Cristol, A. Jay

English

University of Miami School of Law

University of Miami Law Review Volume 13 Number 3 Article 5 5-1-1959 Tax Aspects of Embezzlement A. Jay Cristol Follow this and additional works at: https://repository.law.miami.edu/umlr Recommended Citation A. Jay Cristol, Tax Aspects of Embezzlement, 13 U. Miami L. Rev. 359 (1959) Available at: https://repository.law.miami.edu/umlr/vol13/iss3/5 This Comment is brought to you for free and open access by the Journals at University of Miami School of Law Institutional Repository. It has been accepted for inclusion in University of Miami Law Review by an authorized editor of University of Miami School of Law Institutional Repository. For more information, please contact library@law.miami.edu. COMMENTSTAX ASPECTS OF EMBEZZLEMENTFor persons looking for a so-called loophole in our tax law enforcementone of the last remaining frontiers appears to be embezzlement withinthe jurisdiction of the second judicial circuit of the federal court system.'The second circuit has continued to follow a 1946 Supreme Court decisionin Commissioner v. Wilcox 2 which recites the interesting doctrine thatproceeds of embezzlement are not taxable income to the embezzler. Inspite of respectable authority that the doctrine is no longer the law ofthe land the second circuit continues to hold out an invitation to thewould be embezzler.HistoryA 1919 court of appeals decision held "Money so received [embezzled]would not be subject to income taxation."' This principle, however, hasnever been regarded as extending an exemption to illegal gains generallyand the courts have upheld the taxation of illegally derived funds involvingbootlegging profits, 4 bribes, 5 extortion money,6 illegal commissions, 7 illegalcontract profits,8 illicit bonuses, kickbacks, 10 ransom, 1 ultra vires stockissues' 2 and usurious interest. 13 Thus the right of taxation of unlawfulor illegally derived funds has seldom if ever been questioned. 14 As Mr.I. New York, Vermont and Connecticut.2. Commissioner v. Wilcox, 327 U.S. 404 (1946).3. Rau v. United States, 260 F. 131 (2d Cir. 1919).4. Steinberg v. United States, 14 F. 2d 564 (2d Cir. 1926).5. Chadick v. United States, 77 F. 2d 961 (5th Cir. 1935).6. Estate of Joseph Nitto, 13 T.C. 858 (1949).7. Moore v. Thomas, 131 F.2d 611 (5th Cir. 1942).8. Commonwealth Investment Co., 44 B.T.A. 445 (1941).9. National City Bank v. Helvering, 98 F.2d 93 (2d Cir. 1938); Griffin v.Smith, 101 F.2d 348 (7th Cir. 1938).10. Caldwell v. Commissioner, 135 F.2d 488 (5th Cir. 1943); Estate of HeleneSimmons, 26 T.C. 409 (1956).11. Humphreys v. Commissioner, 125 F.2d 340 (7th Cir. 1942) cert. den. 317U.S, (1942).12. Penn v. Robertson, 29 F. Supp. 386 (M.D. N.C. 1939).13. Barker v. Magruder, 95 F.2d (D.C. Cir. 1938); Barker v. United States, 26 F.Supp. 1004 (Ct. Cl. 1939). Barker is the same party in each case. In Barker v. Magruderhe was seeking a refund for the years 1926 and 1927, in Barker v. United States he isfighting assessment of a deficiency for 1928 and 1929. See also Edgar B. Terrell, 7 B.T.A.773 (1927).14. See Annot. 43 A.L.R. 799 (1926) and supplementary Annot, 51 A.L.R. 1026(1927). See also IREY & SLOCUM, THE TAx DoDcirs (1948), an interesting andcolorful story of taxing and convicting the top bracket illegal income group, includingAl Capone and Moses Annenberg. There is no indication that these parties everquestioned the right to tax their illegal income.359UNIVERSITY OF MIAMI LAW REVIEWJustice Holnes casually commented in 1923, "of course congress may taxwhat it also forbids."'"The Wilcox LoopholeIn 1946 tile Supreme Court adopted the early treatment of embezzledfunds on the ground that the embezzler did not hold under claim of right:To be taxable, a gain must be conditioned on the presence of a"bona fide legal or equitable" claim of right to the alleged gain,and the absence of an unconditional obligation to repay.' 0The impact of the decision upon legal scholars was considerable;' 7however non-legal periodicals gave little attention to the holding.' 8 Theclaim of right theory advanced by the court in Wilcox was not new. Insome earlier cases the courts had held that the recipient of illegally derivedfunds had a claim of right,' 9 hence taxable income. Nevertheless, in othercases where the wrongdoer was held to have no claim of right and a clearlegal obligation to repay his victim the courts held the funds to be taxableincome.Y' Mr. Justice Burton in his dissenting opinion in Wilcox emphasizedthe artificial distinction upon which the majority opinion was based:The embezzlers complete possession of the embezzled funds isexercise of dominion over them to the extent of disposing ofevery cent of them, amounts to such an ample enjoyment ofthem . . . as to make them and his transfer of possession of themto others in such a manner as to give the recipients title to them. .. as to make them of obvious economic value to the embezzler.Such a readily realizable value presents no reasonable basis forexempting these funds from taxation that would be applied tothem if earned in a lawful manner.2 '15. U.S. v. Stafford, 260 U.S. 477 (1923) (involving taxation of bootleggingprofits).16. Commissioner v. Wilcox, 327 U.S. 404 (1946).17. Geller & Rogers, Embezzlement Has Its Tax Problems Tooi 26 TAxxs 10971948); Taxing Unsettled. Income: The "'Claim of Right" Test, 58 YALE L.J. 955 at61 (1949); Notes, 62 LI. 662 (1953), 46 COLUM. L. Rex. 677 (1947), 25 Tex. L. Rev.693 (1947), 26 B.U.L. Rev. 404 (1946); See also Annot. 166 A.L.R. 884 (1947).18. WALL STREET JoURNAL, Feb. 26, 1946, p. 9, Cols. 5 & 6, The Journal carriedportions of the majority and dissenting opinions without editorial comment; N. Y.SSis, Feb. 26, 1946, p. 45 Gol. 4, The Times carried the item on the next to the lastpage in extra fine print listing only the style of the case, the decision and the "justicesfiling opinions. Perhaps the decision was not entirely overlooked on Madison Avenise.The following day the Times carried on its last page an advertisement for an articleby Wesley Price on "How to Rob a Bank." The item opencd with a statement in largetype "There Are 210 Ways to Embezzle." N.Y. "'iiMis, Feb. 27, 1946 p. 44 Cols.4. 5.6. & 7.19. Caldwell v. Commissioner, 135 F.2d 488 (5th Cir. 1943) (Kickback); Moorev. Thomas, 131 F.2d 611 (5th Cir. 1942) (Illegal commission); National City Bankv. Helvering, 98 F.2d 93 (Zd Cir. 1938) (Illicit bonus); Penn v. Robertson, 29 F.Supp. 386 (M.D. N.C. 1939) (Ultra vires stock issuc);.Barker v. United States, 26 F,Supp. 1004 (Ct. Cl. 1938) (Usury).20. Humphreys v. Cornmissioner, 125 F.2d 340 (7th Cir. 1942) (Rinsom);Criffin v. Smith, 101 F.2d 348 (7th Cir. 1938) (Illicit bonus); Barker v. Magruder,95 F.2d 122 (D.C. Cir. 1938) (Usury); Chadick v. Uiiited States. 77 F.2d 961 (5th Cir,1935) (Bribe).21. Commissioner v. Wilcox, 327 U.S. 404 (1946) (Dissenting opinion).[VOL. XII ICOMMENTSImmediately following the court's decision in Wilcox the country wasoverrun with would be embezzlers who upon assessment of tax deficienciestemerariously advised the Commissioner of Internal Revenue that notax was due on their "embezzled" gains. 22 A speedy lady "embezzler"successfully raised the embezzlement defense within a week of the Wilcoxdecision,23 but generally the courts refused to hear such a defense andhave held the ill gotten gains taxable. 24 In cases nearer genuine embezzle-ment the courts found the taxpayer to be a swindler25 or a converter"rather than an embezzler thereby avoiding the so-called Wilcox defense.The Rutkin DecisionIn 1952 the Court decided that money obtained by extortion isincome taxable to the extortioner.27 The majority opinion was written byMr. Justice Burton, the lone dissenter in Wilcox. A strong dissent byMr. Justice Black28 referred to the claim of right theory set forth inWilcox and declared, "I just do not think Congress intended to treat theplunder of such criminals as theirs."29 The intent of Congress is statedperhaps, more clearly and less emotionally in Mr. Justice Burton's dissentin Wilcox.30 As pointed out by Geller and Rogers:... Mr. Justice Burton calls attention to an important change madeby the Revenue Act of 1916. The Act of 1913 originally providedthat "the net income of a taxable person shall include gains,profits, and income from ... the transaction of any lawful businesscarried on for gain or profit. [emphasis added] The 1916 Actomitted the word "lawful."31The Rutkin decision3 2 was hailed by a few judges and writers as overrulingWilcox;3a however some diehard embezzlers continued to fight for their22. Schira v. Commissioner, 240 F.2d 672 (6th Cir. 1957); United States v.Wyss, 239 F.2d 658 (7th Cir. 1957); Drybough v. Commissioner, 238 F.2d 735 (6thCir. 1956); Davis v. United States, 226 F.2d 331 (6th Cir. 1955); United States v.Bruswitz, 219 F.2d 59 (2d Cir. 1955); United States v. Currier Lumber Co. 70 F. Supp.219(D. Mass. 1947); Estate of Helene Simmons, 26 T.C. 409 (1956); Henry C. Boucher,18 TC. 710 (1952); Wallace H. Petit, 10 T.C. 1253 (1948); Agnes McCue, P-1l1956 T.C. Mem. Dec. 46,059; 12 CCH Tax Ct. Mem. 349 (1953).23. Agnes McCue, P-H 1946 T.C. Mer. Dec. 46,059; 12 CCH Tax Ct. Mer.349 (1953). Decided March 4, 1946. The Wilcox decision was handed down onFeb. 5, 1946.24. See note 21 supra.25. Rollinger v. United States, 208 F.2d 109 (8th Cir. 1953); Akers v. Scofield, 167F.2d 718 (5th Cir. 1948), cert. den., 335 U.S. 823 (1948).26. Marienfeld v. United States, 214 F.2d 632 (8th Cir. 1954), rehearing dell., cert.den., 348 U.S. 865 (1954). .%27. Rutkin v. United States, 343 U.S. 130 (1952).28. joined by Mr. Justice Reed, Mr. Justice Frankfurter and Mr. Justice Douglas.29. See note 26, supra, dissenting opinion.30. Commissioner v. Wilcox, 327 U.S. 404 (1946).31. Geller & Rogers, Embezzlement Has Its Tax Problems Too, 26 TAXES 1097(1948 .34. See note 26 supra.33. "It is difficult to perceive what, if anything is left of the Wilcox holdingafter Rutkin . . ." United States v. Bruswitz, 219 F.2d 59 (2d Cir. 1955) at,61;Notes, 7 MIAMI L .Q. 256 (1953); 62 YALE L. J. 662 (1953).19591UNIVERSITY OF MIAMI LAW REVIEWWilcox rights. The majority of cases since Rutkin involve apparentlygenuine embezzlements by taxpayers who wholly own or control closecorporations. 34 Generally the courts have refused the Wilcox defensehere as they did in other illegal income cases. 35 A conflict of decisionsbetween the sixth and second circuits 6 gave the Supreme Court anopportunity to clarify the issue but the Court declined. 7 The factualsituation of the embezzlement in the second circuit case was well withinthe fact pattern of similar cases decided against embezzlers and would beembezzlers subsequent to the Rutkin case.38The Supreme Court's denial of certiorari in the face of the conflictingcontemporaneous decisions of the sixth and second circuits leaves thetax consequences of embezzled funds more muddled than ever. TheCourt's action suggests that it will leave to Congress a specific affirmationof the views set forth in either the Wilcox or Rutkin cases.Proposed SolutionIt is suggested that embezzlement is like other crimes and should notreceive preferential treatment for tax purposes on the basis of suchtechnical niceties as the legal concept of when title passes. "[Tjaxation isnot so much concerned with the refinements of title, as it is with theactual command over the property taxed ... ,Further:Tax liability is an economic not a moral question. No prostitute,narcotics peddler, or anyone else can escape the payment of incometax on moral grounds. No more should an embezzler, a thief, arobber, a burglar, or any other criminal be permitted to go taxfree . . . upon the moral or legal basis that the money whichhe acquired was not technically his own but his victims as against34. Dawkins v. Commissioner, 238 F.2d 174 (8th Cir. 1956) (Husband held3%, wife 95%, two children, each 1%,); Drybough v. Commissioner, 238 F.2d 735(6th Cir. 1956) (Two persons owned or controlled 100%); Davis v. United States, 226F.2d 331 (6th Cir. 1955), cert. den. 350 U.S. 965, rehearing den., 351 U.S. 915 (1956)(wholly owned); Dix v. Commissioner 223 F.2d 436 (2d Cir. 1955), cert. den., 350U.S. 894 (1955) (wholly owned); Kaun v. Commissioner, 210 F.2d 247 (3rd Cir. 1954)(Kann family owned or controlled 90%), cert. den., 347 U.S. (1954); United States v.Currier Lnber Co. inc., 70 F. Stpp. 219 (D. Mass 1947) (husband held 75%,wife 25%).35. See note 21 supra.36. Dix v. Commissioner, 223 F.2d 436 (2d Cir. 1955) and Davis v. United States,226 F.2d 331 (6th Cir. 1955).37. Commissioner v. Dix, 350 U.S. 894 (1955) cert. den. and Davis v. United States,350 U.S. 965 (1956), cert. den., 351 U.S. 951, rehearing den.38. Dix v. Commissioner, 223 F.2d 436 (2d Cir. 1955) (Dissenting opinion ofJudge ltincks, ". . . I think the facts here are stronger than in 'Wilcox and comewithin the rationale of the Rutkin case. Cf. Kann v. Commissioner . . .Marienfeldv. United States ..."39. Mr. Justice Holmes in Corliss v. Bowers, 281 U.S. 376 (1930).[VOL. XlI19591 COMMENTS 363the economic reality of funds having been taken by him withintent to appropriate and enjoy them as his own .... 40It is offered that the collection of taxes should be a purely administrativefunction. It is not for the Commissioner of Internal Revenue to sit as asummary court for the determination of innocence or guilt of taxpayersin collateral matters. Rather it should be his job to assess taxes on thebasis of money coining into the hands of taxpayers from whatever sourcederived and to allow subsequent adjustments in such tax liabilities asallowed by law. Finally it is deemed outrageous that a criminal or would-becriminal should be accorded an advantage in tax consequences over anhonest taxpayer simply because he may be guilty of a crime and the honesttaxpayer is not. A legislative directive, drafted to include embezzlementproceeds, is in order.41A. Jay Cristol40. Marienfeld v. United States, 214 F.2d 632 (8th Cir. 1954), rehearing den., cert.den., 348 U.S. 865 (1954). Quoted from the excellent special concurring opinion ofJudge Johnson. It appears to this writer that the district court found as a matterof fact that the defendant was a converter rather than an embezzler. United Statesv. Marienfeld, 116 F. Supp. 634 (E. D. Mo. 1953). As a result the defense of em-bezzlement was not maintainable. Mr. Justice Black was of the opinion that certiorarishould have been granted. 348 U.S. 865 (1954). See also Briggs v. U.S., 77 F.2d699 (4th Cir. 1954), cert. den., 348 U.S. 864 (1954).41. It is suggested that the lr. REv. ConE of 1954 be amended in the followingfashion.To § 61 Gross Income Defined.(a) General Definition-Except os otherwise provided in this sub-title, gross income means all income from whatever source derived,including (but not limited to) the following items . . . Add the fol-lowing.(16) Any funds or benefits exclusive of gifts which are receivedor taken with intent to appropriate or enjoy such funds or benefitsin the manner of an owner and upon which there is no actual orexpress promise or obligation to the owner or possessor of repayment.To § 1341 Computation of tax where taxpayer restores substantial amountheld under claim of right.a) General Rule. -1-1) An item was included in gross income for a prior taxable yearor years) because it appeared that the taxpayer had an unrestrictedright to such item; (2) . . . Add the following(c) Special Presumption.Any item which was included in gross income under (a) (1) ofthis section shall be treated as if held under claim of right in regardto the allowance of computations and adjustments provided by thissection.

Tax Aspects of Embezzlement

https://repository.law.miami.edu/cgi/viewcontent.cgi?article=3502&amp;context=umlr

Tax Aspects of Embezzlement

Abstract

Similar works

Full text

Available Versions

University of Miami School of Law