James v. United States

366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246, 1961 U.S. LEXIS 2014, 2 C.B. 9, 7 A.F.T.R.2d (RIA) 1361

Opinions

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

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 v. Wilcox, 327 U. S. 404, a case whose relevant facts are concededly the same as those in the case now before us, we granted certiorari. 362 U. S. 974.

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, that extorted money does constitute 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:

“Wé do not reach in this case the factual situation involved in Commissioner v. Wilcox, 327 U. S. 404. We limit that case to its facts. There embezzled funds were held not to constitute taxable income to the embezzler under § 22 (a).” Id., at 138.⁶

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 §22 (a).” Commissioner v. Wilcox, supra, at p. 408. 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, at p. 135. 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; Corliss v. Bowers, 281 U. S. 376, 378. Thus, the fact that Rutkin secured the money with the consent of his victim, Rutkin v. United States, supra, at p. 138, 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, at p. 138; United States v. Sullivan, 274 U. S. 259, 263. 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; United States v. Johnson, 319 U. S. 503. 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, at p. 137. 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. 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 v. Jacobson, 336 U. S. 28, 49; Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 87-91. 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 “aeces- • sions to wealth, clearly realized, and over which the taxpayers have complete dominion.” Commissioner v. Clenshaw Glass Co., 348 U. S. 426, 431. 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, at p. 137. 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 hable to restore its equivalent.” North American Oil v. Burnet, supra, at p. 424. 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. 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 repaid in the year in which the repayment is made, the Government points out that, “If, when, and to the extent that the victim recovers back the misappropriated funds, there is of course a reduction in the embezzler’s income.” Brief for the United States, p. 24.¹⁰

Petitioner contends that the Wilcox rule has been in existence since 1946; that if Congress had intended to change the rule, it would have done so; that there was a general revision of the income tax laws in 1954 without mention of the rule; that a bill to change it¹¹ was introduced in the Eighty-sixth Congress but was not acted upon; that, therefore, we may not change the rule now. But the fact that Congress has remained silent or has re-enacted a statute which we have construed, or that congressional attempts to amend a rule announced by this Court have failed, does not necessarily debar us from re-examining and correcting the Court’s own errors. Girouard v. United States, 328 U. S. 61, 69-70; Helvering v. Hallock, 309 U. S. 106, 119-122. There may have been any number of reasons why Congress acted as it did. Helvering v. Hallock, supra. One of the reasons could well be our subsequent decision in Rutkin which has been thought by many to have repudiated Wilcox. Particularly might this be true in light of the decisions of the Courts of Appeals which have been riding a narrow rail between the two cases and further distinguishing them to the disparagement of Wilcox. See notes 8 and 9, supra.

We believe that Wilcox was wrongly decided and we find nothing in congressional history since then to persuade us that Congress intended to legislate the rule. Thus, we believe that we should now correct the error and the confusion resulting from it, certainly if we do so in a manner that will not prejudice those who might have relied on it. Cf. Helvering v. Hallock, supra, at 119. We should not continue to confound confusion, particularly when the result would be to perpetuate the injustice of relieving embezzlers of the duty of paying income taxes on the money they enrich themselves with through theft while honest people pay their taxes on every conceivable type of income.

But, we are dealing here with a felony conviction under statutes which apply to any person who “willfully” fails to account for his tax or who “willfully” attempts to evade his obligation. In Spies v. United States, 317 U. S. 492, 499, the Court said that § 145 (b) of the 1939 Code embodied “the gravest of offenses against the revenues,” and stated that willfulness must therefore include an evil motive and want of justification in view of all the circumstances. Id., at 498. Willfulness “involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income.” Holland v. United States, 348 U. S. 121, 139.

We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner’s conviction may not stand and that the indictment against him must be dismissed.

Since Mr. Justice Harlan, Mr. Justice Frank- ' eurter, and Mr. Justice Clark agree with us concerning Wilcox, that case is overruled. Mr. Justice Black, Mr. Justice ' Douglas, and Mr. Justice Whittaker believe that petitioner’s conviction must be reversed and the case dismissed for the reasons stated in their opinions.

Accordingly, the judgment of the Court of Appeals is reversed and the case is remanded to the District Court with directions to dismiss the indictment.

It is so ordered.

Footnotes

1

§ 22. Gross Income.

“(a) General Definition. — ‘Gross income’ includes gains, profits, and income derived from salaries, wages, or compensation for personal service ... of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . .” (26 U. S. C. (1952 ed.) §22 (a).)

2

§ 61. Gross Income Defined..

“(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).)

3

Petitioner has pleaded guilty to the offense of conspiracy to embezzle in the-Court of Essex County, New Jersey.

4

§ 145. Penalties.

“ (b) Failure to Collect and Pay Over Tax, or Attempt to Defeat or Evade Tax. — Any person required under this chapter to collect, account for, and pay over any tax imposed by this chapter, who willfully fails to collect or truthfully account for and pay over such tax, and any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000 or imprisoned for not more than five years, or both, together with the costs of prosecution.” (26 U. S. C. (1952 ed.) § 145 (b).)

5

§ 7201. Attempt to Evade or Defeat Tax.

“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than HOjOOO, or imprisoned not more than 5 years, or both, together with the costs of prosecution.” (26 U, S. C. § 7201.)

6

The dissenters in Rutkin stated that the Court had rejected the Wilcox interpretation of § 22 (a). Id., at 140.

7

The Government contends that the adoption in Wilcox of a claim of right test as a touchstone of taxability had no support in the prior cases of this Court; that the claim of right test was a doctrine invoked by the Court in aid of the concept of annual accounting, to determine when, not whether, receipts constituted income. See North American Oil v. Burnet, 286 U. S. 417; United States v. Lewis, 340 U. S. 590; Nealy v. Commissioner, 345 U. S. 278. In view of our reasoning set forth below, we need not pass on this contention. The use to which we put the claim of right test here is only to demonstrate that, whatever its validity as a test of whether certain receipts constitute income, it calls for no distinction between Wilcox and Rutkin.

8

In Marienfeld v. United States, 214 F. 2d 632, the Eighth Circuit stated, “We find it difficult to reconcile the Wilcox case with the later opinion of the Supreme Court in Rutkin . . . .” Id., at 636. The Second Circuit announced, in United States v. Bruswitz, 219 F. 2d 59, “It is difficult to perceive what, if anything, is left of the Wilcox holding after Rutkin ....’’ Id., at 61. The Seventh Circuit’s prior decision in Macias v. Commissioner, 255 F. 2d 23, observed, “If this reasoning [of Rutkin] had been employed in Wilcox, we see no escape from the conclusion that the decision in that case would have been different. In our view, the Court in Rutkin repudiated its holding in Wilcox; certainly it repudiated the reasoning by which the result was reached in that case.” Id., at 26 .

9

For example, Kann v. Commissioner, 210 F. 2d 247, was differentiated on the following grounds: the taxpayer was never indicted or convicted of embezzlement; there was no adequate proof that the victim did not forgive the misappropriation; the taxpayer was financially able to both pay the income tax and make restitution; the taxpayer would have likely received most of the misappropriated money as dividends. In Marienfeld v. United States, supra, the court believed that the victim was not likely to repudiate. In United States v. Wyss, 239 F. 2d 658, the distinguishing factors were that the district judge had not found as a fact that the taxpayer embezzled the funds and the money had not as yet been reclaimed by the victim. See also Briggs v. United States, 214 F. 2d 699, 702; Prokop v. Commissioner, 254 F. 2d 544, 554-555. Cf. J. J. Dix, Inc., v. Commissioner, 223 F. 2d 436.

10

Petitioner urges upon us the case of Alison v. United States, 344 U. S. 167. But that case dealt with the right of the victim of an embezzlement to take a deduction, under § 23 (e) and (f) of the 1939 Code, in the year of the discovery of the embezzlement rather than the year in which, the embezzlement occurred. The Court held only “that the special factual circumstances found by the District Courts in both these cases justify deductions under I. R. C., §§ 23 (e) and (f) and the long-standing Treasury Regulations applicable to embezzlement losses.” Id., at 170. The question of inclusion of embezzled funds in “gross income” was not presented in Alison.

11

H. R. 8854, 86th Cong., 1st Sess.