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

  • James embezzled $738k from his employer. He was caught.
  • In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that the $738k should be counted in James' gross income. James disagreed.
    • James argued that since a person is legally obligated to repay money that they steal, they've received no income in the same way as a person receives no income from taking out a loan. So there should be no tax liability.
  • The US Supreme Court found for the IRS.
    • The US Supreme Court found that found that there was a material difference in the intention of the taxpayer to repay the money. So the money should be considered to be gross income, even though there was an obligation to repay.
    • The Court noted that nothing in the 16th Amendment prevented taxing illegal income.
  • DOJ wanted to go after criminals (like Al Capone), and the powers of the IRS can go beyond the powers of DOJ (e.g. IRS makes you file taxes, but DOJ can't ask you to file a list of your felonies). So they wanted illegal income to count as income so the IRS could go after them.
    • In this case, James avoided prison for embezzlement, but he was eventually sentenced to three years in prison for tax evasion.