James v. United States

PETITIONER:James
RESPONDENT:United States
LOCATION:Grace-New Haven Community Hospital

DOCKET NO.: 63
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Seventh Circuit

CITATION: 366 US 213 (1961)
ARGUED: Nov 17, 1960
DECIDED: May 15, 1961

Facts of the case

Question

Audio Transcription for Oral Argument – November 17, 1960 in James v. United States

Earl Warren:

Number 63, Eugene C. James, Petitioner, versus United States.

Mr. Gorman, you may proceed.

Richard E. Gorman:

I am Your Honor.

Mr. Chief Justice and members of the Court.

This prosecution was commenced on December the 13th, 1957 by the return of an indictment in four counts.

These counts charged a violation of the Internal Revenue statutes for the years of 1951, 1952 and 1953 under the old Section 145 (b) and in 1954 under the applicable Section number 7201 of the Internal Revenue Code of 1954.

The matter was tried to a court on the waiver of a jury.

The amounts which were involved totaled approximately $700,000.

There was a finding of guilty by the Court and special findings of fact pursuant to the provisions of Rule 23 of the Federal Rules of Criminal Procedure were entered.

These findings of fact were most detailed and fulsome and appear in both the brief of the United States and of the brief of the petitioner.

In summary, it might be said that the petitioner, Eugene C. James was an official of the International Laundry Workers Union and also was the Secretary Treasurer of Local 46 of the International Laundry Workers Union in Chicago, Illinois.

The funds which were the subject matter of this embezzlement which was so found especially by the Court to be an embezzlement were funds which were contributed to a welfare — a health and welfare organization within the international and within the local union.

These funds were especially contributed by management of the various members of the union or for the benefit of the various members of the union and were then contributed to a special fund which was set up in Indianapolis, Indiana for the purpose of purchasing this health and welfare plan for the members of the union.

The Mr. James was a Secretary Treasurer of the International Union as well as being a Secretary Treasurer of the Laundry Workers local number 46.

The funds were diverted by Mr. James and one Mr. Saperstein who was an agent of the insurance company which was underwriting these health and welfare plan.

The moneys were diverted to James and were set up in a special bank account in Chicago, Illinois and then were removed from that bank account by him, by the checks drawn to cash and in some instances checks drawn from his own name.

And they, in the bulk, set up the funds which, as I said, were the subject matter of this embezzlement.

The Court in its findings of fact held that this money was embezzled money and it was upon this finding of fact that appeal was taken to the Court of Appeals for the Seventh Circuit.

In its conclusions of law, the Court held that the lawyers — that the financial or monitory gains to a taxpayer was a lawfully or unlawfully acquired, constitutes taxable income to the taxpayer in the year in which he had such control over it.

That is a practical matter he derived readily realizable economic value from it.

It is immaterial whether the receipt of funds by a taxpayer without results from misappropriation, embezzlement, or other lawful or unlawful acts.

It is with the Court’s opinion that the embezzled funds in this case constituted a gain, which was such a gain that it could be — it could be considered subject to income tax that we take exception in this petition here.

This matter was first before this Court in the case of Internal Revenue Commissioner versus Wilcox, and it is interesting to note that in that case in Judge — Justice Murphy’s decision, in his opinion, he started out with these words, “The sole issue here is whether embezzled money constitutes taxable income to the embezzler under Section 22 (a) of the Internal Revenue Code.”

That is the exact same question that we appear before this Court for its decisions here today.

And it is also interesting to note that in that case practically the same argument was made by the Government as has been submitted to this Court in the briefs which are submitted here.

Since the time of the Wilcox case, no other decision has treated that case as being overruled and, except the decision in this case in the Seventh Circuit, there have been numerous decisions by courts, various circuit courts across the land, in which the decision in the Wilcox case has been distinguished but there is no case except the case in which we appear before Your Honors today in which it has been held that the Wilcox case is no longer controlling in cases concerning embezzled funds.

We wish to point out to this Court in answer to the assertions in the Government’s brief that there has been no intension and there is no intension on our part to make an argument as to the illegality of the receipt of the funds.

Our contention is strictly this; that embezzled funds do not constitute a gain, a taxable gain, to the embezzler, and therefore, they have been held not to be income — not to be subject to the income tax laws.

The difficulty that seems to have arisen in connection with the cases which have been held or heard since the Wilcox decision is been the dicta which has been put forward by the various courts of appeal that is to the effect that the Rutkin case, a case subsequent to Wilcox, which was decided by this Court in 1954, pardon me in 1952, in some way overruled the Wilcox case.

To this argument, we can see no basis, because in the Rutkin case itself, in the opinion in the Rutkin case, this Court specifically stated that the Wilcox case was a case of embezzlement and that this Court left that case on its own facts and that the Rutkin case was a case of extortion.

Richard E. Gorman:

Therefore, it would appear that there was a limitation which exists since the time of the Rutkin case but the Rutkin case in no way has extended the doctrine that was set forth in the Wilcox case that embezzled funds are not subject to income tax liability.

The James case since the Wilcox case, in our opinion, is the closest situation factually that we have since that case was decided.

In both the James case and then the Wilcox case, there was an actual embezzlement.

In both the James case and then the Wilcox case, there was an active pursuit of the embezzler by local authorities.

In the Wilcox case, the embezzler was pursuit by the local state authorities and was convicted of embezzlement and served time in the penitentiary.

And I might say in passing here that in the James case, the same situation exists.

There was returned in the State of New Jersey, a indictment charging both James and Saperstein with conspiracy to embezzle that indictment was in effect during the time of the existence of dependency of this case and it is only in this week that as a result of a plea of guilty before the Courts of the State of New Jersey, that the petitioner James here was sentenced to term of one to two years in the penitentiary on the conspiracy to embezzle indictment.

All of the lower court decisions, which have been cited by the Government and which have been discussed by the various courts of appeals are in our opinion distinguishable.

It might — they are a fourth set out in our brief in detail and I will not burden the Court with a recitation of the facts in each one of those cases, but it is apparent in each one of those cases that there was an attempt made to come within the doctrine of the Wilcox case, but that that attempt was more of a legal stratagem than something that existed in reality.

And in all of those cases, the courts were able to distinguish the Wilcox case from the presentation of facts in those cases and it was held that they were not within the doctrine of the Wilcox case, because they were not in fact embezzlers but they were perpetrators of many other types of offences.

It’s interesting if one of those cases, however, to point out that in the Prokop case, which was decided in the Seventh Circuit, that the Government itself in its brief, and this is pointed out in our brief on page 41, adopted the distinction and argued the distinction before the Court of Appeals between the Wilcox case and the Rutkin case and pointed out there that the Rutkin case was a case of extortion and that so was the Prokop case, a case of extortion, and that therefore Mrs. Prokop, who also happened to be a union official, could not bring herself within the doctrine of the Wilcox case because she just was in fact plainly not an embezzler.

Earl Warren:

Well, in principal, what is the difference between embezzlement and extortion so far in this context?

Richard E. Gorman:

The – the — difference is in the type of the events as we see it and as I think the courts have pointed out.

The embezzler, and this Court has recognized and almost all courts have recognized in approximate maybe 90% of the cases, is always detected.

The embezzler in many cases is a person who takes funds with the intent to restore them.

The embezzler in most every case, when he is caught up with so to speak, restitution has been a part of the penalty that attaches to the crime.

Whereas, with extortion we have the — as the Court said itself, the unlikely act of repudiation of the Act.

The extorter takes the money with a clear claim to that money so far as he is concerned as against the whole world and it is unlikely that the extortee would ever pursue him.

In embezzlement cases, we almost always have a pursuit; we almost always have a definite and an unconditional obligation to repay, which as this Court pointed out subsequent to the Rutkin decision, in the Alison decision of this Court was a very lively, was a very lively contingency, because in the Alison case this Court pointed out that a great deal of the money, which was embezzled from the Alisons was recovered by them and although that would be —

Earl Warren:

Do you think that any court had two cases, one of embezzlement and one of extortion would, under the same circumstances, order restitution from the embezzler and not from the extortionist?

Richard E. Gorman:

Oh that well maybe, but the distinction which this Court made, if Your Honor please, was that the likelihood of their being any chance that the extorter would be called to test if that that is very unlikely.

Earl Warren:

Well does that change the principle?

Richard E. Gorman:

It doesn’t change — it doesn’t the principle except that this Court has held that in embezzlement cases there is no taxable gain to the embezzler.

Earl Warren:

Well, I understood.

You don’t think that — you don’t think that Rutkin and Wilcox are in conflict with each other?

Richard E. Gorman:

Not at all, and this Court has so stated.

Earl Warren:

That they are consistent?

Richard E. Gorman:

That they are consistent.

Yes sir.

Hugo L. Black:

Has there been any efforts made so far as you know that Congress changed at all in this respect?

Richard E. Gorman:

There has been, if Your Honor please.

And if Your Honor will refer to our brief on page 51, we set forth a bill which has been proposed in Congress to amend the Internal Revenue Code of 1954 to provide that the proceeds of certain crimes shall be included as gross income and it is —

Hugo L. Black:

When was that proposed?

Who proposed it?

Do you know?

The treasurer, did the treasurer offer it?

Richard E. Gorman:

No.

This is a — this is a bill which was proposed by an individual Congressman, if Your Honor please.

I don’t have the reference to the Congressman himself here but the number of the bill and it set forth in total appears on page 51 of our brief.

Hugo L. Black:

When was Wilcox decided?

Richard E. Gorman:

Wilcox was decided in 1946.

The Rutkin case was decided in 1952, and the Congress, if we are going to argue that the Congress intended that this particular source of funds is to be considered a taxable gain, that Congress have in its power in 1954 when there was a broad revision of the Internal Revenue Code, the opportunity to insert this which wasn’t done.

There is no congressional intent present as we can see to alter the Internal Revenue Code and it would appear so far as we are concerned that the Congress accepted the authority of this Court’s decision in the Wilcox case.

The — the nub of the whole case comes down to just one question insofar as we are concerned and that is what tax — what constitutes a taxable gain and this Court has held that the proceeds of embezzlement do not constitute a taxable gain.

We are not belaboring the fact that it might be a source of funds from an illegal source.

The Government spends a great deal of time in arguing that.

We don’t contend that.

Our sole contention is that the Wilcox case is still in full force in effect that the effect of the Wilcox case is to a whole that embezzled funds are not taxable.

I would like to reserve the rest of my time for reply.

Earl Warren:

You may.

Mr. Heffron.

Howard A. Heffron:

Mr. Chief Justice, please the Court.

As we understand the petitioner’s position here, it comes down to an assertion that unlawful gains of every character are taxable because the Rutkin case, in effect, held them to be taxable the bribes, the graft paid, the kickbacks, the gambling gains, the proceeds from illicit liquor, the whole long catalog of illicit games which have been held taxable, petitioner has no quarrel with, but he says that somehow this Court has carve or should carve in this case a privilege sanctuary for the embezzler.

The embezzler should be free from tax while all the other recipients of their illicit gains must pay the income tax.

William O. Douglas:

One of the things that bothers me about this particular case is how a person, who makes a tax return on the basis on which this Court has said the return is proper, can be convicted willful default, willful evasion, willful avoidance, because if that Wilcox case have never been overruled, it was distinguished whether right or wrong it still there as subsisting authority and man follows it, why would a man who follows it — how he could end up in prison, I don’t understand that?

Howard A. Heffron:

There is no contention along those lines made here by the petitioner.

He does not forward that argument.

William O. Douglas:

I didn’t find it in this brief but I’m asking you.

Howard A. Heffron:

Well, there is nothing in the record to show that he filed his returns on the basis of the Wilcox case.

There was no evidence offered below and none appears to show any kind of reliance upon that decision.

Howard A. Heffron:

And so there was no issue tendered for the District Court to reach on that point.

No evidence at all was offered dealing with it, no showing at all was made of reliance.

If that showing had been made, we might have a different question.

William O. Douglas:

Well, but if there — that this particular — Wilcox isn’t cloudy it’s a decision it’s there and it’s been — it’s been propped up as others decisions have combined.

I can see how you could say on an assessment to well, this is — I think it should be overruled, we are going to get it, but how you can send that man to prison for making a return basis of which we have sustained in our decision as still beyond, I don’t care whether the point is raised or not.

Howard A. Heffron:

Well, not only is the point not raised, there’s no showing that these tax returns were filed and prepared on the basis of the Wilcox decision, as a matter of fact three of the returns for the four years in issue were filed subsequent to this Court’s decision in the Rutkin case.

Hugo L. Black:

I presume though you were saying the Government on that side that he is supposed to know the law.

He is supposed to know I guess the Wilcox case that was here before 14 years the Court had it up several times and left it alone.

Howard A. Heffron:

Well, we would say that on the evidence that District Court properly found that he intended to deprive — to fraud the Government here.

He intended to evade the tax.

If the tax was due, he intended to evade it when he filed his return.

The District Court had ample evidence to render that finding more than adequate evidence of the type referred to by this Court in the Spies case.

Hugo L. Black:

Well, undoubtedly they had enough evidence, I suppose, to show that he embezzled this and had not reported this embezzlement funds, but there would also but behind that, at least were usually accepted the Congress changes it, he didn’t have to report it 14 years ago.

Howard A. Heffron:

Well, our position would be on that that even if he had shown at the trial, and again I want to emphasize, he offered no evidence whatever dealing with reliance under Wilcox decision and in fact three of the tax returns here were filed post Rutkin, but in any event even he had shown —

Hugo L. Black:

But Rutkin didn’t — did Rutkin overrule that?

Howard A. Heffron:

In our view it did.

Hugo L. Black:

Did it say so?

Howard A. Heffron:

It did not say so explicitly, but in our view, it’s an inescapable conclusion that we derived from the reasoning of the Rutkin decision.

The Rutkin case could not have been decided the way it was decided had the Wilcox criteria for taxable gains been applied.

Hugo L. Black:

But I think I argued that.

Felix Frankfurter:

(Inaudible) suggestion, five people escaped what you said couldn’t be escaped?

Howard A. Heffron:

Well, I think the Court in the Rutkin case resorted to the technique of overruling a decision by distinguishing it and we say here that the Wilcox rule has with it a way that the Rutkin decision administered the mortal wound and since then the lower courts have chipped away at it and that really there is nothing left of the Wilcox rule at all, and we’re here asking this Court to declare explicitly that which has been implicit and in fact applied by the lower courts, ever since the Rutkin case and the rule applied by the Rutkin case itself.

William O. Douglas:

You want us to do it retroactively not respectively.

John M. Harlan II:

Is that a suggestion that was drawn by (Inaudible) —

Howard A. Heffron:

Well, —

John M. Harlan II:

— (Inaudible)?

Howard A. Heffron:

Well, the way it has turn out it means Mr. Wilcox specifically.

Potter Stewart:

How do you mean the way it’s turned out, where?

Howard A. Heffron:

Well, we say this first that the legal criteria for the determination of taxable income which were set forth by the Court in the Rutkin case were really an embodiment of the basic principles of determining gross income which this Court has declared in many of the earlier income tax cases, Corliss and Bowers, Helvering and Hallock, the Horst case, Lucas and Earl, the basic principles for the determination of gross income.

In our view, Rutkin simply reiterated them and applied them in the context of unlawful gains there, but the basic principle which the Rutkin decision applied admits of no exception for embezzlement or for any other illicit gains providing the — those criteria are met, that is the economic benefit.

Potter Stewart:

Plenary right and so on.

Howard A. Heffron:

The basis for taxation exists and the lower courts have so construed it ever since —

Potter Stewart:

Well, it’s not universally true, is it, the Dix case in the Second Circuit?

Howard A. Heffron:

Well, I was going to say where the exception of the Dix case, as a matter of fact Chief Judge Clark who participated in Bruswitz case but not the Dix case stated that in his view Rutkin was diametrically opposed to the Wilcox case and that the circuit courts who had — which had been distinguishing Wilcox were calling at the process of distinguishing it out of deference to this Court but that in fact they had concluded as they logically they could conclude that the Rutkin case had overruled Wilcox.

In our view, there is and can be no distinction between embezzlement and extortion.

Hugo L. Black:

But the court proved it.

Here’s what the court said, “We do not reach in this case the factual situation involved in Commissioner versus Wilcox.

There embezzled funds were held not to constitute taxable income to the embezzler under 22 (a).

The issue here is whether money extorted from a victim with his consent induced solely by harassing demands and threats of violence is included in the definition of gross income.”

Now the name is different.

The names — and the other one was Wilcox and the name here is James but they are both embezzler.

Howard A. Heffron:

They are both —

Hugo L. Black:

Perhaps it seems to me like it’s treating the opinion of the Court was to get respect if I may say so?

Howard A. Heffron:

Well, we say —

Hugo L. Black:

The court intended thereby to leave — overrule Wilcox case.

Howard A. Heffron:

We say that the legal criteria in Wilcox and Rutkin cannot be reconciled.

Hugo L. Black:

You say they should’ve overruled.

Howard A. Heffron:

No, we say that the court, in effect, overruled it.

The court distinguished Wilcox and at the same time adopted legal criteria which resulted and in effect overruling the Wilcox case, because if the criteria of the Rutkin case were to be applied to an embezzlement situation, the conclusion would be what we submit the conclusion must be here that is that it is taxable income.

Hugo L. Black:

You’re adopting my argument in dissentient in part, are you not?

I think I said so.

Howard A. Heffron:

I was about to quote –-

Hugo L. Black:

I think I said so.

Howard A. Heffron:

–that reference to Your Honor.

Your Honor has sentenced in the —

Hugo L. Black:

(Inaudible) that close the case.

Howard A. Heffron:

Well, I think that’s right.

The dissenters in the Rutkin case recognized explicitly that the court in its majority opinion was rejecting the reasoning of the Wilcox decision.

Now, that process has continued in the lower courts, the rule of Rutkin which in our view is no more than an affirmation of the basic principles of income taxation in the earlier cases referred to in our brief.

The lower courts have continued in that screamed of authority.

(Inaudible)

Howard A. Heffron:

Well, there been a host of a —

(Inaudible)

Howard A. Heffron:

There have been — since Rutkin there have been many cases involving situations which, in our view, Wilcox with the law the result would — the conclusion would follow that there was no income.

In all of those cases the Government urged that under Rutkin, the proceeds were income in most of those cases the taxpayers asserted that this was embezzlement situation and under Wilcox they would go free or that they did not require to report those proceeds.

Government, in the trade, uniformly took the position that Rutkin was the law and that under Rutkin criteria the proceeds in question, whether they are from embezzlement, from kickbacks, from commercial bribes or from any source, whatever, that under the Rutkin criteria the conclusion must follow that taxable income existed.

What factors propose to develop that (Inaudible)?

Howard A. Heffron:

Well, in our view he’s been entitled to a deduction.

He should be given no more benefit in that regard than this Court has already declared for the honest taxpayer.

When the honest taxpayer receives salable gains, he must report them in income when he receives them.

He is thereafter, if then determined that he must repay them, entitled to a deduction.

We say here that the embezzler is entitled to no better treatment from this Court that he must report to proceeds when he receives them, when and if he pays them back and I might add parenthetically that there are all the three quarters of a million dollars embezzled here of the taxpayer settled for $13,000, he repaid 13 somewhat thousand dollars what became of over $700,000 and nobody —

Hugo L. Black:

Does that have anything do to the tax question?

Howard A. Heffron:

It has to do with the tax question and that is our basic position that the man who receives illicit gain should be treated and precisely the same way as the man who receives gains from an honest source.

Hugo L. Black:

Some several years ago, we had a question of base law in (Inaudible).

The Government at that time insisted that while the reasoning – the reasoning just didn’t justify the distinction.

The Government I think took a little different position in connection with that case, isn’t it, than you are taking in this one?

Howard A. Heffron:

Well, I’m not familiar with the details of that litigation Your Honor.

We say here that the Wilcox rule is a judicially declared rule.

Hugo L. Black:

So, what was the other?

Howard A. Heffron:

And we are here —

Hugo L. Black:

In reference to the exemption of baseball from the antitrust laws.

Howard A. Heffron:

There is no — in our view there is no basis in the bare statutory language here to distinguish licit and illicit gains to the —

(Inaudible)

Howard A. Heffron:

Well, I think without a specific factual example I would have difficulty responding in the generality of cases I would —

But the point (Inaudible) in the general concept.

Howard A. Heffron:

I would say that if the — is that which is acquired is treated by the taxpayer as his own so that he can — he has such control all over it that he derived as the readily realizable economic benefit that he would receive a gain within the meaning of the Code.

William O. Douglas:

Suppose the man borrows $5,000 with fraudulent purpose of not ever repaying it.

Is that a gain?

Howard A. Heffron:

I wouldn’t think that would be a gain because under those circumstances, he’s treating the proceeds as his own and he has that control and dominion from which he derives the economic benefit.

Howard A. Heffron:

He has an accession to wealth.

This Court in Glenshaw Glass case when it was faced with the argument that the proceeds there the windfall didn’t derive from conventional labor or capital, and therefore, could not constitute income.

And this Court said, we’re not — the question of income is not controlled by labels or by sources, it is a question of economic benefit, if the taxpayer has an accession to wealth.

As we say the embezzler clearly has — he has income.

Hugo L. Black:

(Inaudible)

Howard A. Heffron:

He has income.

(Inaudible) wouldn’t we have to show (Inaudible) on the other, indeed.

Howard A. Heffron:

If Your Honor is referring to case of the embezzler, it’s our position essentially the embezzler does not keep books.

No, but I say in this the question is he owes as the money that is embezzled, (Inaudible) he has obtained it by extortion, isn’t that right?

Howard A. Heffron:

He owes it —

Felix Frankfurter:

He doesn’t (Inaudible).

Howard A. Heffron:

He — he owes it in a different way if Your Honor please, he owes it by operation of law.

He owes it by the imposition of a legal — of an obligation by law which he does not acknowledge to which he does not agree.

It’s not a consensual transaction.

We would draw the same distinction this Court ruled in the Healy case where it was faced with an argument by a taxpayer that because the taxpayer held the funds on a constructive trust and there he had received them by a conveyance and fraud of predators, because he held the funds on a constructive trust, he should be treated as an express trustee and clearly an express trustee does not realized personal income when he receives trust proceeds.

Well, this Court held in the unanimous opinion the case of the constructive trustee is clearly different from the case of the express trustee.

The express trustee does not retain the proceeds for his own use and benefit.

He does not realize the accession to wealth.

On the other hand the constructive trustee simply asserts that the property is his own, he realizes the benefit, he claims the control.

The constructive just a legal fiction, which cannot control the economic basis for the finding of gain under the Internal Revenue Code.

(Inaudible) and I think the customers whether or not (Inaudible) gain more profits or income.

Now under the rule of the just and generous whether it is not have to be read as gain, profits, or other income, something that was him and he had a right, entitled to and the right to keep.

Howard A. Heffron:

No.

This Court has held in many of the earlier cases that the common law concepts of title and the technicalities of common law property concepts do not control.

Taxpayers have been held to have realized income for proceeds which never came into their hands where they are assigned them in anticipation of ever receiving them.

Taxpayers have been held to realize income where they turnover funds in trust and where they could receive no income from the trust, nevertheless that those payments paid out of the trust have been held to be income to the taxpayer.

We say those are all in the general line of the cases which hold that the question of gains or income is a practical one based upon economic benefit to the taxpayer.

The code itself —

Potter Stewart:

Mr. Heffron, you stated told us earlier I think that if this man were to make a restitution that you can see he’d be entitled to a deduction in the year that he made restitution on, and what section of the Code would that be?

Howard A. Heffron:

Well, —

Potter Stewart:

Well, I don’t care about the section but I just want to —

Howard A. Heffron:

It is a general principle that amounts which have been included in income when they — thereafter restored, one is entitled to an offsetting deduction.

This Court so held in the Lewis case where a man received salary payments which were erroneously computed.

He received too much.

He was held there that he must nevertheless return those excessive payments as income in the year of receipt and that when he returns those funds, he was entitled to a deduction in the year of repayment.

Hugo L. Black:

(Inaudible).

Howard A. Heffron:

We would say in that case, there was an offsetting transaction.

I mean the annual account — assuming that this was with the same annual accounting period, it would be an offsetting transaction.

There would be no net income realized in that transaction.

He would not have an accession to wealth which is the basic formulation that we rely upon here.

Hugo L. Black:

Do you mean that the man can get a deduction for a receipt, because he was forced to pay back the money he stole?

Howard A. Heffron:

He can be granted such a deduction since we’re requiring reported an income we feel that he’s entitled to a —

Hugo L. Black:

What statute — well, I know how you feel but what statute?

What rules have there been here before to set the man to take the deduction on account law break?

Howard A. Heffron:

I think that is this Court has held and the lower courts have held that moral turpitude is not a touchstone of taxability.

Hugo L. Black:

You’re talking about deduction.

I’m not sure, maybe it has been done but I was asking to know if it could be done.

Howard A. Heffron:

Well, this Court decided the Sullivan case whereas my recollection is it was rents paid in connection with an illegal gambling enterprise.

This Court held those rents were deductible.

Felix Frankfurter:

Mr. Heffron, I’m curious does it help either side or it doesn’t even help me, but I’m curious to know whether you think that Wilcox was decided (Inaudible) sense later, but we saw under the powerful impact of the moral displeasure of having Uncle Sam profits through a crime, but that’s – the high standard morality wore off by the (Inaudible).

Howard A. Heffron:

Your Honor, by the time of Rutkin?

Felix Frankfurter:

Rutkin, yes.

In Wilcox and Rutkin, do you think there was a crime in our moral sense of admit?

Howard A. Heffron:

No, if Your Honor please, we think that the Wilcox case was a departure from established fundamental principle from that —

Felix Frankfurter:

But I want to know why?

I looked up with the briefs and I recall counsel, do you think we were seduced by the moral impact that the man made a promise and that wore off by the time of Rutkin later on?

Howard A. Heffron:

I just — I’m not familiar with the arguments which were made to the Court in those cases.

Our position has been the Court in the Wilcox case entered upon a legal standard which represented a departure from these fundamental principles and that when the matter came before the Court again in Rutkin, it recognized that.

Felix Frankfurter:

So there’s nothing to do with morality.

That is taxation really, the profiteers, squimishers, if I may, (Inaudible).

Howard A. Heffron:

That is our position here.

This is a self reassessment system and we think that all taxpayers are entitled to know that they are being treated similarly across the broad to the man in the street, Mr. James who has over $700,000 unaccounted for realized income or gain in the very practical sense he realized that in the popular sense which Mr. Justice Homes had said these words should be construed.

He realized income and it’s our position that across the board when the basic tasks of economic benefit are met that the result is taxable income.

Hugo L. Black:

Mr. Heffron, I want to ask you.

Has the treasury made any comfort at all if the Wilcox case is changed?

Howard A. Heffron:

The treasury has — through the process —

Hugo L. Black:

I’m not — I’m not talking has it gone to lower courts to do, has it gone to Congress which had power to you.

Howard A. Heffron:

No, the treasury has not gone to Congress.

It has chosen the litigation route, and after the Rutkin case the treasury believed that in fact it had succeeded and is now asking the Court to declare and make explicit what we believe has been in fact the case ever since the Rutkin decision that is that Wilcox is no longer law and that embezzled funds are income just as any of the unlawful gains or honest gains.

Potter Stewart:

Mr. Heffron, you don’t think that the facts in this case are distinguishable in the Wilcox manner?

Howard A. Heffron:

No, there’s a finding of embezzlement here.

We think the case squarely present issue.

Potter Stewart:

This isn’t Wilcox at all.

Earl Warren:

Mr. Gorman.

Richard E. Gorman:

Just a couple of brief in my — if Your Honors please.

As been pointed out, I don’t think and I know that this Court won’t take into consideration the amounts of money that are concerned here.

It’s certainly, if I shot the conscience of some people that $700,000 is involved here, but the question is here, it has been pointed out by the Court, what is the law and what was the law at the time that these tax returns were filed.

The question of willfulness as that has been pointed out here doesn’t have to be pleaded.

We don’t have to do anything in the defense of a case such as this but accept the law as the law is.

I must take exception to one other statement of counsel that many cases have held have overruled the Wilcox case.

Those cases have distinguished the Wilcox case not overruled the Wilcox case.

Potter Stewart:

They generally held that the facts didn’t show embezzlement?

Richard E. Gorman:

That is correct Your Honor please.

There is no case except the case that is presently before this Court so far as we know that it held that embezzled funds as such are taxable.

And with that, we leave it to the Court.

Thank you.