Im not sure if there is anythng special about it. You can take a bribe, get caught and sentenced but that doesn't excuse you from paying taxes. IRS just wants their cut; they are not criminal law enforcers, just a collection agency.
I think the common expectation is that the illegal income/property will be seized by the state and hopefully returned to its rightful owner. No need to tax anything since the thief won't have anything left at the end.
The IRS seems to account for that with "unless in the same year, you return it to its rightful owner."
I wonder what happens if you steal something, keep it until the next year, and then return it? Do you declare it as income in the year you steal it, and a loss in the year you return it?
(Probably not. I'm too lazy to look it up, but I recall another document that explains that, while income from illegal activities is taxable, expenses for illegal activities are not deductible.)
