Commissioner of Internal Revenue v. Wilcox/Opinion of the Court

by Frank Murphy

United States Supreme Court

327 U.S. 404

Commissioner of Internal Revenue  v.  Wilcox

 Argued: Jan. 8, 1946. --- Decided: Feb 25, 1946

The sole issue here is whether embezzled money constitutes taxable income to the embezzler under Section 22(a) of the Internal Revenue Code. ^[1]

The facts are stipulated. The taxpayer was employed as a bookkeeper by a transfer and warehouse company in Reno, Nevada, from 1937 to 1942. He was paid his salary promptly each month when due, it not being the custom to allow him to draw his salary in advance. In June, 1942, the company's books were audited and it was discovered for the first time that the taxpayer had converted $12,748.60 to his own use during 1941. ^[2] This amount was composed of miscellaneous sums of money belonging to the company which he had received and collected at various times in his capacity as bookkeeper. He failed to deposit this money to the credit of the company. Instead he pocketed and withdrew payments in cash made to him by customers, neglecting to credit the customers' accounts or the company's accounts receivable with the funds received.

The taxpayer lost practically all of this money in various gambling houses in Reno. The company never condoned or forgave the taking of the money and still holds him liable to restore it. The taxpayer was convicted in a Nevada state court in 1942 of the crime of embezzlement. He was sentenced to serve from 2 to 14 years in prison and was paroled in December, 1943.

The Commissioner determined that the taxpayer was required to report the $12,748.60 embezzled in 1941 as income received in that year and asserted a tax deficiency of $2,978.09. The Tax Court sustained the Commissioner but the court below reversed. 9 Cir., 148 F.2d 933. We granted certiorari, 326 U.S. 701, 66 S.Ct. 35, because of a conflict among circuits as to the taxability of embezzled money. ^[3]

Section 22(a) of the Internal Revenue Code defines 'gross income' to include 'gains, profits, and income derived from * * * dealings in property * * * growing out of the ownership or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.' The question thus is whether the wrongful acquisition of funds by an embezzler should be included in the statutory phrase 'gains or profits and income derived from any source whatever,' thereby constituting taxable income to the embezzler.

The Commissioner relies upon the established principle that orthodox concepts of ownership fail to reflect the outer boundaries of taxation. As this Court has stated, tax liability 'may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to makd it reasonable and just to deal with him as if he were the owner, and to tax him on that basis.' Burnet v. Wells, 289 U.S. 670, 678, 53 S.Ct. 761, 764, 77 L.Ed. 1439. See Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788; Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655. Applying that rule to this case, the Commissioner urges that the act of appropriating the property of another to one's own use is an exercise of a major power of ownership even though the act is consciously and entirely wrongful. As against all the world except the true owner the embezzler is the legal owner, at least while he remains in possession. The money or property acquired in this unlawful manner, it is said, should therefore betreated as taxable income to the wrongdoer under Section 22(a). We cannot agree.

Section 22(a) is cast in broad, sweeping terms. It 'indicates the purpose of Congr §§ to use the full measure of its taxing power within those definable categories.' Helvering v. Clifford, supra, 309 U.S. 334, 60 S.Ct. 556, 84 L.Ed. 788. The very essence of taxable income, as that concept is used in Section 22(a), is the accrual of some gain, profit or benefit to the taxpayer. This requirement of gain, of course, must be read in its statutory context. Not every benefit received by a taxpayer from his labor or investment necessarily renders him taxable. Nor is mere dominion over money or property decisive in all cases. In fact, no single conclusive criterion has yet been found to determine in all situations what is a sufficient gain to support the imposition of an income tax. No more can be said in general than that all relevant facts and circumstances must be considered. See Magill, Taxable Income (1945).

For present purposes, however, it is enough to note that a taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain. Without some bona fide legal or equitable claim, even though it be contingent or contested in nature, the taxpayer cannot be said to have received any gain or profit within the reach of Section 22(a). See North American Oil v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 615, 76 L.Ed. 1197. Nor can taxable income accrue from the mere receipt of property or money which one is obliged to return or repay to the rightful owner, as in the case of a loan or credit. Taxable income may arise, to be sure, from the use or in connection with the use of such property. Thus if the taxpayer uses the property himself so as to secure a gain or profit therefrom, he may be taxable to that extent. And if the unconditional indebtedness is cancelled or retired taxable income may adhere, under certain circumstances, to the taxpayer. 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).

We fail to perceive any reason for applying different principles to a situation where one embezzles or steals money from another. 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).

It is obvious that the taxpayer in this instance, in embezzling the $12,748.60, received the money without any semblance of a bona fide claim of right. And he was at all times under an unqualified duty and obligation to repay the money to his employer. Under Nevada law the crime of embezzlement was complete whenever an appropriation was made; ^[4] the employer was entitled to replevy the money as soon as it was appropriated ^[5] or to have it summarily restored by a magistrate. ^[6] The employer, moreover, at all times held the taxpayer liable to return the full amount. The debtor-creditor relationship was definite and unconditional. All right, title and interest in the money rested with the employer. The taxpayer thus received no taxable income from the embezzlement.

This conclusion is unaltered by the fact that the taxpayer subsequently dissipated all of the embezzled funds in gambling houses. The loss or dissipation of money cannot create taxable income here any more than the insolvency or bankruptcy of an ordinary borrower causes the loans to be treated as taxable income to the borrower. See McKnight v. Commissioner, 5 Cir., 127 F.2d 572, 573, 574. In each instance the taxability is determined from the circumstance surrounding the receipt and holding of the money rather than by the disastrous use to which it is put. Likewise, the fact that a theft or loan may give rise to a deductible loss to the owner of the money does not create income to the embezzler or the borrower. Such deductions, lacking any necessarily corresponding relationship to gains and being a matter of legislative grace, fail to demonstrate the existence of taxable income.

Had the taxpayer used the embezzled money and obtained profits therefrom such profits might have been taxable regardless of the illegality involved. ^[7] Or had his employer condoned or forgiven any part of the unlawful appropriation the taxpayer might have been subject to tax liability to that estent. But neither situation is present in this proceeding and we need not explore such possibilities. 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.

The Tax Court's determination that the embezzled money constituted taxable income to the embezzler, a result in accord with its prior decisions on the issue, ^[8] involved a clear-cut mistake of law. The court below was therefore justified in reversing that judgment. Cf. Commissioner v. Scottish American Co., 323 U.S. 119, 65 S.Ct. 169; Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248; Trust of Bingham v. Commissioner, 325 U.S. 365, 65 S.Ct. 1232.

Affirmed.

Mr. Justice JACKSON took no part in the consideration or decision of this case.

Notes

1  26 U.S.C. § 22(a), 26 U.S.C.A. Int.Rev.Code, § 22(a).

2  The sum of $10,147.41 was embezzled during 1942 but that amount is not in issue in this case.

3  The decision below is in accord with McKnight v. Commissioner, 5 Cir., 127 F.2d 572, but is in conflict with Kurrle v. Helvering, 8 Cir., 126 F.2d 723. See also Boston Consol. Gas Co. v. Commissioner, 1 Cir., 128 F.2d 473, 476, 477, concurring opinion.

4  State v. Trolson, 21 Nev. 419, 32 P. 930.

5  Nevada Compiled Laws, 1929, § 8681; Perkins v. Barnes, 3 Nev. 557; Studebaker Co. v. Witcher, 44 Nev. 468, 199 P. 477, 201 P. 322.

6  Nevada Compiled Laws, 1929, §§ 11243-11246.

7  See Johnson v. United States, 318 U.S. 189, 63 S.Ct. 549, 87 L.Ed. 704; United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L.Ed. 1037; Caldwell v. Commissioner, 5 Cir., 135 F.2d 488; Chadick v. United States, 5 Cir., 77 F.2d 961; National City Bank v. Helvering, 2 Cir., 98 F.2d 93. See also Mann v. Nash (1932) 1 K.B. 752; Southern v. A.B. (1933) 1 K.B. 713.

8  See Spruance v. Commissioner, 43 B.T.A. 221, reversed sub nom. McKnight v. Commissioner, 5 Cir., 127 F.2d 572; Kurrle v. Commissioner, Prentice-Hall 1941 B.T.A. Memorandum Decisions, par. 41,085, affirmed 8 Cir., 126 F.2d 723. The administrative interpretation is to the same effect as the Tax Court's decisions. G.C.M. 16572, XV,-1 Cum.Bul. 82 (1936).