Source: https://www.law.cornell.edu/supremecourt/text/366/213/
Timestamp: 2019-08-24 00:10:50
Document Index: 609275693

Matched Legal Cases: ['§ 22', '§ 61', '§ 61', '§ 145', '§ 7201', '§ 22', '§ 9', 'art, 2', '§ 7201', '§ 6321', '§ 64', '§ 104', '§ 3466', '§ 191', '§ 6323', '§ 3466', '§ 191', '§ 12', '§ 54']

Eugene C. JAMES, Petitioner, v. UNITED STATES. | US Law | LII / Legal Information Institute
366 U.S. 213 (81 S.Ct. 1052, 6 L.Ed.2d 246)
conc_diss, BLACK, DOUGLAS [HTML]
conc_diss, WHITTAKER, BLACK, DOUGLAS [HTML]
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 under § 22(a) of the Internal Revenue Code of 1939 1 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 1939 4 and § 7201 of the Internal Revenue 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.
'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
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
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 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, 66 S.Ct. 826, 829—830, 90 L.Ed. 1084; Helvering v. Hallock, 309 U.S. 106, 119—122, 60 S.Ct. 444, 451—453, 84 L.Ed. 604. 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.
On February 25, 1946, fifteen years ago, this Court, after mature consideration, and in accordance with what at that time represented the most strongly supported judicial view, held, in an opinion written by Mr. Justice Murphy to which only one Justice dissented, that money secretly taken by an embezzler for his own use did not constitute a taxable gain to him under the federal income tax laws. Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752. The Treasury Department promptly accepted this ruling in a bulletin declaring that the 'mere act of embezzlement does not of itself in taxable income,' although properly urging that 'taxable income may result to the embezzler, depending on the facts in the particular case.' 1 During the fifteen years since Wilcox was decided, both this Court and Congress, although urged to do so, have declined to change the Wilcox interpretation of statutory 'income' with respect to embezzlement. In this case, however, a majority of the Court overrules Wilcox. Only three of the members of the Court who decided the Wilcox case are participating in this case—Mr. Justice FRANKFURTER, Mr. Justice DOUGLAS, and myself. Mr. Justice DOUGLAS and I dissent from the Court's action in 'overruling' Wilcox and from the prospective way in which this is done. We think Wilcox was sound when written and is sound now.
We realize that there is a doctrine with wide support to the effect that under some circumstances courts should make their decisions as to what the law is apply only prospectively. 2 Objections to such a judicial procedure, however, seem to us to have peculiar force in the field of criminal law. In the first place, a criminal statute that is so ambiguous in scope that an interpretation of it brings about totally unexpected results, thereby subjecting people to penalties and punishments for conduct which they could not know was criminal under existing law, raises serious questions of unconstitutional vagueness. 3 Moreover, for a court to interpret a criminal statute in such a way as to make punishment for past conduct under it so unfair and unjust that the interpretation should be given only prospective application seems to us to be the creation of a judicial crime that Congress might not want to create. This country has never been sympathetic with judge-created crimes. Their rejection under our Constitution was said to have been 'long since settled in public opinion' even as early as 1812 when the question first reached this Court in United States v. Hudson & Goodwin, 7 Cranch 32, 3 L.Ed. 259. In that case this Court emphatically declared that the federal courts have no common-law jurisdiction in criminal cases. They are not 'vested with jurisdiction over any particular act done by an individual in supposed violation of the peace and dignity of the sovereign power.' Rather, '(t)he legislative authority of the Union must first make an act a crime, affix a punishment to it, and declare the Court that shall have jurisdiction of the offence.' 4
We think Wilcox was right when it was decided and is right now. It announced no new, novel doctrine. One need only look at the Government's briefs in this Court in the Wilcox case to see just how little past judicial support could then be mustered had the Government sought to send Wilcox to jail for his embezzlement under the guise of a tax evasion prosecution. The Government did cite many cases from many courts saying that under the federal income tax law gains are no less taxable because they have been acquired by illegal methods. This Court had properly held long before Wilcox that there is no 'reason why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.' 5 We fully recognize the correctness of that holding in Wilcox:
'Moral turpitude is not a touchstone of taxability. The question, rather, is whether the taxpayer in fact received a statutory gain, profit or benefit. That the taxpayer's motive may have been reprehensible or the mode of receipt illegal has no bearing upon the application of Section 22(a).' 6
As stated in Wilcox, that case was brought to us because of a conflict among the Circuits. The Ninth Circuit in Wilcox had held that embezzled funds were not any more 'taxable income' to the embezzler than borrowed funds would have been. 7 The Fifth Circuit, in McKnight v. Commissioner, had decided the same thing. 8 The Eighth Circuit, however, had decided in Kurrle v. Helvering that embezzled funds were taxable income. 9 Comparison of the three opinions readily shows that the arguments of the Fifth and Ninth Circuits against taxability of such funds were much stronger than the arguments of the Eighth Circuit for such taxability. The whole picture can best to obtained from the court's opinion in McKnight v. Commissioner, written by Judge Sibley, one of the ablest circuit judges of his time. He recognized that the taxpayer could not rely upon the unlawfulness of his business to defeat taxation if he had made a 'gain' in that business. He pointed out, however, that the ordinary embezzler 'got no title, void or voidable, to what he took. He was still in possession as he was before, but with a changed purpose. He still had no right nor color of right. He claimed none.' 10 Judge Silbley's opinion went on to point out that the 'first takings (of an embezzler) are, indeed, nearly always with the intention of repaying, a sort of unauthorized borrowing. It must be conceded that no gain is realized by borrowing, because of the offsetting obligation.' 11 Approaching the matter from a practical standpoint, Judge Sibley also explained that subjecting the embezzled funds to a tax would amount to allowing the United States 'a preferential claim for part of the dishonest gain, to the direct loss and detriment of those to whom it ought to be restored.' 12 He was not willing to put the owner of funds that had been stolen in competition with the United States Treasury Department as to which one should have a preference to get those funds.
The Wilcox case was decided fifteen years ago. Congress has met every year since then. All of us know that the House and Senate Committees responsible for our tax laws keep a close watch on judicial rulings interpreting the Internal Revenue Code. Each committee has one or more experts at its constant disposal. It cannot possibly be denied that these committees and these experts are, and have been, fully familiar with the Wilcox holding. When Congress is dissatisfied with a tax decision of this Court, it can and frequently does act very quickly to overturn it. 13 On one occasion such an overruling enactment was passed by both the House and Senate and signed by the President all within one day after the decision was rendered by this Court. 14 In 1954 Congress, after extended study, completely overhauled and recodified the Internal Revenue Code. The Wilcox holding was left intact. In the Eighty-sixth Congress and in the present Eighty-seventh Congress bills have been introduced to subject embezzled funds to income taxation. 15 They have not been passed. This is not an instance when we can say that Congress may have neglected to change the law because it did not know what was going on in the courts or because it was not asked to do so, as was the case in Helvering v. Hallock. 16 Nor is this a case in which subsequent affirmative congressional action manifested a view inconsistent with our prior decision, as was true in Girouard v. United States. 17 What we have here instead is a case in which Congress has not passed bills that have been introduced to make embezzled funds taxable and thereby make failure to report them as imcome a federal crime. For this Court to hold under such circumstances that the inherent ambiguity of legislative inaction gives the Court license to repudiate the long-standing interpretation of the income tax statute and thereby bring additional conduct within the tax evasion criminal statute seems to us to be flagrantly violative of the almost universally accepted axiom that criminal statutes are narrowly and strictly construed. Our Brethren cite no precedent in which this or any other court in the English-speaking world has so deliberately overruled a long-standing prior interpretation of a statute in order to create a crime which up to that time did not exist.
This Court as well as Congress was fully apprised of the various criticisms made in some Courts of Appeals opinions and elsewhere against the Wilcox holding, yet it has likewise until today steadfastly refused to overrule that holding during these fifteen years. This has been in the face of the fact that the Government expressly urged that we do so in 1955, nine years after Wilcox was decided and three years after the decision in Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833. On that occasion the Court of Appeals for the Second Circuit, speaking through Judge Frank for himself and Judge Medina, had held in the case of J. J. Dix, Inc. v. Commissioner that embezzled funds were not taxable as income, relying wholly on the Wilcox decision. 18 Judge Hincks dissented, saying that if the facts of Dix were not enough to distinguish it from Wilcox he would not follow Wilcox. In urging us to grant certiorari, the Government said that the case presented a recurring problem in the administration of the income tax laws. One of the arguments the Government presented for overruling Wilcox, strange as it may seem, was that '(s)everal prosecutions have recently been authorized and are now pending in various District Courts, even though the disputed income in those cases apparently came from embezzlements or closely analogous crimes.' 19 And the next to the last sentence of its petition was: 'In short, the question whether the proceeds of embezzlement, unlike other illegal income, are to enjoy a preferred tax-exempt status, will continue to perplex the lower courts until it is settled by this Court.' 20 We denied certiorari. 21 There is surely less reason to repudiate and 'devitalize' Wilcox now, six years after the Court, as composed at that time, refused to overrule it.
It seems to us that we gave the doctrine of stare decisis its proper scope in our treatment of this Court's decision in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 259 U.S. 200, 42 S.Ct. 465, 66 L.Ed. 898. In that case this Court had held for reasons given that professional baseball was not covered by the antitrust acts. Congress was asked through the years to change the law in this respect but declined to do so. In Toolson v. New York Yankees, Inc., 346 U.S. 356, 74 S.Ct. 78, 79, 98 L.Ed. 64, we followed the holding of that case without re-examination of the underlying issues 'so far as that decision determines that Congress had no intention of including the business of baseball within the scope of the federal antitrust laws.' Later we were asked to extend the Federal Baseball case and to hold that the business of boxing could not without congressional action be brought within the antitrust laws. We emphatically declined to do so in United States v. International Boxing Club, 348 U.S. 236, 75 S.Ct. 259, 99 L.Ed. 290, nor did we overrule Toolson in that case, despite strong arguments that the reasoning of the Court in the first baseball case was equally applicable to the business of boxing. We said about the proposed exemption of boxing from the antitrust laws that '(t)heir remedy, if they are entitled to one, lies in further resort to Congress.' 22 That case and that statement fit this case precisely. In fact, as we are about to explain, a far more meaningful distinction can be made between embezzlement and extortion for purposes of this case than it was possible to make between baseball and boxing for purposes of that case, as Mr. Justice FRANKFURTER'S dissenting opinion in that case demonstrates.
Our Brethren advance as a reason for overruling Wilcox the 1952 decision in Rutkin v. United States, which was decided three years before we denied certiorari in the Dix case. They say that 'the reasoning used in Rutkin leads us inescapably to the conclusion that Wilcox was thoroughly devitalized.' This follows, to some extent, the statement in the Government's brief that 'Wilcox and Rutkin cannot be reconciled on the basis of asserted technical differences between the extortionist and the embezzler. * * * The proper course, we submit, * * * is to recognize that the Wilcox rationale was rejected in Rutkin, is unsound, and can no longer be regarded as having vitality. Embezzled funds represent taxable gains.' 23
There is no doubt that some of the reasoning in the Rutkin opinion rejected some of the reasoning in the Wilcox opinion. But this it true only with respect to the broad general standards formulated in the two cases, and such standards of course cannot be accepted as universal panaceas to be mechanically applied to solve all the concrete problems in cases like these. Moreover, the Rutkin opinion expressly purported not to overrule Wilcox and specifically said that Wilcox was still to govern cases fitting its facts, clearly meaning embezzlement cases. 24 And the Government had not asked in Rutkin that Wilcox be overruled. Its argument was that Wilcox was 'inapplicable' to the facts in the Rutkin record. The Government's brief went on to emphasize that the record in Wilcox showed only the bare receipt of money wholly belonging to another, while Rutkin had received the money 'as a result of a bilateral agreement' and, as the Court of Appeals had pointed out, 'with a 'semblance of a bona fide claim of right', a conclusion fully substantiated by the testimony of both the petitioner and the Government witness Reinfeld.' 25 The Government went on to distinguish Rutkin further by pointing out that there was 'not the slightest hint in the record' that Rutkin ever had an obligation to repay the funds he took.
After this Court was persuaded by the Government in Rutkin to accept its distinctions between Rutkin and Wilcox, it seems rather odd to have the Government now contend that the two cases are irreconcilable. While we disagreed, we can understand why the majority in Rutkin drew the distinctions it did. Although the victim of either embezzlement or extortion ordinarily has a legal right to restitution, the extortion victim, like a blackmail victim, can in a sense be charged with complicity in bringing about the taxable event in that he knowingly surrendered the funds to the extortionist, sometimes in payment of an actual obligation. Unlike the victim of an ordinary theft, he generally knows who has taken the property from him and he consents to the taking though under duress; and unlike most victims of embezzlement, he is able to report the taking to law enforcement officers during the taxable year and his failure to do so might be considered a kind of continuing consent to the extortionist's dominion over the property. The longer he acquiesces the less likely it becomes that the extortion victim ever will demand restitution; 26 but once the victim of an embezzlement finds out that his property has been stolen, he most likely will immediately make efforts to get it back. Thus, although we still think Rutkin was wrongly decided for the reasons expressed in the dissenting opinion in that case, we can understand the argument for application of a sort of caveat emptor rule to persons who submit to blackmail or extortion, since it is far from certain that they will ever expose themselves by seeking repayment of what they paid out. The distinctions between crimes like embezzlement and crimes like blackmail and extortion, therefore, are not merely technical, legalistic 'attenuated subleties' for purposes of this decision, but are differences based upon practicalities such as often underlie the distinctions that have been developed in our law.
In departing from both the Wilcox and Rutkin decisions today, our Brethren offer no persuasive reasons to prove that their judgment in overruling Wilcox is better than that of the Justices who decided that case. It contributes nothing new to the analysis of this problem to say repeatedly that the dishonest man must be subject to taxation just as the honest. As already said, Chief Justice Stone and the others sitting with him on the Wilcox Court fully accepted that general principle and we do still. Applying it here, we would say the embezzler should be treated just like the law-abiding, honest borrower who has obtained the owner's consent to his use of the money. 27 It would be unthinkable to tax the borrower on his 'gain' of the borrowed funds and thereby substantially impair the lender's chance of ever recovering the debt. The injury that the Government would inflict on the lender by making the borrower less able to repay the loan surely would not be adequately compensated by telling the lender that he can take a tax deduction for the loss, and it is equally small comfort to the embezzlement victim for the Government, after taking part of his property as a tax on the embezzler, to tell the victim that he can take a deduction for his loss if he has any income against which to offset the deduction. There is, of course, one outstanding distinction between a borrower and an embezzler, and that is that the embezzler uses the funds without the owner's consent. This distinction can be of no importance for purposes of taxability of the funds, however, because as a matter of common sense it suggests that there is, if anything, less reason to tax the embezzler than the borrower. But if this distinction is to be the reason why the embezzlement must be taxed just as 'the gains of the honest laborer,' then the use of this slogan in this case is laid bare as no more than a means of imposing a second punishment for the crime of embezzlement without regard to revenue considerations, the effect on the rightful owner, or the proper role of this Court when asked to overrule a criminal statutory precedent. The double jeopardy implications would seem obvious, 28 and discussion of the serious inadvisability for other reasons of thus injecting the Federal Government into local law enforcement can be found in the dissenting opinion in Rutkin.
Even if we were to join with our Brethren in accepting the Government's present contention that Wilcox and Rutkin cannot both stand, we would disagree as to which of the two decisions should now be repudiated. This is true not only because we would feel less inhibition about narrowing rather than broadening the reach of a previously construed criminal statute. Regardless of such considerations, our conviction that the Rutkin case was wrongly decided in this Court remains undiminished and has been further substantiated by the subsequent events in that controversy, which show all the more clearly the deplorable consequences that can result when federal courts subject people who violate state criminal laws to a double or treble prosecution for the state crime under the guise of attempted enforcement of federal tax laws. 29
It is argued, in reliance on Spies v. United States, 317 U.S. 492, 63 S.Ct. 364, 87 L.Ed. 418, and Holland v. United States, 348 U.S. 121, 75 S.Ct. 127, 99 L.Ed. 150, that so long as Wilcox remained on the books the element of 'willfulness' required in prosecutions of this kind 1 'could not be proven,' and hence, that the conviction of this petitioner fails without more. This would mean, I take it, that no future prosecution or past conviction involving tax derelictions of this nature, occurring during the Wilcox period, may be brought or allowed to stand I cannot agree to such a disposition, which, in my view, is warranted by neither principle nor authority and would carry mischievous implications for the future.
The Spies and Holland cases, which are said to support outright reversal, stand for no more than that where, as here, a criminal tax statute makes 'willfulness' an element of the offense, the Government must prove an 'evil motive and want of justification in view of all the financial circumstances' on the part of the defendant, in failing to do what was required of him. While I agree that in the present case this made germane on the issue of willfulness the petitioner's reliance or nonreliance on the continued vitality of the Wilcox doctrine, 2 I can find nothing in Spies or Holland which justifies the view that the mere existence of Wilcox suffices alone to vitiate petitioner's conviction as a matter of law. If, as appears to have been the case, there was erroneous failure to take that factor into account at the trial on the issue of willfulness, the most that should happen is that petitioner should be given a new trial. This indeed is what Spies and Holland affirmatively indicate as the right solution of the problem this case presents. In Spies, it was said (317 U.S. at pages 499—500, 63 S.Ct. at pages 368):
Coming now to the other possible rationale for barring the prosecution of this petitioner, it might be argued that petitioner at the time he failed to make his return was not under any misapprehension as to the law, but indeed that at the time and under the decisions of this Court his view of the law was entirely correct. The argument not only seems to beg the question, but raises further questions as to the civil liability of one situated in the circumstances of this petitioner. Petitioner's obligation here derived not from the decisions of this or any other court, but from the Act of Congress imposing the tax. It is hard to see what further point is being made, once it is conceded that petitioner, if he was misled by the decisions of this Court, is entitled to plead in defense that misconception. Only in the most metaphorical sense has the law changed: the decisions of this Court have changed, and the decisions of a court interpreting the acts of a legislature have never been subject to the same limitations which are imposed on legislatures themselves, United States Constitution, Art, I, §§ 9, 10, forbidding them to make any ex post facto law 3 and in the case of States to impair the obligation of a contract. Ross v. State of Oregon, 227 U.S. 150, 33 S.Ct. 220, 57 L.Ed. 458; New Orleans Waterworks Co. v. Louisiana Sugar Refining Co., 125 U.S. 18, 8 S.Ct. 741, 31 L.Ed. 607.
The starting point of any inquiry as to what constitutes taxable income must be the Sixteenth Amendment, which grants Congress the power 'to lay and collect taxes on incomes, from whatever source derived * * *.' It has long been settled that Congress' broad statutory definitions of taxable income were intended 'to use the full measure of (the Sixteenth Amendment's) taxing power.' Helvering v. Clifford, 309 U.S. 331, 334, 60 S.Ct. 554, 556, 84 L.Ed. 788; Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 62, 80 L.Ed. 3. Equally well settled is the principle that the Sixteenth Amendment 'is to be taken as written and is not to be extended beyond the meaning clearly indicated by the language used.' Edwards v. Cuba R. Co., 268 U.S. 628, 631, 45 S.Ct. 614, 615, 69 L.Ed. 1124. 1 The language of the Sixteenth Amendment as well as our prior controlling decisions, compels me to conclude that the question now before us—whether an embezzler receives taxable income at the time of his unlawful taking—must be answered negatively. Since the prevailing opinion reaches an opposite conclusion, I must respectfully dissent from that holding, although I concur in the Court's judgment reversing petitioner's conviction. I am convinced that Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, which is today overruled, was correctly decided on the basis of every controlling principle used in defining taxable income since the sixteenth Amendment's adoption.
This doctrine has since been reaffirmed and strengthened by us, see e.g., Helvering v. American Chicle Co., 291 U.S. 426, 54 S.Ct. 460, 78 L.Ed. 891; Commissioner of Internal Revenue v. Jacobson, 336 U.S. 28, 69 S.Ct. 358, 93 L.Ed. 477, and by the lower federal courts in numerous decisions involving a variety of 'bargain cancellations' of indebtedness, as by a creditor's release condoning or forgiving the indebtedness in whole or in part, 2 or by the running of a Statute of Limitations barring the legal enforceability of the obligation. 3 In none of these cases has it been suggested that a taxable gain might be realized by the debtor at any time prior to the effective date of discharge, and as Wilcox recognized, there is no rational basis on which to justify such a rule where the debt arises through embezzlement.
The fact that an embezzler's victim may have less chance of success than other creditors in seeking repayment from his debtor is not a valid reason for us further to diminish his prospects by adopting a rule that would allow the Commissioner of Internal Revenue to assert and enforce a prior federal tax lien against that which 'rightfully and completely belongs' to the victim. Commissioner of Internal Revenue v. Wilcox, supra, 327 U.S. at page 410, 66 S.Ct. at page 550. The Chief Justice's opinion quite understandably expresses much concern for 'honest taxpayers,' but it attempts neither to deny nor justify the manifest injury that its holding will inflict on those honest taxpayers, victimized by embezzlers, who will find their claims for recovery subordinated to federal tax liens. Statutory provisions, by which we are bound, clearly and unequivocally accord priority to federal tax liens over the claims of others, including 'judgment creditors.' 4
Notwithstanding all of this, The Chief Justice's opinion concludes that there is no difference between embezzled funds and 'gains' from other 'illegal sources,' and it points to the fact that Congress, in its 1916 revision of the 1913 Income Tax Act, omitted the word 'lawful' in describing businesses whose income was to be taxed. The opinion then cites United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037, in which it was held that, under the revised statute, gains from illicit traffic in liquor must be reported in gross income, since there is no 'reason why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.' Id., 274 U.S. at page 263, 47 S.Ct. at page 607. (Emphasis added.) That theory has been the primary basis for taxing 'unlawful gains of many kinds' which the prevailing opinion today recites, such as black market profits, gambling proceeds, money derived from the sale of unlawful insurance policies, etc. 5 For, even if lawful, the gains from such activities would clearly not be exempted from taxation. However, as applied to embezzled funds, the holding in Sullivan contradicts, rather than supports, the Court's conclusion today. Obviously, embezzlement could never become 'lawful' and still retain its character. If 'lawful,' it would constitute nothing more than a loan, or possibly a gift, to the 'embezzler,' neither of which would produce a taxable gain to him.
There is still another obvious and important distinction between embezzlement and the varieties of illegal activity listed by the prevailing opinion—one which clearly calls for a different tax treatment. Black marketeering, gambling, bribery, graft and like activities generally give rise to no legally enforceable right of restitution—to no debtorcreditor relationship which the law will recognize. 6 Condemned either by statute or public policy, or both, such transactions are void ab initio. Since any consideration which may have passed is not legally recoverable, its recipient has realized a taxable gain, an 'accession to in come,' as clearly as if his 'indebtedness' had been descharged by a full release or by the running of a Statute of Limitations. As we have already shown at length, quite the opposite is true when an embezzlement occurs; for then the victim acquires an immediately ripe and enforceable claim to repayment, and the embezzler assumes a legal debt equal to his acquisition.
The supposed conflict between Wilcox and Rutkin, upon which The Chief Justice's opinion seeks to justify its repudiation of Wilcox, 7 has been adequately treated in the opinion of Mr. Justice BLACK, and I agree with him that those cases were fully intended to be, and are, reconcilable, both on their controlling facts and applicable law. If the unnecessarily broad language used in the Rutkin opinion has misled any of the lower federal courts in their understanding of the principles underlying Wilcox, we should clarify their understanding at this time, and continue our adherence to 'a prior doctrine more embracing in its scope, intrinsically sounder, and verified by experience.' Helvering v. Hallock, 309 U.S. 106, 119, 60 S.Ct. 444, 451, 84 L.Ed. 604.
'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 $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution.' 26 U.S.C. 7201, 26 U.S.C.A. § 7201.
26 U.S.C. 6321—6323, 6331, 26 U.S.C.A. §§ 6321—6323, 6331; Bankruptcy Act, § 64, sub. a, 11 U.S.C. 104, sub, a, 11 U.S.C.A. § 104, sub. a. Moreover, R.S. § 3466 (1975), now codified in 31 U.S.C. 191, 31 U.S.C.A. § 191, pertaining to state insolvency proceedings against debtors, commands that 'the debts due to the United States shall be first satisfied.' We long ago established that the term 'debts' in this statute includes delinquent federal taxes. Price v. United States, 269 U.S. 492, 499—500, 46 S.Ct. 180, 181, 70 L.Ed. 373. And even though the tax claim of the Government may be only a general lien, with notice thereof not yet filed in the proper local office pursuant to 26 U.S.C. 6323, 26 U.S.C.A. § 6323, we have held that it must be accorded priority over the claims of all prior general lienholders, under R.S. § 3466, 31 U.S.C. 191, 31 U.S.C.A. § 191. United States v. City of New Britain, 347 U.S. 81, 84—85, 74 S.Ct. 367, 369—370, 98 L.Ed. 520; United States v. Gilbert Associates, 345 U.S. 361, 366, 73 S.Ct. 701, 704, 97 L.Ed. 1071; United States v. State of Texas, 314 U.S. 480, 488, 62 S.Ct. 350, 354, 86 L.Ed. 356. See Mertens, Law of Federal Income Taxation, § 12.103, note 67; Id., §§ 54.10—54.56.