Rutkin v. United States

Delivered the opinion of the Court.

The principal issue before us is whether money obtained by extortion is income taxable to the extortioner under § 22 (a) of the Internal Revenue Code. For the reasons hereafter stated we hold that it is.

The petitioner, Rutkin, was indicted under 26 U. S. C. § 145 (b) for willfully attempting to evade and defeat a large part of his income and victory taxes for 1943. He was charged with filing a false and fraudulent return stating his net income to be $18,966.64, whereas he knew that it was $268,622.04. That difference, which would increase his tax liability from $6,843.93 to $222,408.32, was due largely to his omission from his original return of $250,000 received by him in cash from Joseph Reinfeld. The United States claims that this sum was obtained by petitioner by extortion and as such was taxable income. Petitioner contests both the fact that the money was obtained by extortion and the conclusion of law that it was taxable income if so obtained. He contends also that he did not willfully attempt to evade or defeat the tax. Petitioner was found guilty by a jury in the United States District Court for the District of New Jersey, fined $10,000 and sentenced to four years in prison. The Court of Appeals affirmed, one judge dissenting. 189 F. 2d 431. We granted certiorari, 342 U. S. 808, so as to pass upon the alleged conflict between that decision and the decision in Commissioner v. Wilcox, 327 U. S. 404.

The facts are unusual but there can be no doubt that, under the instructions given the jury, we must regard its verdict as reflecting its conclusion that the $250,000 was obtained by petitioner by extortion. There was substantial evidence supporting that result. Reinfeld’s first association with petitioner was in 1929 with several others in a bootlegging operation known as the “High seas venture.” It was accomplished through the use of a ship in the sale of whiskey at sea more than 12 miles from shore. Reinfeld testified that petitioner contributed no money to the enterprise but was taken in because Reinfeld’s associates were afraid that otherwise they would get “interference and trouble” from petitioner. His interest was recognized to be 6% but, when the venture was liquidated in 1933, he already was overdrawn and no distribution was made to him. Without including petitioner, the others then organized Browne Vintners Co., Inc., a New York corporation, to engage in the liquor business. In 1936 petitioner, without making an investment, claimed a 6% interest in Browne Vintners. Despite Reinfeld’s denial of petitioner’s claim, Reinfeld paid him $60,000 and took from him an assignment of “any and all of such shares of capital stock in the said Browne Vintners Co. Inc., that I am entitled to.” In 1940 all the Browne Vintners stock was sold for $7,500,000 to a purchaser who also assumed $8,000,000 of the company’s debts. The shares of stock when sold stood in the names of, and were transferred by, “nominees” so as to conceal the identity of Reinfeld and the other beneficial owners. A capital gains tax upon the profits from these sales was paid by the respective nominees. Petitioner was neither a stockholder of record nor a beneficial owner of any of the stock of the company at any time.

In 1941, in response to petitioner’s request, Reinfeld gave him about $10,000 to help buy a tavern. When petitioner used the money for other purposes Reinfeld refused to finance him further and his “trouble” with petitioner began. In 1942 petitioner again claimed that he had had an interest in Browne Vintners Company and that Reinfeld must give him $100,000 to help him pay his debts. Upon Reinfeld’s refusal, petitioner threatened to kill him. From that time on, the record presents a lurid story of petitioner’s unsatisfied demands upon Rein-feld for various sums up to $500,000, petitioner’s threatening use of a gun and his repeated statements that he would kill Reinfeld and Reinfeld’s family unless his demands were met. Finally, on May 11, 1943, in New Jersey, Reinfeld paid petitioner $250,000 in cash.

Throughout this melodrama petitioner asserted that he was entitled to the payments he demanded from Reinfeld because of petitioner’s alleged former interest in Browne Vintners Company. That interest never was identified by petitioner. Reinfeld and others testified positively that petitioner never had any such interest. Nevertheless, on May 11, Reinfeld handed to petitioner $250,000 in cash at the same time that Reinfeld paid $358,000 to Zwillman and Stacher representing their conceded interest in the proceeds of Browne Vintners stock. Petitioner, with Zwillman and Stacher, thereupon signed a “general release.” It did not state the amounts paid but it did purport to release Reinfeld, Browne Vintners Company and others from all claims the signers had against them.

Under the jury’s verdict, we accept the fact to be that petitioner had no basis for his claim to this $250,000 and that he obtained it by extortion. Accordingly, if proceeds of extortion constitute income taxable to the extortioner, his omission of it from his tax return was unlawful. The further factual issue whether, under all the surrounding circumstances, petitioner’s omission of the $250,000 from his tax return amounted to a willful attempt to evade and defeat the tax is not open to review here. That issue is settled by the verdict of the jury supported by substantial evidence. It remains for us to determine the legal issue of whether money obtained by extortion is taxable to the extortioner under § 22 (a).

Under the instructions to the jury, extortion here meant that the $250,000 was paid to petitioner in response to his false claim thereto, his harassing demands therefor and his repeated threats to kill Reinfeld and Reinfeld’s family unless the payment were made. Petitioner was unable to induce Reinfeld to believe petitioner’s false and fraudulent claims to the money to be true. He induced Reinfeld to consent to pay the money by creating a fear in Reinfeld that harm otherwise would come to him and to his family. Reinfeld thereupon delivered his own money to petitioner. Petitioner’s control over the cash so received was such that, in the absence of Reinfeld’s unlikely repudiation of the transaction and demand for the money’s return, petitioner could enjoy its use as fully as though his title to it were unassailable.

An unlawful gain, as well as a lawful one, constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. Burnet v. Wells, 289 U. S. 670, 678; Corliss v. Bowers, 281 U. S. 376, 378. That occurs when cash, as here, is delivered by its owner to the taxpayer in a manner which allows the recipient freedom to dispose of it at will, even though it may have been obtained by fraud and his freedom to use it may be assailable by someone with a better title to it.

Such gains are taxable in the yearly period during which they are realized. This statutory policy is invoked in the interest of orderly administration. “[CJollection of the revenue cannot be delayed, nor should the Treasury be compelled to decide when a possessor’s claims are without legal warrant.” National City Bank v. Helvering, 98 F. 2d 93, 96. There is no adequate reason why assailable unlawful gains should be treated differently in this respect from assailable lawful gains. Certainly there is no reason for treating them more leniently. United States v. Sullivan, 274 U. S. 259, 263.

There has been a widespread and settled administrative and judicial recognition of the taxability of unlawful gains of many kinds under § 22 (a). The application of this section to unlawful gains is obvious from its legislative history. Section II B of the Income Tax Act of 1913 provided that “the net income of a taxable person shall include gains, profits, and income . . . from . . . the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever . . . .” (Emphasis supplied.) 38 Stat. 167. In 1916 this was amended by omitting the one word “lawful” with the obvious intent thereafter to tax unlawful as well as lawful gains, profits or income derived from any source whatever.

There is little doubt now that where unlawful gains are secured by the fraud of the taxpayer they are taxable. In the instant case it is not questioned that the $250,000 would have been taxable to petitioner if he had obtained it by fraudulently inducing Reinfeld to believe petitioner’s false claims to be true. That being so, it would be an extraordinary result to hold here that petitioner is to be tax free because his fraud was so transparent that it did not mislead his victim and his victim paid him the money because of fear instead of fraud.

We do not reach in this case the factual situation involved in Commissioner v. Wilcox, 327 U. S. 404. We limit that case to its facts. 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 under § 22 (a). We think the power of Congress to tax these receipts as income under the Sixteenth Amendment is unquestionable. The broad language of § 22 (a) supports the declarations of this Court that Congress in enacting that section exercised its full power to tax income. We therefore conclude that § 22(a) reaches these receipts.

We have considered the other contentions of petitioner but find them without merit sufficient to justify a reversal or remand of the case.

The judgment of the Court of Appeals accordingly is

Affirmed.

“SEC. 22. GROSS INCOME.

“(a) General Definition. — 'Gross income’ includes gains, profits, and income derived from salaries, wages, or compensation for personal service ... of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. . . .” (Emphasis supplied.) 53 Stat. 9, 53 Stat. 574, 26 U. S. C. §22 (a).

“SEC. 145. PENALTIES.

“(b) . . . Attempt to Defeat or Evade Tax. — . . . any person who willfully attempts in any manner to evade or defeat any tax imposed by this chapter or the payment thereof, shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, be fined not more than $10,000, or imprisoned for not more than five years, or both, together with the costs of prosecution.” 53 Stat. 62-63, 26 U. S. C. § 145 (b).

The instructions included the following:

“That somebody lied and committed perjury is perfectly patent because contradictory stories have been told, and you must say where the truth lies; and the problem of determining that truth is solely and peculiarly yours. . . .

“But then we come to the admitted payment of $250,000. Ruthin says that that $250,000 was a final settlement of his claim in Browne Vintners, and if that is so — and the government does not contend that the capital gains tax was not paid — he would not be obliged to report that income. But Reinfeld says no, ‘that was the result of extortion. He got that money out of me by threatening me and my family,’ and he told the instances where those threats were made. There is one piece of corroboration of that, and that is from one of the six or seven people who were present in Holtz’s cellar. . . .

"If that money was extorted and was paid as a result of threats, then it was taxable income and Butkin was under the duty of reporting that tax. . . .

". . . There is no contention here that the defendant didn’t know he got the $250,000; the whole point is whether he got it by extortion or whether he got it properly. If he got it properly the tax was already paid.” (Emphasis supplied.)

The United States concedes that although, on a strict construction of the Internal Revenue Code, it may be that the proceeds of the sales should have been reported by the beneficial rather than by the record owners, their failure to so report the proceeds does not provide a satisfactory basis for a charge against them of a willful attempt to evade and defeat the tax in violation of § 145 (b).

Reinfeld testified:

“Q. And did you think that their [your family’s] lives were in danger? A. I thought so, yes.

“Q. Did you do anything to protect their lives? A. I paid off.

“Q. You thought that would protect them from a gunning man?

A. I hoped so.”

That issue was presented to the jury in conformity with the views of this Court expressed in Spies v. United States, 317 U. S. 492, 499. The charge included the following:

“If that money was extorted and was paid as a result of threats, then it was taxable income and Rutkin was under the duty of reporting that tax. But as I indicated to you before, the mere failure to report it doesn’t satisfy the requirements of . the law with regard to the violation of this statute, there must be something else which will indicate the willful intent to defeat and evade the tax. You may consider other elements that appear in the evidence, the fact that this money was paid over in cash; that no record of any kind was made of the receipt of that money; that the money was split and $100,000 of it sent to the sister-in-law of the defendant to be placed in her vault or ‘wault’ as it has been called here, and that the other $150,000 was placed in the defendant’s own vault. You may consider these as factors surrounding the whole transaction.

“Rutkin says that he kept no books; kept no books at that time nor at any other time; kept no books when he received his profit, sixty, seventy, eighty thousand dollars a year, I think it was, from the bootlegging, and admits that he paid no tax; kept no books when he got this $250,000. These are all things that you may consider as circumstances surrounding the whole procedure. The payment of $250,000 was made in the presence of other people, these people being Zwillman, as I recall it, and Stacher who were there with Rutkin and the lawyers. Well, neither the lawyers nor any of these people, it seems to me, would be inclined to go out and publish it.”

There is no suggestion that petitioner relied, at any time, upon any defense for his omission of the $250,000 from his tax return other than his false claim that it represented his beneficial interest in Browne Vintners stock and that the stockholding nominees had paid a capital gains tax on that interest when it was sold in 1940. When this claim was proved to have been false, and necessarily known by petitioner to have been false, that proof not only destroyed petitioner’s claim to the money itself, but it also demonstrated the willfulness of his attempt to evade or defeat paying any tax on the $250,000.

In the New Jersey statute, in effect in 1943, extortion was defined as follows:

"Any person who, with intent to extort from any person any money or other thing of value . . . shall directly or indirectly threaten to kill or to do any bodily injury to any man, woman or child unless a sum of money be paid, shall be guilty of a high misdemeanor and punished by imprisonment at hard labor for a term not exceeding thirty years, or by a fine not exceeding five thousand dollars, or both.” N. J. S. A. 2:127-4.

See also, the federal statute, now in effect, relating to extortion affecting interstate commerce: “The term ‘extortion’ means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.” 60 Stat. 420, 18 U. S. C. §420e-1 (c).

Johnson v. United States, 318 U. S. 189 (money paid to a political leader as protection against police interference with gambling); United States v. Sullivan, 274 U. S. 259 (illicit traffic in liquor); Humphreys v. Commissioner, 125 F. 2d 340 (protection payments to racketeer and ransom paid to kidnapper); Chadick v. United States, 77 F. 2d 961 (graft); United States v. Commerford, 64 F. 2d 28 (bribes); Patterson v. Anderson, 20 F. Supp. 799 (unlawful insurance policies); Petit v. Commissioner, 10 T. C. 1253 (black market gains); Droge v. Commissioner, 35 B. T. A. 829 (lotteries); Rickard v. Commissioner, 15 B. T. A. 316 (illegal prize fight pictures); McKenna v. Commissioner, 1 B. T. A. 326 (race track bookmaking).

For further discussion see dissent in Commissioner v. Wilcox, 327 U. S. 404, 410-411.

For example, see Akers v. Scofield, 167 F. 2d 718. There the taxpayer swindled a wealthy widow out of substantial funds with which he was to conduct fraudulently represented treasure hunts. He was required to pay taxes on those funds.

Helvering v. Bruun, 309 U. S. 461, 468; Helvering v. Clifford, 309 U. S. 331, 334; Helvering v. Midland Ins. Co., 300 U. S. 216, 223; United States v. Safety Car Heating Co., 297 U. S. 88, 93; Douglas v. Willcuts, 296 U. S. 1, 9; Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, 89; Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 174; Irwin v. Gavit, 268 U. S. 161, 166; Eisner v. Macomber, 262 U. S. 189, 203. The scope of § 22 (a) in some instances is limited by specific provisions, e. g., § 22 (b) (9) (income from discharge of indebtedness), § 22(b) (13) (compensation of members of armed forces), but no such provisions apply here.