Syllabus

U.S. Supreme Court

James v. United States, 366 U.S. 213 (1961)

James v. United States

No. 63

Argued November 17, 1960

Decided May 15, 1961

366 U.S. 213

Syllabus

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. 366 U. S. 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. 366 U. S. 214-215, 222.

273 F.2d 5, reversed.

U.S. Supreme Court

James v. United States, 366 U.S. 213 (1961)James v. United States

No. 63

Argued November 17, 1960

Decided May 15, 1961

366 U.S. 213

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Syllabus

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. 366 U. S. 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. 366 U. S. 214-215, 222.

273 F.2d 5, reversed.

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

Page 366 U. S. 214

under § 22(a) of the Internal Revenue Code of 1939 [Footnote 1] and § 61(a) of the

Internal Revenue Code of 1954. [Footnote 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. [Footnote 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 [Footnote 4] and § 7201 of the Internal Revenue

Page 366 U. S. 215

Code of 1954. [Footnote 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 constitutes 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 343 U. S. 138. [Footnote 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,

Page 366 U. S. 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 Section 22(a)."

Commissioner v. Wilcox, supra, at 327 U. S. 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 343 U. S. 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. [Footnote 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, 281 U. S.

114; Corliss v.

Page 366 U. S. 217

Bowers, 281 U. S. 376, 281 U. S. 378. Thus, the fact that Rutkin secured the money

with the consent of his victim, Rutkin v. United States, supra, at p. 343 U. S. 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. [Footnote 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." [Footnote 9]

Page 366 U. S. 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 343 U. S. 138; United States v.

Sullivan, 274 U. S. 259, 274 U. S. 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 343 U. S. 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

Page 366 U. S. 219

v. Clifford, 309 U. S. 331, 309 U. S. 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, 336 U. S. 49; Helvering v. Stockholms

Enskilda Bank, 293 U. S. 84, 293 U. S. 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, 348 U. S. 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 343 U. S. 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 Consolidated v. Burnet, supra, at 286 U. S. 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

Page 366 U. S. 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 lawbreaking 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. [Footnote 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 [Footnote 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 reenacted 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 reexamining and correcting the Court's own

errors. Girouard v. United States, 328 U. S. 61, 328 U. S. 69-70; Helvering v. Hallock, 309

U. S. 106, 309 U. S. 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 � 8

and S. 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 | 8

and S. 213fn9|>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 309 U. S. 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, 317 U. S. 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 317 U. S. 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, 348 U. S. 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

Page 366 U. S. 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.

[Footnote 1]

"§ 22. GROSS INCOME."

"(a) 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. . . ."

(26 U.S.C. (1952 ed.) § 22(a).)

[Footnote 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).)

[Footnote 3]

Petitioner has pleaded guilty to the offense of conspiracy to embezzle in the Court of

Essex County, New Jersey.

[Footnote 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).)

[Footnote 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

$10,000, or imprisoned not more than 5 years, or both, together with the costs of

prosecution."

26 U.S.C. § 7201.

[Footnote 6]

The dissenters in Rutkin stated that the Court had rejected the Wilcox interpretation

of § 22(a). Id. at 343 U. S. 140.

[Footnote 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 Consolidated v. Burnet, 286 U. S. 417; United States v. Lewis, 340 U. S.

590; Healy 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.
[Footnote 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.

[Footnote 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.

[Footnote 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 longstanding Treasury

Regulations applicable to embezzlement losses."

Id. at 344 U. S. 170. The question of inclusion of embezzled funds in "gross income"

was not presented in Alison.

[Footnote 11]

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

MR. JUSTICE BLACK, whom MR. JUSTICE DOUGLAS joins, concurring in part and

dissenting in part.

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 v.

Wilcox, 327 U. S. 404. The Treasury Department promptly accepted this ruling in a

bulletin declaring that the "mere act of embezzlement does not, of itself, result in

taxable income," although properly urging that "taxable income may result to the

embezzler depending on the facts in the particular case." [Footnote 2/1]

Page 366 U. S. 223

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.

IWe dissent from the way the majority of the Court overrules Wilcox. If the statutory

interpretation of "taxable income" in Wilcox is wrong, then James is guilty of violating

the tax evasion statute, for the trial court's judgment establishes that he embezzled

funds and willfully refrained from reporting them as income. It appears to us that

District Courts are bound to be confused as to what they can do hereafter in tax

evasion cases involving "income" from embezzlements committed prior to this day.

Three Justices vote to overrule Wilcox under what we believe to be a questionable

formula, at least a new one in the annals of this Court, and say that, although failure

to report embezzled funds has, despite Wilcox, always been a crime under the

statute, people who have violated this law in the past cannot be prosecuted, but

people who embezzle funds after this opinion is announced can be prosecuted for

failing to report these funds as a "taxable gain." Three other Justices who vote to

overrule Wilcox say that past embezzlers can be prosecuted for the crime of tax

evasion, although two of those Justices believe the Government must prove that the

past embezzler did not commit his crime in reliance on Wilcox.

Page 366 U. S. 224

Thus, although it was not the law yesterday, it will be the law tomorrow that funds

embezzled hereafter are taxable income; and although past embezzlers could not

have been prosecuted yesterday, maybe they can and maybe they cannot be

prosecuted tomorrow for the crime of tax evasion. (The question of the civil tax

liability of past embezzlers is left equally unclear.) We do not challenge the wisdom
of those of our Brethren who refuse to make the Court's new tax evasion crime

applicable to past conduct. This would be good governmental policy even though

the ex post facto provision of the Constitution has not ordinarily been thought to

apply to judicial legislation. Our trouble with this aspect of the Court's action is that

it seems to us to indicate that the Court has passed beyond the interpretation of the

tax statute and proceeded substantially to amend it.

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. [Footnote 2/2] 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. [Footnote 2/3] 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

Page 366 U. S. 225

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. 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.

[Footnote 2/4]"

In our judgment, one of the great inherent restraints upon this Court's departure

from the field of interpretation to enter that of lawmaking has been the fact that its

judgments could not be limited to prospective application. This Court, and, in fact, all

departments of the Government, have always heretofore realized that prospective

lawmaking is the function of Congress, rather than of the courts. We continue to think

that this function should be exercised only by Congress under the constitutional

system.

IIWe 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

Page 366 U. S. 226

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." [Footnote 2/5]

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). [Footnote 2/6]"

The Court today by implication attributes quite a different meaning or consequence

to the Wilcox opinion. One opinion argues at length the "well established principle . .

. that unlawful, as well as lawful, gains are comprehended within the term gross

income.'" Wilcox did not deny that; we do not deny that. This repeated theme of our

Brethren is wholly irrelevant, since the Wilcox holding in no way violates the sound

principle of treating "gains" of honest and dishonest taxpayers alike. The whole basis of

the Wilcox opinion was that an embezzlement is not in itself "gain" or "income" to the

embezzler within the tax sense, for the obvious reason that the embezzled property still

belongs, and is known to belong, to the rightful owner. It is thus a mistake to argue that

petitioner's contention is "that all unlawful gains are taxable except those resulting from

embezzlement."

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

Page 366 U. S. 227

borrowed funds would have been. [Footnote 2/7] The Fifth Circuit, in McKnight v.

Commissioner, had decided the same thing. [Footnote 2/8] The Eighth Circuit,

however, had decided in Kurrle v. Helvering that embezzled funds were taxable

income. [Footnote 2/9] 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. [Footnote 2/10]"

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. [Footnote 2/11]"

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." [Footnote 2/12] He was not willing to put

the owner of

Page 366 U. S. 228

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.

It seems to us that Judge Sibley's argument was then, and is now, unanswerable. The

rightful owner who has entrusted his funds to an employee or agent has troubles

enough when those funds are embezzled, without having the Federal Government

step in with its powerful claim that the embezzlement is a taxable event automatically

subjecting part of those funds (still belonging to the owner) to the waiting hands of

the Government's tax gatherer. We say part of the owner's funds because it is on the

supposed "gain" from them that the embezzler is now held to be duty-bound to pay

the tax, and history probably records few instances of independently wealthy

embezzlers who have had nonstolen assets available for payment of taxes.

There has been nothing shown to us on any of the occasions when we have

considered this problem to indicate that Congress ever intended its income tax laws
to be construed as imposing what is in effect a property or excise tax on the rightful

owner's embezzled funds, for which the owner has already once paid income tax

when he rightfully acquired them. In our view, the Court today does Congress a grave

injustice by assuming that it has imposed this double tax burden upon the victim of

an embezzlement merely because someone has stolen his money, particularly when

Congress has refused requests that it do so. The owner whose funds have been

embezzled has done nothing but entrust an agent with possession of his funds for

limited purposes, as many of us have frequent occasion to do in the course of

business or personal affairs. Ordinarily the owner is not, and has no reason to be, at

all aware of an embezzlement until long after the first misuse occurs. If Congress

ever did manifest an intention to select the mere fact of embezzlement

Page 366 U. S. 229

as the basis for imposing a double tax on the owner, we think a serious question of

confiscation in violation of the Fifth Amendment would be raised. All of us know that,

with the strong lien provisions of the federal income tax law, an owner of stolen funds

would have a very rocky road to travel before he got back, without paying a good

slice to the Federal Government, such funds as an embezzler who had not paid the

tax might, perchance, not have dissipated. An illustration of what this could mean to

a defrauded employer is shown in this very case by the employer's loss of some

$700,000, upon which the Government claims a tax of $559,000.

It seems to be implied that one reason for overruling Wilcox is that a failure to hold

embezzled funds taxable would somehow work havoc with the public revenue or

discriminate against "honest" taxpayers and force them to pay more taxes. We

believe it would be impossible to substantiate either claim. Embezzlers ordinarily are

not rich people against whom judgments, even federal tax judgments, can be

enforced. Judging from the meager settlements that those defrauded were
apparently compelled to make with the embezzlers in this very case, it is hard to

imagine that the Treasury will be able to collect the more than $500,000 it claims.

And certainly the Wilcox case does not seem to have been one in which the

Government could have collected any great amount of tax. The employer's

embezzled $11,000 there went up in gambling houses. The scarcity of cases involving

alleged taxes due from embezzlers is another indication that the Government cannot

expect to make up any treasury deficits with taxes collected from embezzlers and

thieves, especially when the cost to the Government of investigations and court

proceedings against suspected individuals is considered. And, as already indicated,

to the extent that the Government could be successful in collecting some taxes from

Page 366 U. S. 230

embezzlers, it would most likely do so at the expense of the owner whose money

had been stolen.

It follows that, except for the possible adverse effect on rightful owners, the only

substantial result that one can foresee from today's holding is that the Federal

Government will, under the guise of a tax evasion charge, prosecute people for a

simple embezzlement. But the Constitution grants power to Congress to get revenue,

not to prosecute local crimes. And if there is any offense which, under our dual

system of government, is a purely local one which the States should handle, it is

embezzlement or theft. The Federal Government stands to lose much money by

trying to take over prosecution of this type of local offense. It is very doubtful whether

the further congestion of federal court dockets to try such local offenses is good for

the Nation, the States or the people. Here, the embezzler has already pleaded guilty

to the crime of embezzlement in a state court, although the record does not show

what punishment he has received. Were it not for the novel formula of applying the

Court's new law prospectively, petitioner would have to serve three years in federal
prison in addition to his state sentence. This graphically illustrates one of the great

dangers of opening up the federal tax statutes, or any others, for use by federal

prosecutors against defendants who not only can be but are tried for their crimes in

local state courts and punished there. If the people of this country are to be subjected

to such double jeopardy and double punishment, despite the constitutional

command against double jeopardy, it seems to us it would be far wiser for this Court

to wait and let Congress attempt to do it.

IIIThe 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

Page 366 U. S. 231

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. [Footnote 2/13]

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. [Footnote 2/14] 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. [Footnote

2/15] 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

Page 366 U. S. 232

was going on in the courts or because it was not asked to do so, as was the case

in Helvering v. Hallock. [Footnote 2/16] 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. [Footnote 2/17] 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 income

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 longstanding

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 longstanding 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

Page 366 U. S. 233

and three years after the decision in Rutkin v. United States, 343 U. S. 130. 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.

[Footnote 2/18] 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. [Footnote 2/19]"

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. [Footnote 2/20]"

We denied certiorari. [Footnote 2/21] 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.

Of course, the rule of stare decisis is not and should not be an inexorable one. This is

particularly true with reference to constitutional decisions involving determinations

beyond the power of Congress to change, but Congress can and does change

statutory interpretations. It

Page 366 U. S. 234

is perfectly proper and right that it should do so when it believes that this Court's

interpretation of a statute embodies a policy that Congress is against. But Congress

has not taken favorable action on bills introduced to overturn our Wilcox holding

even after we declined the Government's request to reverse the identical holding

in Dix, the latter having occurred three years after the decision in Rutkin which our

Brethren now say may have misled Congress into thinking that we had repudiated

the Wilcox holding.

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 v. National League of

Professional Baseball Clubs, 259 U. S. 200. 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, we followed the holding of that case

without reexamination 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, 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." [Footnote 2/22] That case and that statement fit this case

precisely. In fact, as we are about to explain, a

Page 366 U. S. 235

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.

If the Government wants to prosecute the local crime of embezzlement, ostensibly

because of "tax evasion," it seems clear to us that it should take its request to

Congress, which has power to pass on it and which has, to date, refused to do what

the Government asks us to do in this case.

IVOur 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.

[Footnote 2/23]"

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

Page 366 U. S. 236

specifically said that Wilcox was still to govern cases fitting its facts, clearly meaning

embezzlement cases. [Footnote 2/24] 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. [Footnote

2/25]"

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

Page 366 U. S. 237

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; [Footnote 2/26] 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

Page 366 U. S. 238

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. [Footnote

2/27] It

Page 366 U. S. 239

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,

[Footnote 2/28]

Page 366 U. S. 240

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.

We regret very much that it seems to be implied that the writer of the Rutkin opinion

and those who agreed to it intended to overrule Wilcox when it is manifest that the

language the Court used in Rutkin was meant to leave precisely the opposite

impression. We are sure that our Brethren at that time did not intend to mislead the

public, and it would be hard to imagine why they said what they did in

the Rutkin opinion had they not specifically considered and rejected the possibility of

overruling Wilcox then and there. We think it is unjustifiable to say nine years

after Rutkin that it "devitalized" or "repudiated" the Wilcox holding when

the Rutkin opinion said explicitly that Wilcox is still the rule as to embezzlement.

Congress has seen fit to let both decisions stand, and we think the present Court

should do the same.

VEven 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

Page 366 U. S. 241

a double or treble prosecution for the state crime under the guise of attempted

enforcement of federal tax laws. [Footnote 2/29]

For the foregoing reasons, as well as the reasons stated in MR. JUSTICE WHITTAKER's

opinion, we would reaffirm our holding in Commissioner v. Wilcox, reverse this

judgment and direct that the case be dismissed.

[Footnote 2/1]

G.C.M. No. 24945, 1946-2 Cum.Bull. 27, 28. This was precisely in accord with this

Court's statement of the proper rule in the Wilcox opinion:

"Taxable income may arise, to be sure, from the use or in connection with the use of

such [embezzled] property. . . . But, apart from such factors, the bare receipt of

property or money wholly belonging to another lacks the essential characteristics of

a gain or profit within the meaning of Section 22(a)."

327 U.S. at 327 U. S. 408.

[Footnote 2/2]

See, for example, Great Northern R. Co. v. Sunburst Oil & Refining Co., 287 U. S. 358.

[Footnote 2/3]
See, for example, United States v. L. Cohen Grocery Co., 255 U. S. 81.

[Footnote 2/4]

7 Cranch at 11 U. S. 34. And see United States v. Coolidge, 1 Wheat. 415.

[Footnote 2/5]

United States v. Sullivan, 274 U. S. 259, 274 U. S. 263.

[Footnote 2/6]

327 U.S. at 327 U. S. 408.

[Footnote 2/7]

Wilcox v. Commissioner, 148 F.2d 933.

[Footnote 2/8]

127 F.2d 572.

[Footnote 2/9]

126 F.2d 723.

[Footnote 2/10]

127 F.2d at 573.

[Footnote 2/11]

Ibid. The same reasoning can be found in our opinion in Alison v. United States, 344 U.

S. 167, 344 U. S. 169-170.

[Footnote 2/12]

127 F.2d at 574.

[Footnote 2/13]

E.g., Commissioner v. Smith, 324 U. S. 177 (compensation through exercise of stock

option), led to § 218 of the Revenue Act of 1950, adding § 130A to the 1939

Code; Commissioner v. Tower, 327 U. S. 280; Lusthaus v. Commissioner, 327 U. S. 293;

and Commissioner v. Culbertson, 337 U. S. 733 (family partnerships), led to § 340 of

the Revenue Act of 1951, adding § 191 to the 1939 Code; United States v. Silk, 331 U.
S. 704 ("employees" for purpose of Social Security employment tax), led to the Joint

Resolution of June 14, 1948, c. 468, 62 Stat. 438, amending several sections of the

1939 Code; Commissioner v. Estate of Church, 335 U. S. 632, and Estate of Spiegel v.

Commissioner, 335 U. S. 701 (estate tax), led to the Act of October 25, 1949, § 7, 63

Stat. 891, 894, amending § 811(c) of the 1939 Code; Wilmette Park Dist. v.

Campbell, 338 U. S. 411 (amusement tax), led to § 402 of the Revenue Act of 1951,

adding § 1701(d) to the 1939 Code; Commissioner v. Korell, 339 U. S. 619 (amortization

of bond premium), led to § 217 of the Revenue Act of 1950, amending § 125(b)(1) of

the 1939 Code.

[Footnote 2/14]

46 Stat. 1516; see 74 Cong.Rec. 7078-7079, 7198-7199.

[Footnote 2/15]

H.R. 8854, 86th Cong., 1st Sess.; H.R. 312, 87th Cong., 1st Sess.

[Footnote 2/16]

"To explain the cause of nonaction by Congress when Congress itself sheds no light

is to venture into speculative unrealities. Congress may not have had its attention

directed to an undesirable decision; and there is no indication that, as to the St. Louis

Trust cases, it had, even by any bill that found its way into a committee pigeonhole."

309 U. S. 309 U.S. 106, 309 U. S. 119-120. (Emphasis supplied.)

[Footnote 2/17]

"Thus, the affirmative action taken by Congress in 1942 negatives any inference that

otherwise might be drawn from its silence when it reenacted the oath in 1940."

328 U. S. 328 U.S. 61, 328 U. S. 70.

[Footnote 2/18]

223 F.2d 436.

[Footnote 2/19]
Petition for certiorari, p. 14, n. 6, Commissioner v. Estate of Dix, 350 U.S. 894.

[Footnote 2/20]

Id. at 15.

[Footnote 2/21]

350 U.S. 894.

[Footnote 2/22]

348 U.S. at 348 U. S. 244.

[Footnote 2/23]

Brief for the United States, pp. 32-33.

[Footnote 2/24]

"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). 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)."

343 U.S. at 343 U. S. 138.

[Footnote 2/25]

Brief for the United States in Opposition to Petition for Certiorari, Rutkin v. United

States, 343 U. S. 130, pp. 13-14. The full sentence in the Court of Appeals opinion from

which the Government quoted was:

"So he [Rutkin] did receive the money with a 'semblance of a bona fide claim of right,'

as the embezzler had not in Commissioner of Internal Revenue v. Wilcox, supra, at 327

U. S. 408."

United States v. Rutkin, 189 F.2d 431, 435.

[Footnote 2/26]
This factual distinction was clearly emphasized in the Court's opinion in Rutkin:

"[Rutkin] 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."

Rutkin v. United States, 343 U. S. 130, 343 U. S. 136-137. (Emphasis supplied.)

[Footnote 2/27]

The analogy between the borrower and the embezzler was lucidly analyzed by Judge

Sibley in McKnight v. Commissioner, 127 F.2d 572, 573-574.

The several cases relied on by the Court do not, in our judgment, justify imposing a

tax upon embezzled money. Corliss v. Bowers, 281 U. S. 376, involved income

accumulating in a trust fund belonging to the taxpayer and over which he retained

control. North American Oil Consolidated v. Burnet, 286 U. S. 417; United States v.

Lewis, 340 U. S. 590; and Healy v. Commissioner, 345 U. S. 278, were cases in which the

taxpayer had asserted a bona fide, though mistaken, claim of right. In North American

Oil, the taxpayer not only had a bona fide claim to the money taxed, but there had

been an adjudication that he was entitled to it, and there was only the tenuous

possibility that a competing claimant might later upset that adjudication.

The Lewis and Healy cases involved a tax on payments made and received as a result

of mutual mistake, and it was held that the administration of the tax laws on an

annual basis need not be upset for the convenience of those who caused the

mistaken payments to be made and reported as income. By contrast, the victims do

not cause embezzlements, and the Government is not misled or inconvenienced

under Wilcox, because the embezzler is always fully aware that the embezzled funds

are not rightfully his, and presumably will not report otherwise.

[Footnote 2/28]

See the dissenting opinion in Bartkus v. Illinois, 359 U. S. 121, 359 U. S. 150. It is

interesting to note that, on July 22, 1959, shortly after the Bartkus decision, Illinois, in

order to avoid the danger of prosecuting men in both state and federal courts for the

same crime, passed a statute making conviction or acquittal in a federal prosecution

a defense to a state prosecution for the same criminal act. Illinois Laws, 1959, p. 1893,

§ 1; 38 Ill.Ann.Stat. (Cum.Supp.1960) § 601.1. Thus, while Illinois is moving away from

such double prosecutions, this Court is moving even further than Bartkus in the

direction of authorizing such prosecutions.

[Footnote 2/29]

The subsequent history of the Rutkin-Reinfeld controversy can, in part, be read

in United States v. Rutkin, 208 F.2d 647, especially Judge Kalodner's dissenting opinion

at 655; United States v. Rutkin, 212 F.2d 641, especially at 644; and Rutkin v.

Reinfeld, 122 F. Supp. 265, reversed, 229 F.2d 248.

MR. JUSTICE CLARK, concurring in part and dissenting in part as to the opinion of THE

CHIEF JUSTICE.

Although I join in the specific overruling of Commissioner v. Wilcox, 327 U. S.

404 (1946), in THE CHIEF JUSTICE's opinion, I would affirm this conviction on either of

two grounds. I believe that the Court not only devitalized Wilcox, by limiting it to its

facts in Rutkin v. United States, 343 U. S. 130 (1952), but that, in effect, the Court

overruled that case sub silentio in Commissioner v. Glenshaw Glass Co., 348 U. S.

426 (1955). Even if that not be true, in my view, the proof shows conclusively that

petitioner, in willfully failing to correctly report his income, placed no bona

fide reliance on Wilcox.

MR. JUSTICE HARLAN, whom MR. JUSTICE FRANKFURTER joins, concurring in part and

dissenting in part as to the opinion of THE CHIEF JUSTICE.

I fully agree with so much of THE CHIEF JUSTICE's opinion as dispatches Wilcox to a

final demise. But, as to the disposition of this case, I think that, rather than an outright

reversal, which his opinion proposes, the reversal should be for a new trial.

Page 366 U. S. 242

I share the view that it would be inequitable to sustain this conviction when, by virtue

of the Rutkin-Wilcox dilemma, it might reasonably have been thought by one in

petitioner's position that no tax was due in respect of embezzled moneys. For, as is

pointed out, Rutkin did not expressly overrule Wilcox, but instead merely confined it

"to its facts." Having now concluded that Wilcox was wrongly decided originally, the

problem in this case thus becomes one of how to overrule Wilcox "in a manner that

will not prejudice those who might have relied on it." 366 U.S. at 366 U.S. 221.

It is argued, in reliance on Spies v. United States, 317 U. S. 492, and Holland v. United

States, 348 U. S. 121, that, so long as Wilcox remained on the books, the element of

"willfulness" required in prosecutions of this kind [Footnote 3/1] "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

Page 366 U. S. 243

continued vitality of the Wilcox doctrine, [Footnote 3/2] 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 (at 317 U. S. 499-

500):

". . . By way of Illustration, and not by way of limitation, we would think affirmative

willful attempt may be inferred from conduct such as keeping a double set of books,

making false entries or alterations, or false invoices or documents, destruction of

books or records, concealment of assets or covering up sources of income, handling

of one's affairs to avoid making the records usual in transactions of the kind, and any

conduct, the likely effect of which would be to mislead or to conceal. If the tax evasion

motive plays any part in such conduct, the offense may be made out even though

the conduct may also serve other purposes, such as concealment of other crime."

"In this case, there are several items of evidence, apart from the default in filing the

return and paying the tax, which the Government claims will support an inference of

willful attempt to evade or

Page 366 U. S. 244

defeat the tax. These go to establish that petitioner insisted that certain income be

paid to him in cash, transferred it to his own bank by armored car, deposited it not

in his own name, but in the names of others of his family, and kept inadequate and
misleading records. Petitioner claims other motives animated him in these matters.

We intimate no opinion. Such inferences are for the jury. If, on proper submission,

the jury found these acts, taken together with willful failure to file a return and willful

failure to pay the tax, to constitute a willful attempt to defeat or evade the tax, we

would consider conviction of a felony sustainable."

To the same effect, see Holland, supra, at p. 348 U. S. 139.

In the case at hand, the evidence of devious financial arrangements might well

support the inference that petitioner's purpose was not only to commit the

embezzlement, but also to secrete and immunize his gains from what he considered

to be his tax liabilities in respect of those gains. The District Court, as the trier of the

facts (there having been no jury), found that petitioner's acts were "willful, and were

done in a knowing and conscious attempt to evade and defeat" his tax obligations.

But since it does not appear that petitioner's possible reliance on the Wilcox doctrine

was considered below, Spies and Holland make it appropriate for us to send the case

back for a new trial. They do not support foreclosing the Government from even

undertaking to prove that the petitioner's conduct was "willful" in this respect.

An outright reversal is equally unsound on principle. I take it that our decisions in the

tax, and any other field, for that matter, relate back to the actual transactions with

which they are concerned, and that that is only the normal concomitant of the fact

that we do not sit as an administrative agency making rulings for the future, but

rather adjudicate actual controversies as

Page 366 U. S. 245

to rights and liabilities under the laws of the United States. There can be, I think, two

justifications for barring a prosecution of this petitioner in the unusual circumstances

presented here: (1) that, by reason of Rutkin having formally left intact

the Wilcox doctrine, petitioner did not have due warning of his possible criminal
liability; and (2) that the Court, in making new "law" in Rutkin, should, like the

legislature, not impose criminal liability ex post facto.

As to the first consideration, where the defendant is charged in a case like this with

having "willfully" violated the law, I believe that both reason and authority require no

more than that the trier of fact be instructed that it must take into account in

determining the defendant's "evil motive and want of justification," Spies v. United

States, 317 U.S. at 317 U. S. 498, his possible reliance on Wilcox, which not until now

has this Court explicitly stated was wrongly decided. As far as fairness to this

petitioner is concerned, I do not see why that is not amply accorded by the

disposition which Spies itself exemplifies. See p. 366 U. S. 243 supra. On the other

hand, if the trier of fact, properly instructed, finds that the petitioner did not act

in bona fide reliance on Wilcox, but deliberately refused to report income and pay

taxes thereon knowing of his obligation to do so and not relying on any exception in

the circumstances, I do not see why even the strictest definition of the element of

"willfulness" would not have been satisfied. Willfulness goes to motive, and the

quality of a particular defendant's motive would not seem to be affected by the fact

that another taxpayer similarly situated had a different motive.

An altogether analogous situation was presented in United States v. Murdock, 290 U.

S. 389. In that case, the respondent had been convicted of willfully failing to supply

information to the Bureau of Internal Revenue in that he relied on the possibility of

state prosecution as

Page 366 U. S. 246

justifying his invoking the federal privilege against self-incrimination. The Court said

in that case:

". . . He whose conduct is defined as criminal is one who 'willfully' fails to pay the tax,

to make a return, to keep the required records, or to supply the needed information.
Congress did not intend that a person, by reason of a bona fide misunderstanding as

to his liability for the tax, . . . should become a criminal by his mere failure to measure

up to the prescribed standard of conduct. . . ."

"It follows that the respondent was entitled to the charge he requested with respect

to his good faith and actual belief. Not until this court pronounced judgment in United

States v. Murdock, 284 U. S. 141, had it been definitely settled that one under

examination in a federal tribunal could not refuse to answer on account of probable

incrimination under state law. The question was involved, but not decided, in Ballman

v. Fagin, 200 U. S. 186, 200 U. S. 195, and specifically reserved in Vajtauer v. Comm'r of

Immigration, 273 U. S. 103, 273 U. S. 113. The trial court could not, therefore, properly

tell the jury the defendant's assertion of the privilege was so unreasonable and ill

founded as to exhibit bad faith and establish willful wrongdoing. This was the effect

of the instructions given. We think the Circuit Court of Appeals correctly upheld the

respondent's right to have the question of absence of evil motive submitted to the jury. . .

."

(Emphasis supplied.) It would seem that precisely the same disposition is in order in

this case. Nor do I think that distinctions in terms of the nature of the defendant's

legal misapprehension, its degree, its justifiability, or its source are either warranted

or would be manageable as a basis for deciding future cases.

Page 366 U. S. 247

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,

[Footnote 3/3] and, in the case of States, to impair the obligation

Page 366 U. S. 248

of a contract. Ross v. Oregon, 227 U. S. 150; New Orleans Waterworks Co. v. Louisiana

Sugar Refining Co., 125 U. S. 18.

The proper disposition of this case, in my view, is to treat as plain error, Fed.Rules

Crim.Proc. 52(b), the failure of the trial court as trier of fact to consider whatever

misapprehension may have existed in the mind of the petitioner as to the applicable

law in determining whether the Government had proved that petitioner's conduct

had been willful as required by the statute. On that basis, I would send the case back

for a new trial.

[Footnote 3/1]

The relevant statutes are set forth in footnotes 1-2 4-5 of THE CHIEF JUSTICE's

opinion Ante, pp. 214-215.

[Footnote 3/2]

Compare American Law Institute, Model Penal Code, tentative draft No. 4, § 2.04:

"(1) Ignorance or mistake as to a matter of fact or law is a defense if:"

"(a) the ignorance or mistake negatives the purpose, knowledge, belief, recklessness

or negligence required to establish a material element of the offense. . . ."

[Footnote 3/3]

Aside from problems of warning and specific intent, the policy of the prohibition

against ex post facto legislation would seem to rest on the apprehension that the

legislature, in imposing penalties on past conduct, even though the conduct could

properly have been made criminal and even though the defendant who engaged in

that conduct in the past believed he was doing wrong (as, for instance, when the

penalty is increased retroactively on an existing crime), may be acting with a purpose

not to prevent dangerous conduct generally, but to impose by legislation a penalty

against specific persons or classes of persons. That this policy is inapplicable to

decisions of the courts seems obvious: their opportunity for discrimination is more

limited than the legislature's, in that they can only act in construing existing law in

actual litigation. Given the divergent pulls of flexibility and precedent in our case law

system, it is disquieting to think what perplexities and what subtleties of distinction

would be created in applying this policy, which so properly limits legislative action, to

the decisions of the courts.

MR. JUSTICE WHITTAKER, whom MR. JUSTICE BLACK and MR. JUSTICE DOUGLAS join,

concurring in part and dissenting in part.

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, 309

U. S. 334; Douglas v. Willcuts, 296 U. S. 1, 296 U. S. 9. 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, 268 U. S. 631. [Footnote 4/1] The language of the Sixteenth

Amendment, as well as our prior controlling decisions,

Page 366 U. S. 249

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 v. Wilcox, 327 U.

S. 404, 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.

THE CHIEF JUSTICE's opinion, although it correctly recites Wilcox's holding that

"embezzled money does not constitute taxable income to the embezzler in the year

of the embezzlement" (emphasis added), fails to explain or to answer the true basis of

that holding. Wilcox did not hold that embezzled funds may never constitute taxable

income to the embezzler. To the contrary, it expressly recognized that an embezzler

may realize a taxable gain to the full extent of the amount taken if and when it ever

becomes his. The applicable test of taxable income, i.e., the "presence of a claim of

right to the alleged gain," of which Wilcox spoke, was but a correlative statement of

the factor upon which the decision placed its whole emphasis throughout, namely,

the "absence of a definite, unconditional obligation to repay or return [the money]."

327 U.S. at 327 U. S. 408. In holding that this test was not met at the time of the

embezzlement, the Wilcox opinion repeatedly stressed that the embezzler had no

"bona fide legal or equitable claim" to the embezzled funds, ibid.; that the victim never

"condoned or forgave the taking of the money, and still holds him liable to restore

it," id. at 327 U. S. 406; and that the "debtor-creditor relationship was definite and
unconditional." Id. at 327 U. S. 409. These statements all express the same basic fact

-- the fact which is emphasized most strongly in the opinion's conclusion explaining

Page 366 U. S. 250

why the embezzler had not yet received taxable income:

"Sanctioning a tax under the circumstances before us would serve only to give the

United States an unjustified preference as to part of the money which rightfully and

completely belongs to the taxpayer's employer."

Id. at 327 U. S. 410. (Emphasis added.)

However, Wilcox plainly stated that, "if the unconditional indebtedness is cancelled

or retired, taxable income may adhere, under certain circumstances, to the

taxpayer." 327 U.S. at 327 U. S. 408. More specifically, it recognized that, had the

embezzler's victim "condoned or forgiven any part of the [indebtedness], the

[embezzler] might have been subject to tax liability to that extent," id. at 327 U. S.

410, i.e., in the tax year of such forgiveness.

These statements reflect an understanding of, and regard for, substantive tax law

concepts solidly entrenched in our prior decisions. Since our landmark case of United

States v. Kirby Lumber Co., 284 U. S. 1, it has been settled that, upon a discharge of

indebtedness by an event other than full repayment, the debtor realizes a taxable

gain in the year of discharge to the extent of the indebtedness thus extinguished.

Such gains are commonly referred to as ones realized through "bargain

cancellations" of indebtedness, and it was in this area, and, indeed, in Kirby Lumber

Co. itself, that the "accession" theory or "economic gain" concept of taxable income,

upon which THE CHIEF JUSTICE's opinion today mistakenly relies, found its genesis.

In that case, the taxpayer, a corporation, had reduced a portion of its debt, with a

corresponding gain in assets, by purchasing its bonds in the open market at

considerably less than their issue price. Mr. Justice Holmes, who wrote the Court's
opinion, found it unnecessary to state the elementary principle that, so long as the

bonds remained a fully enforceable debt obligation of the taxpayer, there could be

no taxable gain. However, when the taxpayer retired the debt by purchasing

Page 366 U. S. 251

the bonds for less than their face value, it "made a clear [taxable] gain," and "realized

within the year an accession to income" in the amount of its bargain. 284 U.S. at 284

U. S. 3.

This doctrine has since been reaffirmed and strengthened by us, see e.g., Helvering v.

American Chicle Co., 291 U. S. 426; Commissioner v. Jacobson, 336 U. S. 28, 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, [Footnote 4/2] or by the running of a statute of

limitations barring the legal enforceability of the obligation. [Footnote 4/3] 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.

An embezzler, like a common thief, acquires not a semblance of right, title, or interest

in his plunder, and, whether he spends it or not, he is indebted to his victim in the

full amount taken as surely as if he had left a signed promissory note at the scene of

the crime. Of no consequence from any standpoint is the absence of such formalities

as (in the words of the prevailing opinion) "the consensual recognition, express or

implied, or an obligation to repay." The law readily implies whatever "consensual

recognition" is needed for the rightful owner to assert an immediately ripe and

enforceable obligation of

Page 366 U. S. 252

repayment against the wrongful taker. These principles are not "attenuated

subtleties," but are among the clearest and most easily applied rules of our law. They

exist to protect the rights of the innocent victim, and we should accord them full

recognition and respect.

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 v. Wilcox,

supra, at 327 U. S. 410. 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."

[Footnote 4/4]

Page 366 U. S. 253

However, if it later happens that the debtor-creditor relationship between the

embezzler and his victim is discharged by something other than full repayment, such

as by the running of a statute of limitations against the victim's claim, or by a release

given for less than the full amount owed, the embezzler, at that time, but not before,

will have made a clear taxable gain and realized "an accession to income" which he

will be required, under full penalty of the law, to report in his federal income tax

return for that year. No honest taxpayer could be harmed by this rule.

The inherent soundness of this rule could not be more clearly demonstrated than as

applied to the facts of the case before us. Petitioner, a labor union official, concededly
embezzled sums totaling more than $738,000 from the union's funds over a period

extending from 1951 to 1954. When the shortages were discovered in 1956, the

union at once filed civil actions against petitioner to compel repayment. For reasons

which need not be detailed here, petitioner effected a settlement agreement with

the union on July 30, 1958, whereby, in exchange for releases fully discharging his

indebtedness, he repaid to the union the sum of $13,568.50. Accordingly, at least so

far as the present record discloses, petitioner clearly realized a taxable gain in the

year the releases were executed to the extent of the difference between the amount

taken and the sum restored. However, the Government brought the present action

against him not for his failure to report this gain in his 1958 return, but for his failure

to report that he had incurred "income" from -- actually indebtedness to -- the union

in each of the years 1951 through 1954. It is true that the Government brought a

criminal evasion prosecution, rather than a civil deficiency proceeding, against

petitioner, but this can in no way alter the substantive tax law rules which alone are

determinative of liability in either case.

Page 366 U. S. 254

There can be no doubt that, until the releases were executed in 1958, petitioner and

the union stood in an absolute and unconditional debtor-creditor relationship, and,

under all of our relevant decisions, no taxable event could have occurred until the

indebtedness was discharged for less than full repayment. Application of the normal

rule in such cases will not hinder the efficient and orderly administration of the tax

laws any more than it does in other situations involving "bargain cancellations" of

indebtedness. More importantly, it will enhance the creditor's position by assuring

that prior federal tax liens will not attach to the subject of the debt when he seeks to

recover it.
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, 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. at 274 U. S.

263. (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. [Footnote 4/5] For, even if lawful, the gains from such activities would

clearly

Page 366 U. S. 255

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

debtor-creditor relationship which the law will recognize. [Footnote 4/6] 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 income," as clearly as if his "indebtedness"

had been discharged 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.

To reach the result that it does today, THE CHIEF JUSTICE's opinion constructs the

following theory for defining taxable income:

"When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual

recognition,

Page 366 U. S. 256

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. 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."

This novel formula finds no support in our prior decisions, least of all in those which

are cited. Corliss v. Bowers, 281 U. S. 376, involved nothing more than an inter

vivos trust created by the taxpayer to pay the income to his wife. Since he had
reserved the power to alter or abolish the trust at will, its income was taxable to him

under the express provisions of § 219(g), (h) of the Revenue Act of 1924. North

American Oil Consolidated v. Burnet, 286 U. S. 417, is the case which introduced the

principle since used to facilitate uniformity and certainty in annual tax accounting

procedure, i.e., that a taxpayer must report in gross income, in the year in which

received, money or property acquired under a "claim of right" -- a colorable claim of

the right to exclusive possession of the money or property. Thus, in its complete form,

the sentence in North American Oil from which the above-quoted fragment was

extracted reads:

"If a taxpayer receives earnings under a claim of right and without

Page 366 U. S. 257

restriction as to its [sic] 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."

Id. at 286 U. S. 424. (Emphasis added.) But embezzled funds, like stolen property

generally, are not "earnings" in any sense, and are held without a vestige of a

colorable claim of right; they constitute the principal of a debt. Of no significance

whatever is the formality of "consensual recognition, express or implied" of an

obligation to repay. By substituting this meaningless abstraction in place of the

omitted portion of the North American Oil test of when a receipt constitutes taxable

income, the prevailing opinion today goes far beyond overruling Wilcox -- it reduces

a substantial body of tax law into uncertainty and confusion. The above-cited case

of United States v. Lewis, 340 U. S. 590, decided 19 years after North American

Oil, demonstrates the truth of this. For, there we said:

"The 'claim of right' interpretation of the tax laws has long been used to give finality

to [the accounting] period, and is not deeply rooted in the federal tax system. . . . We
see no reason why the Court should depart from this well settled interpretation

merely because it results in an advantage or disadvantage to a taxpayer."

340 U.S. at 340 U. S. 592. The same principle was reiterated and applied in Healy v.

Commissioner, 345 U. S. 278.

The supposed conflict between Wilcox and Rutkin, upon which THE CHIEF JUSTICE's

opinion seeks to justify its repudiation of Wilcox, [Footnote 4/7] has been adequately

treated in

Page 366 U. S. 258

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, 309 U. S. 119.

[Footnote 4/1]

"A proper regard for its genesis, as well as its very clear language, requires also that

[the Sixteenth] Amendment shall not be extended by loose construction. . . .

Congress cannot, by any definition [of income] it may adopt, conclude the matter,

since it cannot, by legislation, alter the Constitution, from which alone it derives its

power to legislate, and within whose limitations alone that power can be lawfully

exercised."

Eisner v. Macomber, 252 U. S. 189, 252 U. S. 206.

[Footnote 4/2]

See, e.g., Spear Box Co. v. Commissioner, 182 F.2d 844; Helvering v. Jane Holding

Corp., 109 F.2d 933; Pacific Magnesium, Inc. v. Westover, 86 F. Supp. 644.
[Footnote 4/3]

See, e.g., Schweppe v. Commissioner, 168 F.2d 284; North American Coal Corp. v.

Commissioner, 97 F.2d 325; Securities Co. v. United States, 85 F. Supp. 532.

[Footnote 4/4]

26 U.S.C. §§ 6321-6323, 6331; Bankruptcy Act, § 64, sub. a, 11 U.S.C. § 104, sub, a.

Moreover, R.S. § 3466 (1975), now codified in 31 U.S.C. § 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, 269 U.

S. 499-500. 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, 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. United States v. City of New

Britain, 347 U. S. 81, 347 U. S. 84-85; United States v. Gilbert Associates, 345 U. S.

361, 345 U. S. 366; United States v. Texas, 314 U. S. 480, 314 U. S. 488. See Mertens,

Law of Federal Income Taxation, § 12.103, note 67; id., §§ 54.10-54.56.

[Footnote 4/5]

See cases cited in Rutkin v. United States, 343 U. S. 130, 343 U. S. 137, note 8. See also

United States v. Bruswitz, 219 F.2d 59; Steinberg v. United States, 14 F.2d 564; Barker v.

United States, 26 F. Supp. 1004, 88 Ct.Cl. 468; Silberman v. Commissioner, 44 B.T.A. 600.

[Footnote 4/6]

Restatement, Contracts, § 598; 6 Corbin, Contracts, §§ 1373 et seq. (1951). That the

rule applies even as to "unlawful insurance polices" is undoubted. Patterson,

Essentials of Insurance Law (2d ed. 1957), § 43 at 186.

[Footnote 4/7]
I cannot agree with THE CHIEF JUSTICE's assertion that Wilcox has been "thoroughly

devitalized" by Rutkin. See, e.g., the recent case of United States v. Peelle, 159 F. Supp.

45 (D.C.E.D.N.Y.1958). There, the Government sought to enforce liens for federal

income taxes claimed to be due on items of "income" aggregating $678,461.22 which

the taxpayer had embezzled from his corporate employer during the years 1945

through 1949. The items in question consisted of customers' payments intended for

the corporation, and had been embezzled by the taxpayer and kept by him in secret

bank accounts. In 1951 and 1952, he discharged his indebtedness by making full

restitution of the embezzled funds to the corporation. The corporation, which used

the accrual method of accounting, paid deficiencies which the Government

determined in its 1945-1949 income tax returns, based on its accrued right to receive

the embezzled customers' payments in those years. Not satisfied with this, the

Government took the position that the payments were taxable twice during the same

years -- once to the corporation when it accrued the right to receive them, and again

to the embezzler when he diverted them into the secret bank accounts. Had this

effort at double taxation succeeded, the Government's combined tax claims would

have been far in excess of the amount being taxed.

In rejecting the Government's argument that the embezzler received taxable income

at the time of the embezzlements, the District Court relied wholly upon the decision

which the Court today overrules, Commissioner v. Wilcox, supra.