*1
it means the next of kin as the law has always meant
it;
dependency
only
is
a selective factor, a con-
upon recovery by any
dition
class,
members of that
among
members of the first two classes. The
case is not therefore one in which Congress has failed
express
its
purpose,
obvious
and in which courts
supply
necessary
are free to
omission;
it is a case
purpose
where —whatever
certainly did not
—it
plaintiff
what
include
asserts.”
v. Penn-
Poff
Co.,
sylvania R.
COMMISSIONER INTERNAL REVENUE WILCOX et al. Argued January 8, 163. February 25,
No. 1946. Decided *2 Ralph argued F. Fuchs the petitioner. cause for With him on the brief were Solicitor McGrath, General As- sistant Attorney Clark, Jr., General Samuel O. Sewall Key, Robert N. Anderson and Muriel S. Paul. argued
William E. Davis the cause for respondents. him With on George the brief B. was Thatcher. Opinion of the Court an- Murphy, Mr. Justice Rutledge. nounced by Mr. Justice The sole issue here is whether money embezzled con- stitutes taxable income to the embezzler 22 (a) under of the Internal Revenue Code.1
The stipulated. facts are The taxpayer was employed bookkeeper as a by a transfer and warehouse in company Reno, Nevada, from 1937 to 1942. He was paid his salary promptly each month due, when being not the custom him to allow to draw his in salary June, advance. company’s the books were audited and it was discovered for the first time that the taxpayer had converted $12,- 748.60 to his own during use 1941.2 This amount was 1 26 C. U.S. §22 $10,147.41 The during sum of was embezzled 1942 but that amount is not in issue in this case. belonging money sums miscellaneous
composed at var- and collected received he had which company the He failed to bookkeeper. capacity in times ious Instead company. credit of money to this deposit in made to him cash payments withdrew and pocketed accounts customers’ neglecting to credit customers, with the- funds receivable accounts company’s received. money various of this all practically lost taxpayer
The never condoned company The in Reno. houses gambling him still holds taking of forgave was convicted taxpayer The it. restore liable of embezzlement. crime in 1942 of the court state Nevada years prison to serve sentenced was He December, 1943. paroled was was determined Commissioner embezzled in 1941 as $12,748.60 report *3 required deficiency a tax and asserted year in that received the sustained Commissioner The Tax Court $2,978.09. of F. 2d 933. We 148" below reversed. court the but among conflict circuits of a because certiorari granted money.3 embezzled taxability of the toas Revenue defines Internal Code (a) 22 Section income de- “gains, profits, and include income” “gross growing . . . out of property dealings . . . from rived use,of in such also property; interest or ownership or the carried on any business for transaction of the . . . from income derived from and profits or or gain profit, or whether thus is the question The whatever.” any source an embezzler should be by funds acquisition of wrongful and “gains or statutory phrase in the included 3 McKnight Commissioner, with is in accord below The decision Helvering, with Kurrle in conflict (C. 5), but is C. A. 127F. 2d 572 Co. Gas 8).. Boston Consolidated also (C. C. A. F. 2d concurring (C. 1, C. A. 476-477 128 F. opinion). thereby whatever,” from source
income derived the income to embezzler. constituting taxable principle established upon the Commissioner relies The reflect fail to ownership concepts orthodox of that stated, has As this Court taxation. outer boúndaries of the tax enjoyment upon rest liability “may tax im and benefits so substantial privileges payer with just to deal it reasonable and portant as to make him that basis.” tax on owner, if and to him as he were Helvering v. Wells, 670, 678. See Burnet v. 289 U. S. Horst, 311 U. S. Helvering 309 U. S. Clifford, urges the Commissioner case, that rule to this Applying another property appropriating act of major power of owner is an exercise of to one’s own use entirely wrong .consciously is though the act ship even owner the except the true all the world against ful. As while he remains legal owner, least at embezzler is in this un acquired property The possession. treated as therefore be said, should manner, it is- lawful We under wrongdoer to the taxable income agree. cannot It sweeping terms. broad, (a) is cast
Section to use the full measure Congress purpose “indicates categories.” definable within those taxing power its essence of very Clifford, supra, 334. Helvering v. (a), is used income, concept taxpayer. benefit to the gain, of some profit accrual in its course, read must be requirement gain, This tax- Not benefit received every statutory context. necessarily renders his labor or investment payer *4 money prop- dominion over or Nor is mere taxable. him single, conclusive fact, in cases. no all erty decisive in situations all been found to determine yet has criterion imposition of an support gain to what is a sufficient all in than that general be No more can said tax. See be considered. facts and circumstances relevant must (1945). Magill, Taxable Income however, enough it is to note that purposes, present Eor of a (1) presence upon gain is conditioned a (2) the absence of alleged gain and right of to the claim or return obligation repay definite, unconditional a Without gain. constitute a which would otherwise claim, though legal equitable even some bona fide or nature, taxpayer eannot contingent contested be or the reach gain profit or within any said to have received be Burnet, 286 U. S. North American Oil v. (a). mere income accrue from the can taxable Nor return obliged which one is receipt property money or in the case a loan rightful owner, as repay or to the arise, sure, be from the may or credit. Taxable income such property. use or connection with the use of Thus to secure if the himself so as taxpayer property uses that ex- gain therefrom, may or taxable to profit be And if is cancelled tent. the unconditional indebtedness cir- retired, may adhere, or taxable income under certain cumstances, taxpayer. apart to the But from such factors receipt money belonging property wholly bare lacks essential gain to another characteristics of a meaning (a). profit within the perceive any We fail to reason for applying different situation where one principles embezzles or steals turpitude Moral money another. is not a touchstone taxability. question, rather, is whether the tax- payer statutory gain, profit fact received a or benefit. taxpayer’s may That the motive reprehensible have been receipt illegal or the mode of has bearing no upon the application of §
It is obvious that the in this instance, em- bezzling $12,748.60, received the money without right. semblance of a bona fide claim of And he was at unqualified duty obligation times an all to re- under pay employer. to his Under Nevada law the complete crime of embezzlement was appro- whenever an
409
4
replevy
entitled to
was
employer
the
made;
was
priation
or to have
appropriated5
it was
as soon as
money
the
employer,
The
magistrate.6
by a
restored
summarily
to return
taxpayer
liable
times held
moreover, at all
relationship was
The debtor-creditor
full
amount.
All
title and interest
right,
definite and unconditional.
employer.
taxpayer
The
with the
money
in the
rested
from the embezzlement.
taxable income
received no
thus
the fact that
the tax-
is unaltered
This conclusion
the embezzled funds
dissipated all of
subsequently
payer
money
dissipation
houses.
loss or
gambling
more than the in-
income here
create taxable
cannot
borrower causes
bankruptcy
ordinary
of an
solvency or
the borrower.
treated as taxable income to
loans to be
572,
127 F. 2d
573-574.
McKnight v.
See
taxability is determined from
cir-
instance the
each
holding of the
receipt
surrounding
cumstances
to which it is
the disastrous use
rather than
may give
theft
loan
fact that a
Likewise, the
put.
money does
the owner of the
loss to
deductible
rise to a
or the borrower. Such
to the embezzler
not create
rela-
necessarily corresponding
lacking any
deductions,
legislative grace,
a matter of
being
tionship
income.
of taxable
the existence
demonstrate
fail
money and ob-
the embezzled
taxpayer used
Had
might have been tax-
profits
therefrom such
tained
had
involved.7 Or
illegality
regardless
able
Sullivan,
Helvering,
557;
Chadick v.
4
5
6
State
Nevada
Nevada
Studebaker
Johnson v.
v.
employer
subject to
might have been
appropriation,
that extent. But neither situation
liability
tax
*6
explore
and we need not
such
proceeding
in this
present
Sanctioning
tax under the circumstances
a
possibilities.
an un-
give
the United States
only
would serve
us
before
right-
which
part
as to
of
justified preference
belongs
taxpayer’s employer.
completely
fully
the embezzled
determination
The Tax Court’s
embezzler,
income to the
taxable
money constituted
issue,8,
prior
its
decisions on
in accord with
result
The court below was
clear-cut mistake of law.
involved
judgment.
reversing
Cf. Com
justified
therefore
Co.,
119;
Scottish American
323 U. S.
Dob
missioner v.
Commissioner,
Bingham
489;
U.
Trust
320
S.
v.
son
of
Commissioner,
Affirmed. in the consideration part no Justice Jackson took Mr. this case. decision of or dissenting. Burton, Justice
Mr.
do
that embezzled funds
not
case
By holding
this
In-
under the
the embezzler
gain
constitute a
misinterprets
I believe the Court
Code,
Revenue
ternal
contrary
is
to the estab-
interpretation
That
the Code.
and to
construction of
Code
lished administrative
22 (a)
as disclosed
to be the intent of
appears
what
(a)
22
includes
history.
expressly
Section
legislative
its
“gains or
person
in the net income of a taxable
Spruance
Commissioner,
221,
Estate
B. T.
A.
reversed
McKnight
nom.
Kurrle sub
Decisions, par.
Memorandum
ice-Hall
1941 B. T. A.
Prent
interpretation
41,085, affirmed
traffic
race-track bookmaking,2
playing,3
card
policies,4 illegal
unlawful
insurance
prize fighting pic-
tures,5 lotteries,6 graft,7 fraudulently misapplied moneys of
a client by
attorney,8 “protection
an
payments” to racket-
eers and ransom money paid
a kidnapper.9
opinion
present
recognizes
case
that
majority
“the
had
used the embezzled
and ob-
profits
tained
therefrom such
might have been
regardless
the illegality
involved.” The ma-
jority opinion
exempt
therefore does not
the embezzled
merely
“illegality
funds
taxation
because there is
opinion
involved.” The
its
by reading
reaches
result
into
(a)
22
legislative
I do not
distinction
find there. The
opinion
gains,
limits the
to such
not,
section
unlawful or
accompanied
are
right” by
as
with “a claim of
the tax-
accompanied
and as are not
with
payer
definite,
“a
un-
obligation
repay
conditional
return
which
would
gain.” Believing,
otherwise constitute a
I do,
Congress in this
has sought
section
“to use the full measure
doing
taxing power,”
sought
of its
so has
to tax
“gains
. from
whatever,”
all
. .
source
I am unable
recognize
adequate basis
reading
an
for
into
the broad
sweep
language the unexpressed
pro-
limitation
majority
posed
opinion.
also, Steinberg
United States v.
The embezzler’s
of the embezzled
funds, his exercise of dominion over them the
extent
disposing
every
cent of them
his
transfer of
possession
of them to
give
others
such a manner as to
the recipients
them,
title to
ample
amounts
such an
enjoyment of them, use of them,
them,
dominion over
dis-
position
themof
and receipt of benefits from them as to
make them of obvious economic value to the embezzler.
Such
readily
realizable
presents
value
no reasonable
basiá for exempting these funds from taxation that would
applied
be
to them if
earned
a lawfui manner. The
“Government
. . .
tax
may
not only ownership,
but
right
privilege
that is a constituent
ownership.
.
. .
Liability may
upon
enjoyment
rest
privileges
and benefits so substantial
important
to make it
just
reasonable and
to deal with him ifas
were the owner,
tax him
and to
Burnet on that
basis.”
Wells,
L. J., writing court, for the said:
“Although taxes public are duties attached to the ownership of property, the state should be able to exact their performance being without compelled to take sides in private Possession is controversies. in general prima facie evidence of. ownership, and is perhaps indeed source of the concept itself, though, long the time is past when it synonymous was with it. It would be intolerable that the tax must be assessed against putative both the tortfeasor and the claim- ant ; collection of the revenue cannot be delayed, nor Treasury should the compelled be to decide when a possessor’s claims are legal without warrant.” In the present case, the embezzler concealed the em- long enough bezzlement him gamble enable away all of the embezzled funds. He asserted, falsely to be sure, but nonetheless positively, right to dispose of the funds dispose and he did beyond them all chance *9 him his by them for of was a use This recovery. of their title to though legal had he fully as just as enjoyment own profits or other gambling If had them. .made own and those as his have claimed would them, he gained If profits. he had on those taxed been would have extortion, fraud or funds original possession him would be taxable to gains those practices, usurious majority language §of general under the gained possession if he however, holds that opinion, then such ar'e not by embezzlement funds original language. This him that reads into under be taxed distinction between the embezzler and sharp a the section not the defrauder, exempting the former but latter. such an intent by declaration of Con- express absence an not justified reading I that the courts are believe gress, into section. distinction this such a Furthermore, where an embezzler uses embezzled funds purposes and, by concealment of the embezzle- for his-own otherwise, deprives his victim a corresponding ment or enjoy funds, permits those the Code opportunity “loss,” as from the to deduct a victim’s taxable victim Huff, so embezzled.10 See Burnet the sums income, suggests 156. The allowance of such deduction U. S. Congress liability to transfer for the tax intent funds to the embezzler. The majority opinion on those such a transfer. prevents
A has been made of the fact that the Govern- point lien embezzler upon property ment’s tax of the would have the claim priority over of the victim embezzlement property from such the losses which the to recover victim the embezzlement. priority This of the tax suffered argument hardly adequate an to eliminate the tax lien argument most it is an Congress At for modify itself. tax lien in favor of the victim. (e). S. C. U. 10 26 §23 expressly requires, nothing the Code
There is
there
gain,
óf
the existence
a condition
obligation
definite, unconditional
of “a
be an absence
also
*10
constitute
return that which would otherwise
repay or
Helvering,
City
In the
of National
Bank v.
case
gain.”
on
he
95, the
was taxed
bonds which
p.
supra,
corporation
the
which
unlawfully withheld from
had
were
of the
property
officer. These bonds
the
was an
he
in
it
them
the sense that
could
reclaimed
corporation
have
court said—
the
in
“But there are
cases which
have
persons
several
upon property
taxed
which could be recovered
been
example,
upon
from
For
lender
usurious
them.
his
interest —if on an accrual basis —must
include
though
may
in
profit
return,
possibly
apparent
re-
allowed to deduct it as
loss if the borrower
be
Magruder,
211,
App.
it. Barker v.
D. C.
claims
large
railroad
too
Again,
2d 122.
when a
collects
F.
fares,
income, though
passengers
the excess is
right
R. I.
Chicago,
a theoretical
of restitution.
have
Commissioner, Cir.,
NIPPERT v. CITY OF RICHMOND. Argued 72. No. November February 25, 1945. Decided