¶1dissenting: In almost all respects I agree with the views expressed by Judge Hoyt in his dissenting opinion. But, since the rationale of the majority herein is so astonishing, I am impelled to add the following comments.
¶2It is simply hokey to say that what happened here gave rise to a “debt” due from the petitioner to S & D Meats, Inc., and to draw an analogy to cases like United States v. Merrill, 211 F. 2d 297 (C.A. 9, 1954), and J. W. Gaddy, 38 T.C. 943 (1962). I am surprised that the majority has chosen to fan the flickering flame of form under circumstances where it rewards the thief with an unintended tax benefit and places in jeopardy the victim’s embezzlement loss deduction. It may now be argued that the petitioner’s promise to repay the embezzled funds offsets any claimed loss in that year. If any loss is to be allowed, it might have to be postponed until the so-called promise to repay is shown to be worthless. This creates an absurd situation. The effect of the majority opinion is to destroy the underpinnings of the Supreme Court’s decision in the James case.
¶3In any event, I think the rationale of the Merrill case, so heavily relied upon by the majority, is of questionable validity. It erroneously permits a cash basis taxpayer to deduct from or offset against his income for the taxable year an amount which is merely acknowledged to be owed to another but has not yet been paid. I see no distinction between this situation and one where a cash basis taxpayer executes a promissory note for the repayment of a loan together with interest, due in installments over several years. Surely we would not conclude that this cash basis taxpayer could deduct all the interest due over the term of the loan in the first year when he executed his note, even though the face amount of the note is for the amount of the loan plus the interest due. To the extent that a renunciation of the Merrill holding would work a hardship in certain circumstances, relief should be obtained through congressional expansion of the ameliorative provisions now contained in section 1341 of the Code.
¶4dissenting: I respectfully dissent from the majority opinion holding that the petitioner did not receive taxable income in 1965 as a result of his embezzlement of funds in that year because of his confession of a judgment in favor of his employer in the same year for the amount stolen.
¶5James v. United States, 366 U.S. 213 (1961), established the basic principle that embezzled funds constitute taxable income because at the time of an embezzlement there is no consensual recognition, expressed or implied, of an obligation to repay the money embezzled; therefore, the taxpayer is chargeable with income to the extent of the amounts embezzled and is entitled to deductions only when repayments are made. Quoting from the Government’s brief, the Court concluded that, “//, when, and to the extent that the victim recovers bade the misappropriated funds, there is of course a reduction in the embezzler’s income." (Emphasis supplied.) James v. United States, supra at 220.
¶6I would conclude that even if the parties in the year of embezzlement make an arrangement for repayment of the embezzled funds, this cannot have the effect of changing the original transaction into one in the nature of a loan; in the absence of a consensual recognition at the time of the taking, the acquisition of embezzled funds results in the receipt of taxable income by the embezzler. As indicated by the Supreme Court, this standard brings wrongful appropriations within the broad sweep of gross income; it excludes loans. James v. United States, supra at 219.
¶7It is obvious from the facts before us here that there was no consensual recognition when petitioner embezzled funds from his employer in 1965. The petitioner’s confession of a worthless judgment thereafter in the year he was caught with his hand in the till did not, to any extent, constitute a repayment in that year; that the judgment was not worth the paper it was written on is clearly shown by the finding that it remains outstanding today, some I years later. It can no more be regarded as repayment in 1985 than a worthless promissory note given at that time. In so stating, I do not mean to imply that the giving of a promissory note or other evidence of indebtedness by an otherwise solvent embezzler, would necessarily constitute payment sufficient to support a current deduction. That is a question which need not now be decided.
¶8It seems to me that the majority’s conclusion that the “consensual agreement” 'between the embezzler and his victimized employer in 1965, after his crime was detected, changed the nature of the embezzled funds from taxable income to nontaxable borrowed funds, equates such subsequent agreement with full repayment in that year. Thus, this taxpayer, who embezzled over $22,000 from his employer in 1965 and who had the full use, command, and benefit of those funds, escapes taxability without making restitution merely because he was caught early in the same year and before the end thereof he acknowledged Ms obligation to make restitution. This seems contra, not only to the doctrine enunciated in the James case but also to other more recent cases.
¶9In Norman v. Commissioner, 407 F. 2d 1337 (C.A. 3, 1969), certiorari denied 395 U.S. 947 (1969), affirming a Memorandum Opinion of this Court, the taxpayer had embezzled funds from his employer in each of the years 1958 through 1962. In October 1962, the taxpayer, in satisfaction of his employer’s claim against Mm for all years including 1962, paid the employer cash and placed stock in trust to be delivered to the employer over a number of years. It was there held that the amounts embezzled constituted income to the taxpayer in the years of embezzlement, and that the taxpayer was entitled to a deduction in 1962 for the amount repaid during such year. The fact that the arrangement to repay was made in 1962 did not change the embezzled funds taken that year from income, taxable under James, to nontaxaJble proceeds from a loan. In affirming our Memorandum Opinion the Court of Appeals stated in part as follows:
In 'Our view the 1962 agreement neither purported to nor could change the original legal character of Norman’s earlier conduct from embezzlement to borrowing. …
¶10In Norman Mais, 51 T.C. 494 (1968), the petitioner embezzled funds and when caught in the same year acknowledged his obligation to make restitution. The same arguments were made on behalf of the taxpayer in that case. We rejected them and after discussing the arguments and applicable principles stated (p.498) :
We interpret the James case as meaning that any taxpayer who acquires property under circumstances which do not permit the conclusion that the property was received with a consensual recognition, express or implied, of an obligation to repay, and without restriction as to its disposition, is in ¡receipt of taxable income. Certainly in tbe case of an embezzlement it cannot be considered that tbe funds are obtained by tbe embezzler under any consensual recognition of an obligation to repay; indeed, tbe victim of tbe embezzlement is unaware of tbe diversion of bis property.
¶11We then stated that the acknowledgment by the embezzler of his legal obligation to repay could not be considered a consensual agreement which would justify treating embezzled funds as in any way similar “to borrowed funds and hence excludable from gross income.” We concluded (p. 499): “The only relief available to the embezzler is to deduct from income of any year any amount repaid in such year in restitution.”
¶12I think the majority here is rejecting those principles announced and applied only a few years ago by this Court in Norman Mais. The majority opinion seeks to distinguish the cases by the statement that here the petitioner went further by executing an affidavit of judgment after he was caught. I submit that this is merely a matter of degree, a distinction without a difference. The two cases cannot stand together and yet the majority opinion does not refuse to follow Mais or expressly overrule it.
¶13It seems clear to me that the results reached in Mais and in Norman were correct 'and required by the opinion of the Supreme Court in James v. United States, supra. The cases of United States v. Merrill, 211 F. 2d 297 (C.A. 9, 1954), and J. W. Gaddy, 38 T.C. 943 (1962), reversed in part on other grounds 344 F. 2d 460 (C.A. 5,1965), involving funds mistakenly received and held under a claim of right, on which the majority relies, are clearly distinguishable, as pointed out in our opinion in Norman Mais, supra. The quotation from Mais contained in the majority opinion omits the carefully drawn distinctions indicating that there were implied consensual recognitions to repay excessive receipts {Gaddy) and overpayments {Merrill), which obligations were similar to the obligation to repay a loan. No such similar recognition or obligation existed here when petitioner embezzled his employer’s funds and I would deny the petitioner’s attempt to change the nature of the income by a subsequent mea culpa confession of an uncollectible judgment even though it occurred during the same year. Respondent has allowed petitioner a deduction for the small amount he repaid his victim in 1965; I think that is all he should be allowed. I would follow Mais and Norman here and thus not do damage to stare decisis, creating the inevitable doubts, confusion, and uncertainty that the majority opinion will certainly engender.
¶14Raum, Withey, Scott, DawsoN, Tannenwald, and Simpson, JJ., agree with this dissent.