Sometimes it’s the little financial details that trip you up. Ask Al Capone. 

On Sept. 22 the U.S. attorney for the Southern District of New York unsealed the indictment against Sen. Robert Menendez, his wife Nadine Menendez and three New Jersey businessmen for “participating in a years-long bribery scheme” in which Menendez and his wife allegedly accepted hundreds of thousands of dollars of bribes in exchange for Menendez’s agreement to use his official position to protect and enrich them and to benefit the government of Egypt. Menendez faces one count of conspiracy to commit bribery, one count of conspiracy to commit honest services fraud and one count of conspiracy to commit extortion under color of official right.   

That’s bad, but more may be coming: civil and criminal tax liability. 

The indictment doesn’t specifically allege tax crimes, but it does assert that Menendez and his wife received bribes consisting of cash, gold bullion, payments toward a home mortgage, compensation for a low- or no-show job, a new Mercedes convertible, home furnishings and “other things of value” from their co-defendants. In response, Menendez and his wife face a legal conundrum: how to characterize these things of value for tax purposes?   

One approach would be to argue that there was no receipt and thus no tax consequence. Not coincidentally, Sen. Menendez, in a post-indictment statement to the press, claimed that the $480,000 in cash found in his home simply represents withdrawals from his savings account over some 30 years. Presumably, Sen. Menendez would not have made this claim without being confident that bank records and date information from serial numbers on the currency bills will back him up. But how will he explain the $70,000 in cash found in Ms. Menendez’s safe deposit box and the fact that some of the envelopes holding the cash are linked through DNA and/or fingerprints to a co-defendant? Moreover, this “no receipt” argument may be tougher to make in connection with the other things of value listed in the indictment, such as the payments made by the co-defendants toward the Mercedes convertible and Ms. Menendez’s home mortgage. 

Distinct tax consequences 

Assuming it can be proven that they did indeed receive things of value, the Menendezes will be obliged to choose whether the receipt of these things constitutes taxable compensation, a loan or a gift. Each carries distinct tax consequences. 

Menendez could maintain that he and his wife received the things of value as compensation for services rendered. The facts alleged in the indictment suggest that would be a stretch: Is it normal to receive gold bars as compensation? In any case, the Menendezes could easily preempt speculation by disclosing their tax returns for the relevant years, as the senator voluntarily did when up for reelection in 2012 and 2018. But what happens if those returns don’t include those items of income? (Awkwardly, per the indictment, Menendez did not disclose car payments, gold or cash in the relevant calendar year on his annual Senate financial disclosure form.) Menendez would either have to concede that the stuff he and his wife received was not compensation or admit that he underreported income and filed false tax returns, statements and documents — serious tax offenses.   

The couple might assert that the things of value they received were a loan and thus not taxable. Indeed, they may already be advancing this argument. According to the indictment, following the execution of search warrants on the Menendez home in June 2022, Nadine Menendez wrote a $21,000 check to a co-defendant who had been making payments on her Mercedes convertible with a memo line reading “personal loan.” Maybe Ms. Menendez can produce documentation to substantiate the car payments as a loan, but she and her husband may find it a bit more challenging to argue that the other stuff, such as gold bars or home furnishings, were loans. Moreover, even if it accepted the depiction of the car or mortgage payments as made in connection with a loan, based on the facts in the indictment, the IRS might well assert that the co-defendants forgave a portion of any such loan, generating taxable income to the Menendezes.   

Gifts, maybe, but complicated 

Finally, the Menendezes could claim that the things of value they received were gifts. This is their best scenario since the receipt of a gift is not taxable. But there are complications. 

First, donors of gifts are liable to pay tax on the value of any gift that exceeds the annual gift tax exclusion amount ($16,000 in 2022, the relevant year). In this case, the donors are the three co-defendants, and some of the transferred things of value (e.g., the gold bars) appear to have exceeded $16,000 in value. If the co-defendants did not in fact pay applicable gift tax — a not unreasonable assumption, and easily checked — they might object to any attempt to characterize the transfers as gifts since it would expose them to civil tax penalties. But if they weren’t gifts, what were they? 

Second, the IRS is aware that some taxpayers will try to mischaracterize income as gifts and therefore is fairly strict in defining a gift as “the transfer of property by one individual to another while receiving nothing, or less than full value, in return … whether or not the donor intends the transfer to be a gift.” Here, the alleged facts suggest that it would be difficult to argue that the co-defendants received “nothing in return,” even if they claim that it was their intention to make gifts. 

Third and finally, Senate Rule 35 generally prohibits the receipt of gifts unless an exception applies. The only reasonably applicable exception in this case is for gifts “given on the basis of personal friendship, unless there is reason to believe that the gift was provided because of the individual’s official position and not because of the personal friendship.” Although the indictment suggests that Sen. Menendez and his co-defendants were indeed friendly, the rule also provides that senators must obtain written approval from the Select Committee on Ethics before accepting any gift given on the basis of personal friendship that exceeds $250. Query: Did Sen. Menendez request and receive such approval? If not, how could he claim that he received gifts for tax purposes without admitting that he violated the Senate’s rules? 

Al Capone reportedly once boasted that “they can’t collect legal taxes from illegal money.” Sen. Menendez would be well advised to remember that Capone was ultimately jailed for tax evasion.