James v. United States, 366 U.S.

213 (1961)[1], was a case in which the United States

Supreme Court held that money obtained by a taxpayer illegally was taxable
income, even though the law might require the taxpayer to repay the ill-gotten
gains to the person from whom they had been taken.

Facts

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. His argument was that just
as the receipt of loan proceeds is not taxable to the borrower (because of the
borrower's corresponding obligation to repay the loan), the person who embezzles
money should not be treated as having received income, since that person is legally
obligated to return those funds to their rightful owner. Indeed, Eugene 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

The Supreme Court was called upon to determine whether the receipt of embezzled
funds constitutes income taxable to the wrongdoer, even though an obligation to
repay exists.

Holding

The Supreme Court ruled that under section 22(a) of the Internal Revenue Code of
1939 and section 61(a) of the Internal Revenue Code of 1954, 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.

Rationale[edit]

The Court was divided between several different rationales. The majority opinion
was written by Chief Justice Earl Warren, joined by Justices Brennan and Stewart.
That opinion held that if a taxpayer receives income legally or illegally without
consensual recognition of obligation to repay, that income is taxable.

The Court noted that the scope of the Sixteenth Amendment was not limited to
"lawful" income, a distinction which had been found in the Revenue Act of 1913. The
absence of the "lawful" modifier indicated that the framers of the Sixteenth
Amendment had intended no safe harbor for illegal income. The Court expressly
overruled Commissioner v. Wilcox and ruled that James was therefore liable for the
federal income tax due on his embezzled funds. 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.

Effect of the decision[edit]

Although Eugene James avoided criminal liability, the opinion of the Court left James
in a situation where he would be required not only to repay the embezzled $738,000
to the union, but would also be required to pay federal income taxes on the receipt
of those funds, just as though he had been able to keep them.

Concurrences and dissents[edit]

Justice Whittaker, joined by Justice Black and Justice Douglas, wrote an opinion
concurring in the dismissal of the indictment against James, but dissenting from the
overruling of Wilcox. Justice Black raised a Federalism argument, arguing that this
ruling constituted a preemption of state criminal jurisdiction.

Justice Harlan, joined by Justice Frankfurter, wrote an opinion concurring with the
overruling of Wilcox, but contending that James should have been set for a new trial,
rather than set free of criminal liability. Justice Clark wrote a brief concurrence, also
agreeing with the overruling of Wilcox, but stating that James' conviction should also
have been upheld.