If a taxpayer receives income , legally or illegally, without consensual recognition of obligation to repay, that income is automatically taxable.
• The defendant, Eugene James, was an official in a labor union who had embezzled more than $738,000 in union funds, and did not report these amounts on his tax return.
• He was tried for tax evasion, and claimed in his defense that embezzled funds did not constitute taxable income because, like a loan, the taxpayer was legally obligated to return those funds to their rightful owner
• Indeed, James pointed out, the Supreme Court had previously made such a determination in Commissioner v. Wilcox, 327 U.S. 404 (1946). However, this defense was unavailing in the trial court, where Eugene James was convicted and sentenced to three years in prison
ISSUE: Whether or not the receipt of embezzled funds constitutes income taxable to the wrongdoer, even though an obligation to repay exists.
• The Supreme Court of the US ruled that the receipt of embezzled funds was includable in the gross income of the wrongdoer and was taxable to the wrongdoer, even though the wrongdoer had an obligation to return the funds to the rightful owner.
• If a taxpayer receives income , legally or illegally, without consensual recognition of obligation to repay, that income is automatically taxable.
• The Court noted that the Sixteenth Amendment did not limit its scope to "lawful" income, a distinction which had been found in the Revenue Act of 1913. The removal of this modifier indicated that the framers of the Sixteenth Amendment had intended no safe harbor for illegal income.
• The Court also ruled, however, that Eugene James could not be held liable for the willful tax evasion because it is not possible to willfully violate laws that were not established at the time of the violation.