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January 26, 1965

Mario PITOSCIA, Defendant

The opinion of the court was delivered by: MADDEN

This matter is presently before the Court on the defendant's motion to dismiss the Indictment (Criminal No. 10-64) which charges the defendant in three separate counts with wilfully and knowingly attempting to evade the payment of certain income taxes for the respective years of 1957, 1958 and 1959 by the filing of false and fraudulent returns, in violation of Section 7201 of the Internal Revenue Code of 1954, 26 U.S.C.A. ยง 7201.

Subsequent to the filing of the Indictment, counsel for the defendant made demand for several bills of particulars. To each demand, counsel for the United States responded and provided the specific information requested. Thereafter this motion was made and the matter was argued orally before the Court. For the purpose of determining this motion, counsel for the defendant and for the United States have submitted an agreed statement or stipulation of facts.

 Briefly the facts are, as follows:

 During the years of 1957, 1958 and 1959, the defendant, Mario Pitoscia, was employed as store manager by Bearings, Inc. of Camden, New Jersey. As store manager, the defendant had access to the Company's stock and records, and authority to contract supplies, issue purchase orders and pick up merchandise from suppliers in the Philadelphia branch of Bearings, Inc.

 From time to time during the years in question, the defendant, without the knowledge or consent of the Company, received the proceeds from various sales of bearings either owned by or charged to the Company for which he failed to account to the Company and which he appropriated to his own use and benefit. It appears that over the period of time involved the defendant sold to a third party approximately 1000 bearings which he appropriated from Company stock and procured from suppliers who charged the Company therefor. By preparing false entries and falsifying the Company's inventory books, the defendant was able to cover the shortages and conceal his unlawful activities from which he received a total of approximately $ 32,000.00.

 For each year in question, the defendant failed to report as income on his income tax returns the sums or proceeds which he had appropriated to his own use, and it is for his failure to include said sums or proceeds on his income tax returns for 1957, 1958 and 1959 that the defendant is charged with wilfully and knowingly attempting to evade and defeat a portion of his income tax for each of the years alleged in the indictment. The defendant is not charged with the receipt of any other unreported taxable income in his returns of 1957, 1958 and 1959.

 The defendant's position on this motion is quite clear. The defendant contends that under the stipulated facts, the proceeds or funds in question which he has failed to include as gross income in his income tax returns for 1957, 1958 and 1959 constitute embezzled funds under the doctrine of C.I.R. v. Wilcox, 327 U.S. 404, 66 S. Ct. 546, 90 L. Ed. 752 (1946), and that under the decision of James v. United States, 366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246 (1961) the Government cannot prosecute the defendant for 'wilfully' attempting to evade income taxes by his failure to include said funds as gross income in his income tax returns for the years alleged in the indictment.

 In opposition to the defendant's motion, the United States contends that the Wilcox and James cases, supra, are not applicable and that the unreported funds involved do not constitute embezzled funds.

 In the Wilcox case, supra, the Supreme Court held that embezzled funds do not constitute taxable income to the embezzler in the year of the embezzlement under Section 22 of the Internal Revenue Code of 1939 for the reason that a taxable gain is conditioned upon (1) the presence of a claim of right to the alleged gain and (2) the absence of a definite, unconditional obligation to repay or return that which would otherwise constitute a gain. Embezzled funds, according to the Wilcox doctrine, do not meet the conditions established by definition in determining taxable gains. In the later case of Rutkin v. United States, 343 U.S. 130, 72 S. Ct. 571, 96 L. Ed. 833 (1952), the Supreme Court not only held that extorted funds constitute taxable income to the extorter in the year of the extortion under Section 22 and that the Wilcox case is limited to its own facts, but it implicitly rejected the Wilcox rationale by concluding that lawful gains as well as unlawful gains constitute taxable income when its recipient has such control over it that as a practical matter he derives readily economic value from it.

 More recently, the Supreme Court was confronted with the opportunity to consider and evaluate the decisions rendered in the Wilcox and Rutkin cases. In James v. United States, 273 F.2d 5 (C.A. 7th Cir., 1959), the Court of Appeals for the Seventh Circuit had before it a factual situation on 'all fours' with that of the Wilcox case. *fn1" In affirming the judgment of the District Court on the conviction of the defendant James, the Court of Appeals rejected the application of the Wilcox doctrine and relied upon the Rutkin case in support of its decision. Thereafter, the Supreme Court granted certiorari in order to resolve the conflict of the decision of the Court of Appeals with its decision in the Wilcox case. *fn2" In its opinion, James v. United States, 366 U.S. 213, 81 S. Ct. 1052, 6 L. Ed. 2d 246, the Supreme Court recognized that the Rutkin case had effectively vitiated the Wilcox rationale and acknowledged the irreconcilability of the Wilcox case with the Rutkin case. The Supreme Court then proceeded to specifically overrule the Wilcox case and stated that the Wilcox case was wrongly decided.

 However, while the Supreme Court 'cut away the remaining vestiges of the Wilcox rationale' in the James decision and held that embezzled funds do constitute taxable gains, it reversed the criminal conviction for 'wilfully' failing to report embezzled funds as income on the grounds that the defendant had a right to rely on the Wilcox case in not reporting the income for the years involved. The majority opinion, 366 U.S. 213, at pages 221 and 222, 81 S. Ct. 1052, at pages 1056 and 1057, reads as follows:

 'But, we are dealing here with a felony conviction under statutes which apply to any person who 'willfully' fails to account for his tax or who 'willfully' attempts to evade his obligation. In Spies v. United States, 317 U.S. 492, 499 (63 S. Ct. 364, 368, 87 L. Ed. 418), the Court said that 145(b) of the 1939 Code embodied 'the gravest of offenses against the revenues,' and stated that willfulness must therefore include an evil motive and want of justification in view of all the circumstances. Id. (317 U.S. at page 498, 63 S. Ct. at page 367). Willfulness 'involves a specific intent which must be proven by independent evidence and which cannot be inferred from the mere understatement of income.' Holland v. United States, 348 U.S. 121, 139 (75 S. Ct. 127, 137, 99 L. Ed. 150).

 'We believe that the element of willfulness could not be proven in a criminal prosecution for failing to include embezzled funds in gross income in the year of misappropriation so long as the statute contained the gloss placed upon it by Wilcox at the time the alleged crime was committed. Therefore, we feel that petitioner's conviction may not stand and that the indictment against him must be dismissed.'

 Thus, the James case appears to reserve a 'form of a residual protection to those embezzling in the interim' between the time the Wilcox case was decided and the date of the James decision, and provides them with the now tattered 'umbrella' afforded by the Wilcox decision. Cooper v. United States, 321 F.2d 274 (C.A. 5th Cir., 1963), cer. den. 375 U.S. 964, 84 S. Ct. 482, 11 L. Ed. 2d 414, reh. den. 376 U.S. 929, 84 S. Ct. 657, 11 L. Ed. 2d 627; In Re Parr, 205 F.Supp. 492 (D.C., S.D. Texas, 1962), aff. 265 F.2d 894, rev. 363 U.S. 370, 80 S. Ct. 1171, 4 L. Ed. 2d 1277; Armstrong v. United States, 327 F.2d 189 (C.A. 9th Cir., 1964); Beck v. United States, 298 F.2d 622 (C.A. 9th Cir., 1962); Riddell v. Monolith Portland Cement Co., 301 F.2d 488 (C.A. 9th Cir., 1962). Consequently, the Court feels that if the defendant's activities in the instant case constitute embezzlement and the approximate ...

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