JAMES V. U.S., 61-1 USTC 9449, 7 AFTR2D 1361, 366 U.S. 213 (USSC, 1961)
FACTS:
In this particular case, the defendant, Eugene C. James, embezzled money from both his union employer as well as an insurance company and failed to include these funds as gross income for tax purposes. The taxpayer disputed that the embezzled money should not qualify as taxable income as the funds were already required to be returned. James used a previous decision from Commissioner of Internal Revenue v. Wilcox to show that the money was not taxable as he had “no claim of right” to the money because he no longer had possession of it. The court held that all income was to be taxed
The court ultimately overturned the Wilcox case and ruled that the money was to be included in gross income because both legal and illegal earnings that are) acquired without the consensual recognition of an obligation to repay, are fully taxable. James was required to face legal penalties of three years in jail for his attempt at evading taxes in addition to the tax penalties of the crime.
ISSUE:
The issue being litigated in this case is whether embezzled funds should be a part of the embezzler’s gross income regardless of a repayment obligation.
HOLDING:
The Supreme Court ruled in agreement with the lower court’s decision and held that the defendant’s embezzled earnings were to be included on his tax return as gross income.
LEGAL ANALYSIS:
This ruling was supported by §61 of the Internal Revenue Code which defines gross income. §61 states that gross income means all income from whatever source derived. By evading the taxes for the earnings, the taxpayer was in violation with the IRC of 1939 §145(b), Attempt to Evade or Defeat Tax, and §7201 of the IRC of 1954 which is a similar regulation.
The major case law that came into question was the Wilcox rule from, Commissioner of Internal