U.S.

Supreme Court
JAMES v. UNITED STATES, 366 U.S. 213 (1961)
366 U.S. 213

JAMES v. UNITED STATES.

1. Embezzled money is taxable income of the embezzler in the year of the embezzlement under 22 (a) of
the Internal Revenue Code of 1939, which defines "gross income" as including "gains or profits and
income derived from any source whatever," and under 61 (a) of the Internal Revenue Code of 1954, which
defines "gross income" as "all income from whatever source derived." Commissioner v. Wilcox, 327 U.S.
404 , overruled. Pp. 213-222.

2. After this Court's decision in Commissioner v. Wilcox, supra, petitioner embezzled large sums of money
during the years 1951 through 1954. He failed to report those amounts as gross income in his income tax
returns for those years, and he was convicted of "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 1939 and
7201 of the Internal Revenue Code of 1954. Held: The judgment affirming the conviction is reversed and
the cause is remanded with directions to dismiss the indictment. Pp. 214-215, 222.

273 F.2d 5, reversed.

Richard E. Gorman argued the cause and filed a brief for petitioner.

Assistant Deputy Attorney General Heffron argued the cause for the United States. With him on the brief
were Solicitor General Rankin, Assistant Attorney General Rice and Meyer Rothwacks.

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 misappropriated [366 U.S. 213, 214] under 22 (a) of the
Internal Revenue Code of 1939 1 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 1939 4 and
7201 of the Internal Revenue [366 U.S. 213, 215] 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:

"We 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, [366 U.S. 213, 216] 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. [366 U.S. 213, 217] 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 [366 U.S. 213,
218]

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 [366 U.S. 213, 219] 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 "accessions to wealth, clearly realized, and over which the taxpayers have complete
dominion." Commissioner v. Glenshaw 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 liable 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
[366 U.S. 213, 220] 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 it 11 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 [366 U.S. 213, 221] 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 [366 U.S. 213, 222] 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 FRANKFURTER, 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.