## Facts

- Eugene C. James, a union official, embezzled more than $738,000 during tax years 1951–1954 from his union and from an insurance company doing business with the union.
- James did not report the embezzled amounts as gross income on his federal returns for those years.
- He was convicted of willfully attempting to evade federal income tax for each year under federal tax evasion statutes and was sentenced to a total of three years’ imprisonment.
- The Seventh Circuit affirmed the convictions.
- The Supreme Court reviewed the case because prior precedent had treated embezzled funds as non-taxable to the embezzler.

## Issues

1. Whether embezzled funds constitute “gross income” to the embezzler in the year the funds are misappropriated under the Internal Revenue Codes of 1939 and 1954.
2. Whether a defendant can be convicted of willful tax evasion for failing to report embezzled funds when, at the time of the conduct, Supreme Court precedent indicated such funds were not taxable income.

## Decision

- The Court held that embezzled funds are includable in the embezzler’s gross income in the year of embezzlement under the 1939 and 1954 Codes.
- The Court overruled Commissioner v. Wilcox, which had held embezzled funds were not taxable income to the embezzler.
- The Court reversed James’s criminal convictions and remanded with directions to dismiss the indictment because willfulness could not be established given the state of the law when the conduct occurred.

## Legal Principles

- “Gross income” under federal tax law is broadly defined to include gains “from whatever source derived,” including illegal gains.
- When a taxpayer obtains money—lawfully or unlawfully—exercises control over it, and has no consensual, recognized obligation to repay and no restriction on disposition, the receipt is taxable income even if the recipient may later be required to restore the funds.
- Embezzlement is not meaningfully distinguishable from other unlawful takings (such as extortion) for purposes of gross income inclusion.
- Criminal tax evasion requires proof of a willful violation of a known legal duty; where controlling Supreme Court precedent at the time reasonably indicated the receipt was not taxable, willfulness cannot be proved beyond a reasonable doubt.

## Conclusion

The Court treated embezzled receipts as taxable gross income and repudiated prior contrary precedent, but set aside the defendant’s criminal tax evasion convictions because the government could not prove willfulness in light of then-controlling law.


James v. United States, 366 U.S. 213 (1961)