Geiger's Estate v. CIR

• Decision Date: 24 January 1966
• Docket Number: No. 17864.,17864.
• Parties: ESTATE of Wallace P. GEIGER, Deceased, Warren G. Dunkle, Executor, and Burnice I. Geiger, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

352 F.2d 221 (1965) ESTATE of Wallace P. GEIGER, Deceased, Warren G. Dunkle, Executor, and Burnice I. Geiger, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17864.

United States Court of Appeals Eighth Circuit.

October 20, 1965.

Certiorari Denied January 24, 1966.

COPYRIGHT MATERIAL OMITTED

Melford M. Lothrop, Sioux City, Iowa, for petitioners and filed brief with Franklin E. Gill, Sioux City, Iowa.

Harold C. Wilkenfeld, Atty., Tax Division, Dept. of Justice, Washington, D. C., for respondent and filed brief with John B. Jones, Jr., Acting Asst. Atty. Gen., and Lee A. Jackson, Norman Sepenuk, and Lawrence B. Silver, Attys., Dept. of Justice, Washington, D. C.

Before BLACKMUN and RIDGE, Circuit Judges, and REGISTER, District Judge.

Certiorari Denied January 24, 1966. See 86 S.Ct. 620.

BLACKMUN, Circuit Judge.

The primary issue here is whether funds embezzled during the calendar years 1954-1959, inclusive, qualify as income for federal income tax civil deficiency purposes.

The taxpayers are Burnice I. Geiger and her husband, Wallace P. Geiger. They filed calendar year joint returns. Mr. Geiger died in 1961. The Tax Court held that the amounts of tax returned by the Geigers for the six years in question were deficient in the aggregate amount of $183,734.34.¹ The taxpayers petition for review. Judge Withey's opinion, not reviewed by the full court, is T. C. Memo 1964-153.

The background facts are not disputed. They are established by admissions in the pleadings and by stipulation.

Mrs. Geiger, when a young girl of 18 or 19 and after attending college for one year, was employed in 1921 by the Sheldon National Bank, Sheldon, Iowa, as a bookkeeper. She had had no prior banking training. In 1930 she was placed in charge of the bank's bookkeeping department and became assistant cashier. She continued to work with the bank until January 16, 1961, a period of approximately 40 years.

During the last 30 years of her employment Mrs. Geiger without authority and unlawfully, as the Tax Court found, "appropriated and converted money of the bank to her own use". She used an average of about $1,000 a month for transactions on the "Board of Trade". She also effected transfers of funds to various individuals and firms, including herself, her husband and her husband's business. This was accomplished either by crediting the accounts of depositors without having received deposits from them or by honoring and then withholding checks drawn on the bank by persons who maintained insufficient balances or none at all. Mrs. Geiger concealed her conduct by pulling out ledger sheets for enough accounts to cover the existing shortage whenever bank examiners were expected. Apparently, except for Northern Biochemicals Corporation and its president, both of whom received diverted funds in 1960 and 1961 (years not at issue here), and except for herself and the Geiger accounts, those who were the beneficiaries of these manipulations thought they were the fortunate recipients of "loans and gifts" from Mrs. Geiger. According to figures prepared by the Federal Deposit Insurance Corporation, the total shortage occasioned by Mrs. Geiger's operations in this small bank over this lengthy period exceeded the almost unbelievable amount of $2,175,000.

From September 1947 until June 1961 Mr. Geiger had a hardware and seed business in Sheldon. His wife, however, had full charge of the financial aspects of this business and he relied on her for information as to its profits.

Mrs. Geiger prepared the joint federal income tax returns for 1954-1959, inclusive, for herself and her husband. In those returns she knowingly overstated the seed company's sales in varying amounts less than $20,000 per year. Apart from this purposeful overstatement, no part of the funds she diverted from the bank was reported or mentioned in the Geigers' returns.

On January 16, 1961, examiners found that the bank's books did not balance. They asked Mrs. Geiger to look for the shortage. She informed them that this would be of no use and she then revealed what she had done. The FDIC forthwith took over the bank for liquidation.

Two weeks later an information was returned against Mrs. Geiger. This charged her, in three counts, with embezzlement of bank funds in 1960, in violation of 18 U.S.C. § 656; in eight counts, with causing false entries to be made in the bank's records at various times in 1957 to 1960, inclusive, in violation of 18 U.S.C. § 1005; and, in 24 counts, with willfully misapplying funds of the bank in 1960 and 1961 by honoring checks drawn by persons with insufficient or no funds, in violation of 18 U.S.C. § 656. She pleaded guilty to all 35 counts. Consecutive sentences of five years each on the three embezzlement counts and concurrent sentences of five years on each of the other 32 counts were imposed. She is now in prison.

Mrs. Geiger had no prior criminal record.

The issues here are (A) whether funds embezzled in 1954-1959, inclusive, constitute taxable income to the embezzler under § 61(a) of the 1954 Code, 26 U.S.C. § 61(a);² (B) if so, whether the Tax Court correctly determined the amount of such income for the years in question; and (C) whether the period of limitations applicable to the Geigers' returns for 1954-1956, inclusive, is the usual three years prescribed by § 6501(a), or is the six years specified by § 6501(e) (1) (A) for a situation where more than 25% of gross income is omitted. The resolution of the last issue obviously turns on the answers to the first two.

A. Embezzled funds. On this issue the following chronology is significant:

1. In February 1946 Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, was decided.

2. In March 1952 Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833, was decided.

3. In 1954-1959, inclusive, those portions of Mrs. Geiger\'s embezzlements which now concern us were effected.

4. In May 1961 James v. United States, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246, was decided.

Our task is to ascertain, from these three cases, the attitude and teaching of the Supreme Court, as presently constituted, as to the taxability of funds embezzled subsequent to Rutkin but prior to James.

It is of interest to note initially that the Income Tax Act of 1913, § II, subd. B, 38 Stat. 167, provided "That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from * * the transaction of any lawful business carried on for gain or profit", and that the Revenue Act of 1916, § 2(a), 39 Stat. 757, reenacted this language except that it omitted the word "lawful". That statutory omission has continued to the present day. The omission would seem to imply a congressional intent to tax income unlawfully gained, as well as that honestly received and, indeed, the Supreme Court has so recognized. James v. United States, supra, p. 218 of 366 U.S., 81 S.Ct. 1052. This determination, however, does not resolve the basic question whether a particular illegal receipt is "income" within the meaning and grasp of an income tax statute's catch-all section. That is our present problem.

In Commissioner of Internal Revenue v. Wilcox, supra, 327 U.S. 404, 66 S.Ct. 546 (1946), the Court for the first time was confronted with the question whether embezzled money constitutes taxable income to the embezzler.³ The pertinent statute was § 22(a) of the 1939 Code. The tax year was 1941. Wilcox was a bookkeeper who had diverted collections belonging to his employer and lost most of them in gambling. The Supreme Court, by a 7 to 1 vote, with the majority opinion by Mr. Justice Murphy, held that embezzled funds were not income. It observed, pp. 407-408 of 327 U.S., 66 S.Ct. p. 549, that "mere dominion over money or property" is not decisive and that "no single, conclusive criterion has yet been found to determine in all situations what is a sufficient gain to support the imposition of an income tax. * * * For present purposes, however, it is enough to note that a taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return. * * * Moral turpitude is not a touchstone of taxability." Mr. Justice Burton alone dissented. He found no "adequate basis for reading into the broad sweep of the statute's language the unexpressed limitation proposed in the majority opinion." He noted that the embezzler's complete possession of the funds and his use of them made them "of obvious economic value to" him; that the majority was reading into the statute an unjustified and sharp distinction between the embezzler and the defrauder; and that there was nothing in the Code which required an absence of an obligation to repay. Pp. 412-415 of 327 U.S., 66 S.Ct. p. 551. See also United States v. Lewis, 340 U.S. 590, 591-592, 71 S.Ct. 522, 95 L.Ed. 560 (1951).

In Rutkin v. United States, supra, 343 U.S. 130, 72 S.Ct. 571 (1952), the issue was the taxability of money obtained by extortion in 1943. This was a criminal case centering in willful evasion and § 145(b) of the 1939 Code but its resolution depended upon whether extortion money qualified as income under § 22 (a). The Court, by a 5 to 4 vote, with the majority opinion written by Mr. Justice Burton, the sole dissenter in Wilcox, held that extorted funds were taxable income. It was observed that Rutkins' "control over the cash so received was such that, in the absence of * * * unlikely repudiation * * * petitioner could enjoy its use as fully as though his title to it were unassailable" and that an unlawful gain was taxable "when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it". Pp. 136-137 of 343 U.S., 72 S.Ct. p. 575. The reconcilability of Rutkin with Wilcox was treated cursorily...