James v US

Chief Justice Warren

May 15, 1961
366 U.S 213
Doctrine
Money obtained by a taxpayer illegally was taxable income, even though the law might require the
taxpayer to repay the ill-gotten gains to the person from whom they had been taken.
Summary
James embezzled money from his labor union. He did not include the amount in his taxable income. He
was convicted for violating the 1939 Internal revenue code with a penalty of 3 years in prison in the trial
court. The Supreme Court held that the amount he embezzled must be included in his taxable income as
the law did not provide the qualifier that only those lawfully gained income may be taxed, this is also
against public policy. However, although he was ordered to pay his tax deficiency. His conviction was
overturned because it cannot be said that he willfully committed tax evasion. At the time he did this
unlawful act, there was a ruling of the SC (Wilcox) holding that embezzled funds is not included in gross
income. However, the Court also notes that with this decision on James, the court officially overturns the
aforementioned ruling.
Facts

The defendant, Eugene James, was an official in a labor union who had embezzled more than
$738,000 in union funds, and did not report these amounts on his tax return.
He was tried for tax evasion, under 145(b)1 of the 1939 Internal Revenue code and claimed in his
defense that embezzled funds did not constitute taxable income.
His argument was that, just as the receipt of loan proceeds is not taxable to the borrower (because of
the borrower's corresponding obligation to repay the loan), the person who embezzles money should
not be treated as having received income, since that person is legally obligated to return those funds
to their rightful owner.
Indeed, Eugene James pointed out, the Supreme Court had previously made such a determination in
Commissioner v. Wilcox, 327 U.S. 404 (1946). However, this defense was unavailing in the trial court,
where Eugene James was convicted and sentenced to three years in prison.

1 (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

Ratio/Issue
s

1.
I.

II.

2.
I.

WON the receipt of embezzled funds constitutes income taxable to the wrongdoer, even though an
obligation to repay exists? (YES, he is civilly liable )
Laws/Jurisprudence to be examined:
1. Sec 22(a) of Internal Revenue Code of 1939:General definitions. -- '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. . . ."
2. Sec 61 of Internal Revenue code of 1954:" General Definition. -- Except as otherwise provided in
this subtitle, gross income means all income from whatever source derived. .
3. Commissioner v 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.
4. Rutkin v US: 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
Determination of the SC
1. Rutkin overturned Wilcox. (NB: Must be noted that prior to this decision of James, Wilcox was
good law)
2. 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."
(1) 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. . .
.". When the statute was amended in 1916, the one word "lawful" was omitted. This revealed
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
3. 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.
4. 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."
WON James should be convicted for the felony he committed? [NO]
145(b) of the 1939 Code requires willfulness as an element of the crime. The fact that the case of
Wilcox was good law when James did not include embezzled funds in his gross income, it could not
be said that the willfulness was present.

Held
James is acquitted for the felony but he is civilly liable for the non payment of tax.
Prepared by: Carla Cucueco [Tax|Cabreras]