separate ordinary costs from fines or illegal payments.
• Apply current express disallowance provisions before claiming a deduction.