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5 - JAMES v.

US o HOWEVER, it was also held in this case that the

Court did not overrule Wilcox.
DOCTRINE: Embezzled money is taxable income of the
embezzler in the year of the embezzlement under 22(a) of HELD:
the Internal Revenue Code of 1939, which defines "gross Examination of the reasoning used in Rutkin leads to
income" as including "gains or profits and income derived the conclusion that Wilcox was thoroughly
from any source whatever," and under 61(a) of the Internal devitalized.
Revenue Code of 1954, which defines "gross income" as "all o Basis for Wilcox decision: a taxable gain is
income from whatever source derived." conditioned upon:
Presence of a claim of right to the alleged
gain; and
1. Petitioner is a union official who, with another person, Absence of a definite, unconditional
embezzled money during the years 1951 to 1954 from obligation to repay or return that which
his employer union and from an insurance company would otherwise constitute a gain.
with which the union was doing business. o Without some bona fide legal or equitable claim,
2. Petitioner failed to report the amounts in his gross even though it be contingent or contested in
income and was convicted for willfully attempting to nature, the taxpayer cannot be said to have
evade the federal income tax due for each year of received any gain or profit.
1951 to 1954 in violation of Sec. 145 of the Internal o Since Wilcox embezzled the money, held it
Revenue Code of 1939 and sec. 7201 of the Internal
without any semblance of a bona fide claim of
Revenue Code of 1954.
right and therefore was at all times under
a. Was sentenced to 3 years imprisonment.
unqualified duty and obligation to repay the
3. CA affirmed.
money to his employer, the Court found that
4. Because of a conflict with the SC ruling in
the money embezzled was not includible
Commissioner v. Wilcox, whose relevant facts are
within the gross income.
almost the same; this petition for Certiorari was
BUT Rutkins legal claim was no greater than that of
ISSUE: WON the embezzled funds are to be included in the o Petitioner had no basis for his claim and that he
gross income of the embezzler in the year which the funds obtained it by extortion;
are misappropriated. YES. o Both Wilcox and Rutkin obtained money by
means of a criminal act, neither had bona fide
The court in this case compared the decision in claim of right to the funds;
Commissioner v. Wilcox and Rutkin v. US. o Victim of extortion, like the victim of
Wilcox case the court held that embezzled money embezzlement, has a right to restitution; it is
does not constitute taxable income to the embezzler in unimportant that the sufferer of extortion is less
the year of the embezzlement. likely to seek restitution that one whose funds
are embezzled. What is important is that the
Rutkin case extorted money DOES CONSTITUTE
right to recoupment exists in both situations.
taxable income to the extortionist in the year that the
o Wilcox rationale was effectively vitiated by the
money is received.
decision in Rutkin.
IMPORTANT: ITO LANG MAHALAGA SA RULING GUYZ found to be invalid in a subsequent year, the taxpayer
plus the doctrine must nonetheless report the amount as "gross income"
From the ppt, but not on the case: Gross-income is in the year received.
source blind
It has been a well established principle, long before We do not believe that Congress intended to treat a
either Rutkin or Wilcox, that unlawful, as well as lawbreaking taxpayer differently. Just as the honest
lawful, gains are comprehended within the term taxpayer may deduct any amount repaid in the year in
gross income. which the repayment is made, the Government points
Court has given a liberal construction to the broad out that "If, when, and to the extent that the victim
phraseology of the "gross income" definition statutes recovers back the misappropriated funds, there is, of
in recognition of the intention of Congress to tax all course, a reduction in the embezzler's income."
gains except those specifically exempted. We believe that Wilcox was wrongly decided, and we
The language of 22(a) of the 1939 Code, "gains or find nothing in congressional history since then to
profits and income derived from any source persuade us that Congress intended to legislate the
whatever," and the more simplified language of rule. Thus, we believe that we should now correct the
61(a) of the 1954 Code, "all income from whatever error and the confusion resulting from it, certainly if we
source derived," have been held to encompass all do so in a manner that will not prejudice those who
"accessions to wealth, clearly realized, and over which might have relied on it.
the taxpayers have complete dominion."
A gain "constitutes taxable income when its recipient AS TO THE ISSUE of WILLFULNESS OF PETITIONER IN
has such control over it that, as a practical matter, he EVADING PAYMENT OF TAX
derives readily realizable economic value from it." Willfulness "involves a specific intent which must be
proven by independent evidence, and which cannot be
When a taxpayer acquires earnings, lawfully or inferred from the mere understatement of income."
unlawfully, without the consensual recognition,
express or implied, of an obligation to repay and the element of willfulness could not be proven in a
without restriction as to their disposition, "he criminal prosecution for failing to include embezzled
has received income which he is required to funds in gross income in the year of misappropriation
return, even though it may still be claimed that so long as the statute contained the gloss placed upon
he is not entitled to retain the money, and even it by Wilcox at the time the alleged crime was
though he may still be adjudged liable to restore committed.
its equivalent."
Therefore, we feel that petitioner's conviction may not
When a law-abiding taxpayer mistakenly receives stand, and that the indictment against him must be
income in one year, which receipt is assailed and dismissed.