Source: http://www.law.cornell.edu/supremecourt/text/343/130
Timestamp: 2014-03-15 08:20:08
Document Index: 48793772

Matched Legal Cases: ['§ 22', '§ 145', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 22', '§ 145']

RUTKIN v. UNITED STATES. | LII / Legal Information Institute
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343 U.S. 130 (72 S.Ct. 571, 96 L.Ed. 833)
[HTML] dissent, BLACK, REED, FRANKFURTER, DOUGLAS
The principal issue before us is whether money obtained by extortion is income taxable to the extortioner under § 22(a) of the Internal Revenue Code.
The petitioner, Rutkin, was indicted under 26 U.S.C. 145(b), 26 U.S.C.A. § 145(b),
for willfully attempting to evade and defeat a large part of his income and victory taxes for 1943. He was charged with filing a false and fraudulent return stating his net income to be $18,966.64, whereas he knew that it was $268,622.04. That difference, which would increase his tax liability from $6,843.93 to $222,408.32, was due largely to his omission from his original return of $250,000 received by him in cash from Joseph Reinfeld. The United States claims that this sum was obtained by petitioner by extortion and as such was taxable income. Petitioner contests both the fact that the money was obtained by extortion and the conclusion of law that it was taxable income if so obtained. He contends also that he did not willfully attempt to evade or defeat the tax. Petitioner was found guilty by a jury in the United States District Court for the District of New Jersey, fined $10,000 and sentenced to four years in prison. The Court of Appeals affirmed, one judge dissenting. 189 F.2d 431. We granted certiorari, 342 U.S. 808, 72 S.Ct. 50, so as to pass upon the alleged conflict between that decision and the decision in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752.
There was substantial evidence supporting that result. Reinfeld's first association with petitioner was in 1929 with several others in a bootlegging operation known as the 'High seas venture.' It was accomplished through the use of a ship in the sale of whiskey at sea more than 12 miles from shore. Reinfeld testified that petitioner contributed no money to the enterprise but was taken in because Reinfeld's associates were afraid that otherwise they would get 'interference and trouble' from petitioner. His interest was recognized to be 6% but, when the venture was liquidated in 1933, he already was overdrawn and no distribution was made to him. Without including petitioner, the others then organized Browne Vintners Co., Inc., a New York corporation, to engage in the liquor business. In 1936 petitioner, without making an investment, claimed a 6% interest in Browne Vintners. Despite Reinfeld's denial of petitioner's claim, Reinfeld paid him $60,000 and took from him an assignment of 'any and all of such shares of capital stock in the said Browne Vintners Co. Inc., that I am entitled to.' In 1940 all the Browne Vintners stock was sold for $7,500,000 to a purchaser who also assumed $8,000,000 of the company's debts. The shares of stock when sold stood in the names of, and were transferred by, 'nominees' so as to conceal the identity of Reinfeld and the other beneficial owners. A capital gains tax upon the profits from these sales was paid by the respective nominees.
Petitioner was neither a stockholder of record nor a beneficial owner of any of the stock of the company at any time.
In 1941, in response to petitioner's request, Reinfeld gave him about $10,000 to help buy a tavern. When petitioner used the money for other purposes Reinfeld refused to finance him further and his 'trouble' with petitioner began. In 1942 petitioner again claimed that he had had an interest in Browne Vintners Company and that Reinfeld must give him $100,000 to help him pay his debts. Upon Reinfeld's refusal, petitioner threatened to kill him. From that time on, the record presents a lurid story of petitioner's unsatisfied demands upon Reinfeld for various sums up to $500,000, petitioner's threatening use of a gun and his repeated statements that he would kill Reinfeld and Reinfeld's family unless his demands were met. Finally, on May 11, 1943, in New Jersey, Reinfeld paid petitioner $250,000 in cash.
It remains for us to determine the legal issue of whether money obtained by extortion is taxable to the extortioner under § 22(a).
Petitioner was unable to induce Reinfeld to believe petitioner's false and fraudulent claims to the money to be true. He induced Reinfeld to consent to pay the money by creating a fear in Reinfeld that harm otherwise would come to him and to his family. Reinfeld thereupon delivered his own money to petitioner. Petitioner's control over the cash so received was such that, in the absence of Reinfeld's unlikely repudiation of the transaction and demand for the money's return, petitioner could enjoy its use as fully as though his title to it were unassailable.
There has been a widespread and settled administrative and judicial recognition of the taxability of unlawful gains of many kinds under § 22(a).
The application of this section to unlawful gains is obvious from its legislative history. Section II, subd. 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. In 1916, 39 Stat. 756, this was amended by omitting the one word 'lawful' with the obvious intent thereafter to tax unlawful as well as lawful gains, profits or income derived from any source whatever.
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). The issue here is whether money extorted from a victim with his consent induced solely by harassing demands and threats of violence is included in the definition of gross income under § 22(a). We think the power of Congress to tax these receipts as income under the Sixteenth Amendment is unquestionable. The broad language of § 22(a) supports the declarations of this Court that Congress in enacting that section exercised its full power to tax income.
We therefore conclude that § 22(a) reaches these receipts.
In Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752, decided February, 1946, we held that embezzled money did not constitute taxable income to the embezzler under § 22(a) of the Internal Revenue Code. We there pointed out that the embezzler had no bona fide legal or equitable claim to the money, was under a definite legal obligation to return it to its rightful owner, and consequently had no more received the kind of 'gain' or 'income' which Congress has taxed than if he had merely borrowed money. One who extorts money not owed him stands in this precise situation. He has neither legal nor equitable claim to the extorted money and is under a continuing obligation to return it to its owner. See, e.g., Bank of the United States v. Bank of Washington, 6 Pet. 8, 19, 8 L.Ed. 299; Miller v. Eisele, 111 N.J.L. 268, 168 A. 426; 2 N.J.S.A. 2:731. A COMPARISON of Mr. Justice BURTON'S opinion in this case with his dissent in the Wilcox case reveals beyond doubt that the Court today adopts the reasoning of his prior dissent, thereby rejecting the Wilcox interpretation of § 22(a). A tax interpretation which Congress has left in effect for six years is thus altered largely as a consequence of a change in the Court's personnel. I think that our former interpretation was right and do not believe that the Government is suffering because of a failure to collect income taxes from embezzlers and extortioners. Indeed further considerations strengthen my support of our Wilcox holding.
Since it seems pretty clear that the Government can never collect substantial amounts of money from extortioners, there must be another reason for applying the tax law to money they extract from others. The Government's brief is suggestive of the only other reason that occurs to meto give Washington more and more power to punish purely local crimes such as embezzlement and extortion. Today's decision illustrates an expansion of federal criminal jurisdiction into fields of law enforcement heretofore wholly left to states and local communities. I doubt if this expansion is wise from the standpoint of the United States or the states.
Even when states attempt to play their traditional role in the field of law enforcement, the overriding federal authority forces them to surrender control over the manner and policy of construing and applying their own laws. State courts not only lose control over the interpretation of their own laws,
Punishment is frequently different. In fact, the same kind of conduct may be ignored as not worth criminal punishment by one jurisdiction while considered a serious criminal offense by another. For example, under the Federal White Slave Law men can be imprisoned five years for conduct which many states would not hold criminal at all. Schwartz, Federal Criminal Jurisdiction and Prosecutors' Discretion, 13 Law and Contemporary Problems 64, 72. When faced with specific federal legislation, such differences in treatment may be inevitable, but I do not think the tax laws should be judicially extended for the purpose of taking from local officials the responsibility for prosecuting local offenses.
Most of the evidence dealt with the following aspects of Rutkin's past life and associations: Back in prohibition days Rutkin had joined one Reinfeld and others in a bootlegging scheme called the 'High seas venture.' The organization made millions. About 1940, some time after prohibition ended, Reinfeld, apparently acting for the group, sold the business establishment for about $7,500,000 net. Reinfeld's accounting methods and management of the proceeds were not satisfactory to his associates. They claimed that Reinfeld held back more than his share of the millions. Reinfeld claimed that some of his former associates, including Rutkin, were 'overdrawn' and entitled to nothing out of the $7,500,000. This quarrel went on for several years during which time Reinfeld was required to pay hundreds of thousands of dollars to former partners as a result of their claims that he had swindled them. Rutkin was one of them. Rutkin's $250,000 was paid to him by lawyers whose reputations seem to have been above reproach. It was paid openly. And it was some eight years later when Rutkin sued Reinfeld for more millions that Reinfeld, apparently for the first time, charged that Rutkin had extorted the $250,000 under threats of death. Yet he has been convicted here of federal tax evasion on the theory that he was guilty of the crime of 'extortion.'
'(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. * * *' (Emphasis supplied.) 53 Stat. 9, 53 Stat. 574, 26 U.S.C. 22(a), 26 U.S.C.A. § 22(a).
'(b) * * * attempt to defeat or evade tax. * * * 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.' 53 Stat. 6263, 26 U.S.C. 145(b), 26 U.S.C.A. § 145(b).
'But then we come to the admitted payment of $250,000. Rutkin says that that $250,000 was a final settlement of his claim in Browne Vintners, and if that is soand the government does not contend that the capital gains tax was not paidhe would not be obliged to report that income. But Reinfeld says no, 'that was the result of extortion. He got that money out of me by threatening me and my family,' and he told the instances where those threats were made. There is one piece of corroboration of that, and that is from one of the six or seven people who were present in Holtz's cellar. * * *
'Any person who, with intent to extort from any person any money or other thing of value * * * shall directly or indirectly threaten to kill or to do any bodily injury to any man, woman or child unless a sum of money be paid, shall be guilty of a high misdemeanor and punished by imprisonment at hard labor for a term not exceeding thirty years, or by a fine not exceeding five thousand dollars, or both.' N.J.S.A. 2:1274.
See also, the federal statute, now in effect, relating to extortion affecting interstate commerce: 'The term 'extortion' means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.' 60 Stat. 420, 18 U.S.C. 420e1(c) (Revised section 1951(b)(2)).
For further discussion see dissent in Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 410411, 66 S.Ct. 546, 550, 90 L.Ed. 752.