Mais v. Comm'r of Internal Revenue , Docket No. 2094-66.

• Decision Date: 30 December 1968
• Docket Number: Docket No. 2094-66.
• Citation: 51 T.C. 494
• Parties: NORMAN MAIS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

51 T.C. 494

NORMAN MAIS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2094-66.

Tax Court of the United States.

Filed December 30, 1968.

Lawrence Holzman and David W. Feeney, for petitioner.

Agatha L. Vorsanger, for respondent.

In 1960 the petitioner received proceeds from the sale of securities which he had embezzled. This embezzlement was discovered later in the same year and the petitioner confessed his guilt and surrendered a part of the proceeds of the embezzlement for restitution to his employer. Held, that the respondent did not err in including in the petitioner's gross income for the taxable year 1960 that portion of the embezzled funds which was not repaid in 1960.

ATKINS, Judge:

The respondent determined a deficiency in income tax against the petitioner for the taxable year 1960 in the amount of $6,761.92.

The issue presented is whether under the circumstances presented petitioner for his taxable year 1960 is taxable upon the portion of amounts embezzled by him from his employer in that year which he did not repay during such year.

FINDINGS OF FACT

The petitioner, an individual, resided in New York City, at the time he filed his petition. He filed his Federal income tax return for the taxable year 1960 with the district director of internal revenue, Manhattan, New York, using the cash receipts and disbursements method of accounting.

During the first half of 1960, the petitioner was employed as a stock transfer clerk by Bache & Co., a stock-brokerage firm (hereinafter referred to as Bache). His duties consisted of receiving securities sold by either Bache or its customers and arranging for the transfer of such securities into the names of the new owners who would be either other private investors or Bache. Sometime during the first 5 months of 1960, petitioner, acting in concert with others, embezzled certain securities from Bache. Such securities were then sold and petitioner received as his portion of the proceeds the amount of $28,557.40.

Of the amount so received the petitioner invested between $6,000 and $7,000 in other securities. Such other securities were purchased in the name of his brother-in-law, Balfour Schwartzseid, and were apparently left with the broker through whom they were purchased. Of the remainder petitioner gave Schwartzseid $10,700 to hold for him, spent between $2,000 and $4,000 on clothing and a vacation trip, and made gifts of an undetermined sum.

In June 1960, Bache discovered that some of its securities had not been returned to it by the transfer agent and petitioner's supervisors began an inquiry. Shortly thereafter, a number of Bache employees, including petitioner, were called into the local district attorney's office for questioning. When he was first questioned about the securities, petitioner did not admit that he had taken them. However, the next morning he voluntarily went to the district attorney's office and confessed everything that had happened. He told an assistant district attorney that he still had a portion of the proceeds, namely, the $10,700 he had given to Schwartzseid to hold and the securities he had purchased in Schwartzseid's name. He also told the assistant district attorney that he wanted to give back everything he had taken. However, at the time, the petitioner knew that he did not have available for restitution the portion of the proceeds which he had spent. Schwartzseid was brought to the district attorney's office and told the assistant district attorney about the $10,700 of cash which he was holding for petitioner and about the securities which were in his name, but which were not in his physical possession. He told the assistant district attorney that this was the extent of his involvement in the case. He turned over the $10,700 of cash to the New York police. He was not requested to, and did not, turn over the securities.

Shortly after his confession the petitioner retained an attorney, Alvin Tahlor, to represent him in connection with any criminal liability petitioner might have as a result of his actions.

Also shortly after petitioner's confession, a representative of an indemnity company, which presumably had insured Bache, called Schwartzseid and requested that the securities purchased by petitioner be turned over to him. Schwartzseid told such representative that he would have to consult an attorney first. Schwartzseid then called Tahlor, and Tahlor advised him not to turn them over, but rather to hold them and release them only when he or the petitioner so directed. Schwartzseid was not again asked for the securities, either by a representative of Bache or by the district attorney's office.

Petitioner also discussed with Tahlor the request of the indemnity company representative and told him that he wanted to give back whatever he had and make restitution. Tahlor told petitioner that if the district attorney's office or the court should ask for the securities, petitioner should instruct Schwartzseid to turn them over immediately, but that petitioner should not otherwise do so. Tahlor's advice was that the best procedure, because of its impact, would be to surrender the securities and make full restitution at the time of sentencing, after a plea of guilty. Schwartzseid continued to retain the securities in his own name and did not account to anyone regarding them during 1960. He received about $5 in dividends during the period he held the securities.

In August 1960, petitioner was indicted on several counts of grand larceny and pleased guilty.

Early in 1961, petitioner retained another attorney, George M. Golden. Golden promptly obtained a power of attorney from Schwartzseid and sold the securities, realizing $15,708. He then placed the proceeds in a special bank account of his law firm, on the understanding with petitioner that he would turn such proceeds over to the court at the proper time. Petitioner was found guilty, and in February 1962, he was sentenced. About a week prior to that time, petitioner caused Golden to turn the $15,708 over to an officer of the probation department, for eventual restitution to Bache.

In his return for the taxable year 1960 the petitioner did not report any income resulting from the embezzlement.

In the notice of deficiency, the respondent determined that ‘the amount of $28,557.40 that you embezzled from your employer, Bache & Company, during the year 1960 is taxable income to you to the extent of $17,857.40 in the year 1960.’

OPINION

The respondent determined that of the amount of $28,557.40 which petitioner received in 1960 as his share of the proceeds from the sale of securities which he embezzled, the amount of $17,857.40 is taxable to him in that year. The respondent did not treat as income $10,700 of such proceeds since in that year the petitioner relinquished that amount to the New York Police Department for restitution to Bache. As support for his determination that $17,857.40 is taxable to the petitioner in 1960, the respondent relies upon the proposition that embezzled funds constitute taxable income to the embezzler in the year of embezzlement, citing James v. United States, 366 U.S. 213. He also cites cases, including Marvin E. Nerem, 41 T.C. 338, and Geiger's Estate v. Commissioner (C.A. 8) 352 F.2d 221, certiorari denied 382 U.S. 1012, affirming a Memorandum Opinion of this Court, to show that the principle of the James case applies retroactively to years prior to 1961, the year the James case was decided by the Supreme Court. He also contends that despite any acknowledgement by an embezzler of an obligation to make restitution, the embezzler may reduce income only if, when, and to the extent actual repayment of the embezzled funds is made, relying upon language used by the Supreme Court in the James case. The Court there stated in part:

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...