''James v. United States'', 366 U.S. 213 (1961), was a case in which the

United States Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...

held that the receipt of money obtained by a taxpayer illegally was

taxable income Taxable income refers to the base upon which an income tax system imposes tax. In other words, the income over which the government imposed tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. Th ...

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 A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ( ...

who had

embezzled Embezzlement is a crime that consists of withholding assets for the purpose of conversion of such assets, by one or more persons to whom the assets were entrusted, either to be held or to be used for specific purposes. Embezzlement is a type ...

more than $738,000 in union funds, and did not report the amounts on his tax return. He was

tried In law, a trial is a coming together of parties to a dispute, to present information (in the form of evidence) in a tribunal, a formal setting with the authority to adjudicate claims or disputes. One form of tribunal is a court. The tribunal, w ...

for

tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the taxp ...

and claimed in his defense that embezzled funds were not taxable income. His argument was that just as the receipt of

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

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 required to return those funds to their rightful owner. Indeed, Eugene James pointed out that the Supreme Court had made such a determination in '' Commissioner v. Wilcox''. However, the defense was unavailing in the

trial court A trial court or court of first instance is a court having original jurisdiction, in which trials take place. Appeals from the decisions of trial courts are usually made by higher courts with the power of appellate review (appellate courts). Mos ...

, which Eugene James and sentenced him to three years in

prison A prison, also known as a jail, gaol (dated, standard English, Australian, and historically in Canada), penitentiary (American English and Canadian English), detention center (or detention centre outside the US), correction center, correc ...

Issue

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

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 Internal may refer to: *Internality as a concept in behavioural economics *Neijia, internal styles of Chinese martial arts *Neigong or "internal skills", a type of exercise in meditation associated with Daoism *''Internal (album)'' by Safia, 2016 ...

, I.R.C. § 61(a) (). the receipt of embezzled funds was included in the gross income of the wrongdoer and was taxable to the wrongdoer even though the wrongdoer was required to return the funds to the rightful owner.

Rationale

The Court was divided between several different rationales. The majority opinion was written by Chief Justice

Earl Warren Earl Warren (March 19, 1891 – July 9, 1974) was an American attorney, politician, and jurist who served as the 14th Chief Justice of the United States from 1953 to 1969. The Warren Court presided over a major shift in American constitution ...

, 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, the income is taxable. The Court noted that the scope of the Sixteenth Amendment was not limited to "lawful" income, a distinction that had been found in the

Revenue Act of 1913 The Revenue Act of 1913, also known as the Underwood Tariff or the Underwood-Simmons Act (ch. 16, ), re-established a federal income tax in the United States and substantially lowered tariff rates. The act was sponsored by Representative Oscar U ...

. 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 liable for the federal income tax that was 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 violate laws willfully that were not established at the time of the violation.

Concurrences and dissents

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 an argument on

federalism Federalism is a combined or compound mode of government that combines a general government (the central or "federal" government) with regional governments (Province, provincial, State (sub-national), state, Canton (administrative division), can ...

that the ruling was 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 also stating that James's conviction should have been upheld.

Aftermath

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

References

External links

* * {{US16thAmendment United States Supreme Court cases United States Supreme Court cases of the Warren Court United States taxation and revenue case law 1961 in United States case law Embezzlement