James v. United States

Citation366 U.S. 213,6 L.Ed.2d 246,81 S.Ct. 1052
Decision Date15 May 1961
Docket NumberNo. 63,63
PartiesEugene C. JAMES, Petitioner, v. UNITED STATES
CourtUnited States Supreme Court

Mr. Richard E. Gorman, Chicago, Ill., for petitioner.

Mr. Howard A. Heffron, New York City, for respondent.

Mr. Chief Justice WARREN announced the judgment of the Court and an opinion in which Mr. Justice BRENNAN, and Mr. Justice STEWART concur.

The issue before us in this case is whether embezzled funds are to be included in the 'gross income' of the embezzler in the year in which the funds are misappro- priated under § 22(a) of the Internal Revenue Code of 19391 and § 61(a) of the Internal Revenue Code of 1954.2

'(a) General definition.—Except as otherwise provided in this subtitle, gross income means all income from whatever source derived * * *.' 26 U.S.C. § 61(a), 26 U.S.C.A. § 61(a).

The facts are not in dispute. The petitioner is a union official who, with another person, embezzled in excess of $738,000 during the years 1951 through 1954 from his employer union and from an insurance company with which the union was doing business.3 Petitioner failed to report these amounts in his gross income in those years and was convicted for willfully attempting to evade the federal income tax due for each of the years 1951 through 1954 in violation of § 145(b) of the Internal Revenue Code of 19394 and § 7201 of the Internal Rev- enue Code of 1954.5 He was sentenced to a total of three years' imprisonment. The Court of Appeals affirmed. 273 F.2d 5. Because of a conflict with this Court's decision in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, a case whose relevant facts are concededly the same as those in the case now before us, we granted certiorari. 362 U.S. 974, 80 S.Ct. 1059, 4 L.Ed.2d 1009.

In Wilcox, the Court held that embezzled money does not constitute taxable income to the embezzler in the year of the embezzlement under § 22(a) of the Internal Revenue Code of 1939. Six years later, this Court held, in Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833, that extorted money does constitutes taxable income to the extortionist in the year that the money is received under § 22(a) of the Internal Revenue Code of 1939. In Rutkin, the Court did not overrule Wilcox, but stated:

'We do not reach in this case the factual situation involved in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752. We limit that case to its facts. There embezzled funds were held not to constitute taxable income to the embezzler under § 22(a).' Id., 343 U.S. at page 138, 72 S.Ct. at page 576.6

However, examination of the reasoning used in Rutkin leads us inescapably to the conclusion that Wilcox was thoroughly devitalized.

The basis for the Wilcox decision was '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 that which would otherwise constitute a gain. Without some bona fide legal or equitable claim, even though it be contingent or contested in nature, the taxpayer cannot be said to have received any gain or profit within the reach of Section 22(a).' Commissioner of Internal Revenue v. Wilcox, supra, 327 U.S. at page 408, 66 S.Ct. at page 549. Since Wilcox embezzled the money, held it 'without any semblance of a bona fide claim of right,' ibid., and therefore 'was at all times under an unqualified duty and obligation to repay the money to his employer,' ibid., the Court found that the money embezzled was not includible within 'gross income.' But, Rutkin's legal claim was no greater than that of Wilcox. It was specifically found 'that petitioner had no basis for his claim * * * and that he obtained it by extortion.' Rutkin v. United States, supra, 343 U.S. at page 135, 72 S.Ct. at page 574. Both Wilcox and Rutkin obtained the money by means of a criminal act; neither had a bona fide claim of right to the funds.7 Nor was Rutkin's obligation to repay the extorted money to the victim any less than that of Wilcox. The victim of an extortion, like the victim of an embezzlement, has a right to restitution. Furthermore, it is inconsequential that an embezzler may lack title to the sums he appropriates while an extortionist may gain a voidable title. Questions of federal income taxation are not determined by such 'attenuated subtleties.' Lucas v. Earl, 281 U.S. 111, 114, 50 S.Ct. 241, 74 L.Ed. 731; Corliss v Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 337, 74 L.Ed. 916. Thus, the fact that Rutkin secured the money with the consent of his victim. Rutkin v. United States, supra, 343 U.S. at p. 138, 72 S.Ct. at page 575, is irrelevant. Likewise unimportant is the fact that the sufferer of an extortion is less likely to seek restitution than one whose funds are embezzled. What is important is that the right to recoupment exists in both situations.

Examination of the relevant cases in the courts of appeals lends credence to our conclusion that the Wilcox rationale was effectively vitiated by this Court's decision in Rutkin.8 Although this case appears to be the first to arise that is 'on all fours' with Wilcox, the lower federal courts, in deference to the undisturbed Wilcox holding, have earnestly endeavored to find distinguishing facts in the cases before them which would enable them to include sundry unlawful gains within 'gross income.'9 It had been a well-established principle, long before either Rutkin or Wilcox, that unlawful, as well as lawful, gains are comprehended within the term 'gross income.' Section II B of the Income Tax Act of 1913 provided that 'the net income of a taxable person shall include gains, profits, and income * * * from * * * the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever * * *.' (Emphasis supplied.) 38 Stat. 167. When the statute was amended in 1916, the one word 'lawful' was omitted. This revealed, we think, the obvious intent of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune. Rutkin v. United States, supra, 343 U.S. at page 138, 72 S.Ct. at page 575; United States v. Sullivan, 274 U.S. 259, 263, 47 S.Ct. 607, 71 L.Ed. 1037. Thereafter, the Court held that gains from illicit traffic in liquor are includible within 'gross income.' Ibid. See also Johnson v. United States, 318 U.S. 189, 63 S.Ct. 549, 87 L.Ed. 704; United States v. Johnson, 319 U.S. 503, 63 S.Ct. 1233, 87 L.Ed. 1546. And, the Court has pointed out, with approval, that there 'has been a widespread and settled administrative and judicial recognition of the taxability of unlawful gains of many kinds,' Rutkin v. United States, supra, 343 U.S. at page 137, 72 S.Ct. at page 575. These include protection payments made to racketeers, ransom payments paid to kidnappers, bribes, money derived from the sale of unlawful insurance policies, graft, black market gains, funds obtained from the operation of lotteries, income from race track bookmaking and illegal prize fight pictures. Ibid.

The starting point in all cases dealing with the question of the scope of what is included in 'gross income' begins with the basic premise that the purpose of Congress was 'to use the full measure of its taxing power.' Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788. And the Court has given a liberal construction to the broad phraseology of the 'gross income' definition statutes in recognition of the intention of Congress to tax all gains except those specifically exempted. Commissioner of Internal Revenue v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87—91, 55 S.Ct. 50, 51—53, 79 L.Ed. 211. The language of § 22(a) of the 1939 Code, 'gains or profits and income derived from any source whatever,' and the more simplified language of § 61(a) of the 1954 Code, 'all income from whatever source derived,' have been held to encompass all 'accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.' Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 431, 75 S.Ct. 473, 477, 99 L.Ed. 483. A gain 'constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.' Rutkin v. United States, supra, 343 U.S. at page 137, 72 S.Ct. at page 575. Under these broad principles, we believe that petitioner's contention, that all unlawful gains are taxable except those resulting from embezzlement, should fail.

When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, 'he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent.' North American Oil Consolidated v. Burnet, supra, 286 U.S. at page 424, 52 S.Ct. at page 615. In such case, the taxpayer has 'actual command over the property taxed—the actual benefit for which the tax is paid,' Corliss v. Bowers, supra (281 U.S. 376, 50 S.Ct. 336). This standard brings wrongful appropriations within the broad sweep of 'gross income'; it excludes loans. When a law-abiding taxpayer mistakenly receives income in one year, which receipt is assailed and found to be invalid in a subsequent year, the taxpayer must nonetheless report the amount as 'gross income' in the year received. United States v. Lewis, supra; Healy v. Commissioner, supra. We do not believe that Congress intended to treat a law-breaking taxpayer differently. Just as the honest taxpayer may deduct any amount...

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