James v. United States (366 U.S. 213)/Concurrence-dissent Black

Mr. Justice BLACK, whom Mr. Justice DOUGLAS joins, concurring in part and dissenting in part.

On February 25, 1946, fifteen years ago, this Court, after mature consideration, and in accordance with what at that time represented the most strongly supported judicial view, held, in an opinion written by Mr. Justice Murphy to which only one Justice dissented, that money secretly taken by an embezzler for his own use did not constitute a taxable gain to him under the federal income tax laws. Commissioner of Internal Revenue v. Wilcox, 327 U.S. 404, 66 S.Ct. 546, 90 L.Ed. 752. The Treasury Department promptly accepted this ruling in a bulletin declaring that the 'mere act of embezzlement does not of itself in taxable income,' although properly urging that 'taxable income may result to the embezzler, depending on the facts in the particular case.' During the fifteen years since Wilcox was decided, both this Court and Congress, although urged to do so, have declined to change the Wilcox interpretation of statutory 'income' with respect to embezzlement. In this case, however, a majority of the Court overrules Wilcox. Only three of the members of the Court who decided the Wilcox case are participating in this case-Mr. Justice FRANKFURTER, Mr. Justice DOUGLAS, and myself. Mr. Justice DOUGLAS and I dissent from the Court's action in 'overruling' Wilcox and from the prospective way in which this is done. We think Wilcox was sound when written and is sound now.

We dissent from the way the majority of the Court overrules Wilcox. If the statutory interpretation of 'taxable income' in Wilcox is wrong, then James is guilty of violating the tax evasion statute for the trial court's judgment establishes that he embezzled funds and wilfully refrained from reporting them as income. It appears to us that District Courts are bound to be confused as to what they can do hereafter in tax-evasion cases involving 'income' from embezzlements committed prior to this day. Three Justices vote to overrule Wilcox under what we believe to be a questionable formula, at least a new one in the annals of this Court, and say that although failure to report embezzled funds has, despite Wilcox, always been a crime under the statute, people who have violated this law in the past cannot be prosecuted but people who embezzle funds after this opinion is announced can be prosecuted for failing to report these funds as a 'taxable gain.' Three other Justices who vote to overrule Wilcox say that past embezzlers can be prosecuted for the crime of tax evasion although two of those Justices believe the Government must prove that the past embezzler did not commit his crime in reliance on Wilcox. Thus, although it was not the law yesterday, it will be the law tomorrow that funds embezzled hereafter are taxable income; and although past embezzlers could not have been prosecuted yesterday, maybe they can and maybe they cannot be prosecuted tomorrow for the crime of tax evasion. (The question of the civil tax liability of past embezzlers is left equally unclear.) We do not challenge the wisdom of those of our Brethren who refuse to make the Court's new tax evasion crime applicable to past conduct. This would be good governmental policy even though the ex post facto provision of the Constitution has not ordinarily been thought to apply to judicial legislation. Our trouble with this aspect of the Court's action is that it seems to us to indicate that the Court has passed beyond the interpretation of the tax statute and proceeded substantially to amend it.

We realize that there is a doctrine with wide support to the effect that under some circumstances courts should make their decisions as to what the law is apply only prospectively. Objections to such a judicial procedure, however, seem to us to have peculiar force in the field of criminal law. In the first place, a criminal statute that is so ambiguous in scope that an interpretation of it brings about totally unexpected results, thereby subjecting people to penalties and punishments for conduct which they could not know was criminal under existing law, raises serious questions of unconstitutional vagueness. Moreover, for a court to interpret a criminal statute in such a way as to make punishment for past conduct under it so unfair and unjust that the interpretation should be given only prospective application seems to us to be the creation of a judicial crime that Congress might not want to create. This country has never been sympathetic with judge-created crimes. Their rejection under our Constitution was said to have been 'long since settled in public opinion' even as early as 1812 when the question first reached this Court in United States v. Hudson & Goodwin, 7 Cranch 32, 3 L.Ed. 259. In that case this Court emphatically declared that the federal courts have no common-law jurisdiction in criminal cases. They are not 'vested with jurisdiction over any particular act done by an individual in supposed violation of the peace and dignity of the sovereign power.' Rather, '(t)he legislative authority of the Union must first make an act a crime, affix a punishment to it, and declare the Court that shall have jurisdiction of the offence.'

In our judgment one of the great inherent restraints upon this Court's departure from the field of interpretation to enter that of lawmaking has been the fact that its judgments could not be limited to prospective application. This Court and in fact all departments of the Government have always heretofore realized that prospective lawmaking is the function of Congress rather than of the courts. We continue to think that this function should be exercised only by Congress under the constitutional system.

We think Wilcox was right when it was decided and is right now. It announced no new, novel doctrine. One need only look at the Government's briefs in this Court in the Wilcox case to see just how little past judicial support could then be mustered had the Government sought to send Wilcox to jail for his embezzlement under the guise of a tax evasion prosecution. The Government did cite many cases from many courts saying that under the federal income tax law gains are no less taxable because they have been acquired by illegal methods. This Court had properly held long before Wilcox that there is no 'reason why the fact that a business is unlawful should exempt it from paying the taxes that if lawful it would have to pay.' We fully recognize the correctness of that holding in Wilcox:

'Moral turpitude is not a touchstone of taxability. The     question, rather, is whether the taxpayer in fact received a      statutory gain, profit or benefit. That the taxpayer's motive     may have been reprehensible or the mode of receipt illegal      has no bearing upon the application of Section 22(a).'

The Court today by implication attributes quite a different meaning or consequence to the Wilcox opinion. One opinion argues at length the 'well-established principle * *  * that unlawful, as well as lawful, gains are comprehended within the term 'gross income." Wilcox did not deny that; we do not deny that. This repeated theme of our Brethren is wholly irrelevant since the Wilcox holding in no way violates the sound principle of treating 'gains' of honest and dishonest taxpayers alike. The whole basis of the Wilcox opinion was that an embezzlement is not in itself 'gain' or 'income' to the embezzler within the tax sense, for the obvious reason that the embezzled property still belongs, and is known to belong, to the rightful owner. It is thus a mistake to argue that petitioner's contention is 'that all unlawful gains are taxable except those resulting from embezzlement.'

As stated in Wilcox, that case was brought to us because of a conflict among the Circuits. The Ninth Circuit in Wilcox had held that embezzled funds were not any more 'taxable income' to the embezzler than borrowed funds would have been. The Fifth Circuit, in McKnight v. Commissioner, had decided the same thing. The Eighth Circuit, however, had decided in Kurrle v. Helvering that embezzled funds were taxable income. Comparison of the three opinions readily shows that the arguments of the Fifth and Ninth Circuits against taxability of such funds were much stronger than the arguments of the Eighth Circuit for such taxability. The whole picture can best to obtained from the court's opinion in McKnight v. Commissioner, written by Judge Sibley, one of the ablest circuit judges of his time. He recognized that the taxpayer could not rely upon the unlawfulness of his business to defeat taxation if he had made a 'gain' in that business. He pointed out, however, that the ordinary embezzler 'got no title, void or voidable, to what he took. He was still in possession as he was before, but with a changed purpose. He still had no right nor color of right. He claimed none.' Judge Silbley's opinion went on to point out that the 'first takings (of an embezzler) are, indeed, nearly always with the intention of repaying, a sort of unauthorized borrowing. It must be conceded that no gain is realized by borrowing, because of the offsetting obligation.' Approaching the matter from a practical standpoint, Judge Sibley also explained that subjecting the embezzled funds to a tax would amount to allowing the United States 'a preferential claim for part of the dishonest gain, to the direct loss and detriment of those to whom it ought to be restored.'  He was not willing to put the owner of funds that had been stolen in competition with the United States Treasury Department as to which one should have a preference to get those funds.

It seems to us that Judge Sibley's argument was then and is now unanswerable. The rightful owner who has entrusted his funds to an employee or agent has troubles enough when those funds are embezzled without having the Federal Government step in with its powerful claim that the embezzlement is a taxable event automatically subjecting part of those funds (still belonging to the owner) to the waiting hands of the Government's tax gatherer. We say part of the owner's funds because it is on the supposed 'gain' from them that the embezzler is now held to be duty-bound to pay the tax and history probably records few instances of independently wealthy embezzlers who have had nonstolen assets available for payment of taxes.

There has been nothing shown to us on any of the occasions when we have considered this problem to indicate that Congress ever intended its income tax laws to be construed as imposing what is in effect a property or excise tax on the rightful owner's embezzled funds, for which the owner has already once paid income tax when he rightfully acquired them. In our view, the Court today does Congress a grave injustice by assuming that it has imposed this double tax burden upon the victim of an embezzlement merely because someone has stolen his money, particularly when Congress has refused requests that it do so. The owner whose funds have been embezzled has done nothing but entrust an agent with possession of his funds for limited purposes, as many of us have frequent occasion to do in the course of business or personal affairs. Ordinarily the owner is not, and has no reason to be, at all aware of an embezzlement until long after the first misuse occurs. If Congress ever did manifest an intention to select the mere fact of embezzlement as the basis for imposing a double tax on the owner, we think a serious question of confiscation in violation of the Fifth Amendment would be raised. All of us know that with the strong lien provisions of the federal income tax law an owner of stolen funds would have a very rocky road to travel before he got back, without paying a good slice to the Federal Government, such funds as an embezzler who had not paid the tax might, perchance, not have dissipated. An illustration of what this could mean to a defrauded employer is shown in this very case by the employer's loss of some $700,000, upon which the Government claims a tax of $559,000.

It seems to be implied that one reason for overruling Wilcox is that a failure to hold embezzled funds taxable would somehow work havoc with the public revenue or discriminate against 'honest' taxpayers and force them to pay more taxes. We believe it would be impossible to substantiate either claim. Embezzlers ordinarily are not rich people against whom judgments, even federal tax judgments, can be enforced. Judging from the meager settlements that those defrauded were apparently compelled to make with the embezzlers in this very case, it is hard to imagine that the Treasury will be able to collect the more than $500,000 it claims. And certainly the Wilcox case does not seem to have been one in which the Government could have collected any great amount of tax. The employer's embezzled $11,000 there went up in gambling houses. The scarcity of cases involving alleged taxes due from embezzlers is another indication that the Government cannot expect to make up any treasury deficits with taxes collected from embezzlers and thieves, especially when the cost to the Government of investigations and court proceedings against suspected individuals is considered. And, as already indicated, to the extent that the Government could be successful in collecting some taxes from embezzlers, it would most likely do so at the expense of the owner whose money had been stolen.

It follows that, except for the possible adverse effect on rightful owners, the only substantial result that one can foresee from today's holding is that the Federal Government will, under the guise of a tax evasion charge, prosecute people for a simple embezzlement. But the Constitution grants power to Congress to get revenue not to prosecute local crimes. And if there is any offense which under our dual system of government is a purely local one which the States should handle, it is embezzlement or theft. The Federal Government stands to lose much money by trying to take over prosecution of this type of local offense. It is very doubtful whether the further congestion of federal court dockets to try such local offenses is good for the Nation, the States or the people. Here the embezzler has already pleaded guilty to the crime of embezzlement in a state court, although the record does not show what punishment he has received. Were it not for the novel formula of applying the Court's new law prospectively, petitioner would have to serve three years in federal prison in addition to his state sentence. This graphically illustrates one of the great dangers of opening up the federal tax statutes, or any others, for use by federal prosecutors against defendants who not only can be but are tried for their crimes in local state courts and punished there. If the people of this country are to be subjected to such double jeopardy and double punishment, despite the constitutional command against double jeopardy, it seems to us it would be far wiser for this Court to wait and let Congress attempt to do it.

The Wilcox case was decided fifteen years ago. Congress has met every year since then. All of us know that the House and Senate Committees responsible for our tax laws keep a close watch on judicial rulings interpreting the Internal Revenue Code. Each committee has one or more experts at its constant disposal. It cannot possibly be denied that these committees and these experts are, and have been, fully familiar with the Wilcox holding. When Congress is dissatisfied with a tax decision of this Court, it can and frequently does act very quickly to overturn it. On one occasion such an overruling enactment was passed by both the House and Senate and signed by the President all within one day after the decision was rendered by this Court. In 1954 Congress, after extended study, completely overhauled and recodified the Internal Revenue Code. The Wilcox holding was left intact. In the Eighty-sixth Congress and in the present Eighty-seventh Congress bills have been introduced to subject embezzled funds to income taxation. They have not been passed. This is not an instance when we can say that Congress may have neglected to change the law because it did not know what was going on in the courts or because it was not asked to do so, as was the case in Helvering v. Hallock. Nor is this a case in which subsequent affirmative congressional action manifested a view inconsistent with our prior decision, as was true in Girouard v. United States. What we have here instead is a case in which Congress has not passed bills that have been introduced to make embezzled funds taxable and thereby make failure to report them as imcome a federal crime. For this Court to hold under such circumstances that the inherent ambiguity of legislative inaction gives the Court license to repudiate the long-standing interpretation of the income tax statute and thereby bring additional conduct within the tax evasion criminal statute seems to us to be flagrantly violative of the almost universally accepted axiom that criminal statutes are narrowly and strictly construed. Our Brethren cite no precedent in which this or any other court in the English-speaking world has so deliberately overruled a long-standing prior interpretation of a statute in order to create a crime which up to that time did not exist.

This Court as well as Congress was fully apprised of the various criticisms made in some Courts of Appeals opinions and elsewhere against the Wilcox holding, yet it has likewise until today steadfastly refused to overrule that holding during these fifteen years. This has been in the face of the fact that the Government expressly urged that we do so in 1955, nine years after Wilcox was decided and three years after the decision in Rutkin v. United States, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833. On that occasion the Court of Appeals for the Second Circuit, speaking through Judge Frank for himself and Judge Medina, had held in the case of J. J. Dix, Inc. v. Commissioner that embezzled funds were not taxable as income, relying wholly on the Wilcox decision. Judge Hincks dissented, saying that if the facts of Dix were not enough to distinguish it from Wilcox he would not follow Wilcox. In urging us to grant certiorari, the Government said that the case presented a recurring problem in the administration of the income tax laws. One of the arguments the Government presented for overruling Wilcox, strange as it may seem, was that '(s)everal prosecutions have recently been authorized and are now pending in various District Courts, even though the disputed income in those cases apparently came from embezzlements or closely analogous crimes.' And the next to the last sentence of its petition was: 'In short, the question whether the proceeds of embezzlement, unlike other illegal income, are to enjoy a preferred tax-exempt status, will continue to perplex the lower courts until it is settled by this Court.'  We denied certiorari. There is surely less reason to repudiate and 'devitalize' Wilcox now, six years after the Court, as composed at that time, refused to overrule it.

Of course the rule of stare decisis is not and should not be an inexorable one. This is particularly true with reference to constitutional decisions involving determinations beyond the power of Congress to change, but Congress can and does change statutory interpretations. It is perfectly proper and right that it should do so when it believes that this Court's interpretation of a statute embodies a policy that Congress is against. But Congress has not taken favorable action on bills introduced to overturn our Wilcox holding even after we declined the Government's request to reverse the identical holding in Dix, the latter having occurred three years after the decision in Rutkin which our Brethren now say may have misled Congress into thinking that we had repudiated the Wilcox holding.

It seems to us that we gave the doctrine of stare decisis its proper scope in our treatment of this Court's decision in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 259 U.S. 200, 42 S.Ct. 465, 66 L.Ed. 898. In that case this Court had held for reasons given that professional baseball was not covered by the antitrust acts. Congress was asked through the years to change the law in this respect but declined to do so. In Toolson v. New York Yankees, Inc., 346 U.S. 356, 74 S.Ct. 78, 79, 98 L.Ed. 64, we followed the holding of that case without re-examination of the underlying issues 'so far as that decision determines that Congress had no intention of including the business of baseball within the scope of the federal antitrust laws.' Later we were asked to extend the Federal Baseball case and to hold that the business of boxing could not without congressional action be brought within the antitrust laws. We emphatically declined to do so in United States v. International Boxing Club, 348 U.S. 236, 75 S.Ct. 259, 99 L.Ed. 290, nor did we overrule Toolson in that case, despite strong arguments that the reasoning of the Court in the first baseball case was equally applicable to the business of boxing. We said about the proposed exemption of boxing from the antitrust laws that '(t)heir remedy, if they are entitled to one, lies in further resort to Congress.' That case and that statement fit this case precisely. In fact, as we are about to explain, a far more meaningful distinction can be made between embezzlement and extortion for purposes of this case than it was possible to make between baseball and boxing for purposes of that case, as Mr. Justice FRANKFURTER'S dissenting opinion in that case demonstrates.

If the Government wants to prosecute the local crime of embezzlement, ostensibly because of 'tax evasion,' it seems clear to us that it should take its request to Congress which has power to pass on it and which has, to date, refused to do what the Government asks us to do in this case.

Our Brethren advance as a reason for overruling Wilcox the 1952 decision in Rutkin v. United States, which was decided three years before we denied certiorari in the Dix case. They say that 'the reasoning used in Rutkin leads us inescapably to the conclusion that Wilcox was thoroughly devitalized.' This follows, to some extent, the statement in the Government's brief that 'Wilcox and Rutkin cannot be reconciled on the basis of asserted technical differences between the extortionist and the embezzler. * *  * The proper course, we submit, *  *  * is to recognize that the Wilcox rationale was rejected in Rutkin, is unsound, and can no longer be regarded as having vitality. Embezzled funds represent taxable gains.'

There is no doubt that some of the reasoning in the Rutkin opinion rejected some of the reasoning in the Wilcox opinion. But this it true only with respect to the broad general standards formulated in the two cases, and such standards of course cannot be accepted as universal panaceas to be mechanically applied to solve all the concrete problems in cases like these. Moreover, the Rutkin opinion expressly purported not to overrule Wilcox and specifically said that Wilcox was still to govern cases fitting its facts, clearly meaning embezzlement cases. And the Government had not asked in Rutkin that Wilcox be overruled. Its argument was that Wilcox was 'inapplicable' to the facts in the Rutkin record. The Government's brief went on to emphasize that the record in Wilcox showed only the bare receipt of money wholly belonging to another, while Rutkin had received the money 'as a result of a bilateral agreement' and, as the Court of Appeals had pointed out, 'with a 'semblance of a bona fide claim of right', a conclusion fully substantiated by the testimony of both the petitioner and the Government witness Reinfeld.' The Government went on to distinguish Rutkin further by pointing out that there was 'not the slightest hint in the record' that Rutkin ever had an obligation to repay the funds he took.

After this Court was persuaded by the Government in Rutkin to accept its distinctions between Rutkin and Wilcox, it seems rather odd to have the Government now contend that the two cases are irreconcilable. While we disagreed, we can understand why the majority in Rutkin drew the distinctions it did. Although the victim of either embezzlement or extortion ordinarily has a legal right to restitution, the extortion victim, like a blackmail victim, can in a sense be charged with complicity in bringing about the taxable event in that he knowingly surrendered the funds to the extortionist, sometimes in payment of an actual obligation. Unlike the victim of an ordinary theft, he generally knows who has taken the property from him and he consents to the taking though under duress; and unlike most victims of embezzlement, he is able to report the taking to law enforcement officers during the taxable year and his failure to do so might be considered a kind of continuing consent to the extortionist's dominion over the property. The longer he acquiesces the less likely it becomes that the extortion victim ever will demand restitution; but once the victim of an embezzlement finds out that his property has been stolen, he most likely will immediately make efforts to get it back. Thus, although we still think Rutkin was wrongly decided for the reasons expressed in the dissenting opinion in that case, we can understand the argument for application of a sort of caveat emptor rule to persons who submit to blackmail or extortion, since it is far from certain that they will ever expose themselves by seeking repayment of what they paid out. The distinctions between crimes like embezzlement and crimes like blackmail and extortion, therefore, are not merely technical, legalistic 'attenuated subleties' for purposes of this decision, but are differences based upon practicalities such as often underlie the distinctions that have been developed in our law.

In departing from both the Wilcox and Rutkin decisions today, our Brethren offer no persuasive reasons to prove that their judgment in overruling Wilcox is better than that of the Justices who decided that case. It contributes nothing new to the analysis of this problem to say repeatedly that the dishonest man must be subject to taxation just as the honest. As already said, Chief Justice Stone and the others sitting with him on the Wilcox Court fully accepted that general principle and we do still. Applying it here, we would say the embezzler should be treated just like the law-abiding, honest borrower who has obtained the owner's consent to his use of the money. It would be unthinkable to tax the borrower on his 'gain' of the borrowed funds and thereby substantially impair the lender's chance of ever recovering the debt. The injury that the Government would inflict on the lender by making the borrower less able to repay the loan surely would not be adequately compensated by telling the lender that he can take a tax deduction for the loss, and it is equally small comfort to the embezzlement victim for the Government, after taking part of his property as a tax on the embezzler, to tell the victim that he can take a deduction for his loss if he has any income against which to offset the deduction. There is, of course, one outstanding distinction between a borrower and an embezzler, and that is that the embezzler uses the funds without the owner's consent. This distinction can be of no importance for purposes of taxability of the funds, however, because as a matter of common sense it suggests that there is, if anything, less reason to tax the embezzler than the borrower. But if this distinction is to be the reason why the embezzlement must be taxed just as 'the gains of the honest laborer,' then the use of this slogan in this case is laid bare as no more than a means of imposing a second punishment for the crime of embezzlement without regard to revenue considerations, the effect on the rightful owner, or the proper role of this Court when asked to overrule a criminal statutory precedent. The double jeopardy implications would seem obvious, and discussion of the serious inadvisability for other reasons of thus injecting the Federal Government into local law enforcement can be found in the dissenting opinion in Rutkin.

We regret very much that it seems to be implied that the writer of the Rutkin opinion and those who agreed to it intended to overrule Wilcox when it is manifest that the language the Court used in Rutkin was meant to leave precisely the opposite impression. We are sure that our Brethren at that time did not intend to mislead the public, and it would be hard to imagine why they said what they did in the Rutkin opinion had they not specifically considered and rejected the possibility of overruling Wilcox then and there. We think it is unjustifiable to say nine years after Rutkin that it 'devitalized' or 'repudiated' the Wilcox holding when the Rutkin opinion said explicitly that Wilcox is still the rule as to embezzlement. Congress has seen fit to let both decisions stand, and we think the present Court should do the same.

Even if we were to join with our Brethren in accepting the Government's present contention that Wilcox and Rutkin cannot both stand, we would disagree as to which of the two decisions should now be repudiated. This is true not only because we would feel less inhibition about narrowing rather than broadening the reach of a previously construed criminal statute. Regardless of such considerations, our conviction that the Rutkin case was wrongly decided in this Court remains undiminished and has been further substantiated by the subsequent events in that controversy, which show all the more clearly the deplorable consequences that can result when federal courts subject people who violate state criminal laws to a double or treble prosecution for the state crime under the guise of attempted enforcement of federal tax laws.

For the foregoing reasons, as well as the reasons stated in Mr. Justice WHITTAKER'S opinion, we would reaffirm our holding in Commissioner of Internal Revenue v. Wilcox, reverse this judgment and direct that the case be dismissed.