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Accordingly, respondent contends that the alleged embezzled funds
constitute gross income to petitioners in the year of
embezzlement. It is well established that profits or gains
earned illegally constitute gross income within the meaning of
section 61. James v. United States, 366 U.S. 213 (1961).
Embezzled funds, therefore, constitute income to the embezzler.
Id. In James, the Supreme Court explained that a taxpayer has
income when he or she "acquires earnings, lawfully or unlawfully,
without the consensual recognition, express or implied, of an
obligation to repay and without restriction as to their
disposition". Id. at 219. Embezzlement income results from a
taxpayer's embezzlement activity if such activity "enriches" the
taxpayer. Id. at 221.
Petitioners contend that an application of the principles
enunciated in James v. United States, supra, necessitates a
conclusion that petitioners did not realize embezzlement income
as a result of petitioner's using the Fruitland funds to purchase
cashier's checks. Petitioners argue that Carlton was fully aware
of the cashier's checks and that he had approved of petitioner's
exclusive handling of them. Petitioner testified that he
considered the cashier's checks to be owned jointly by himself
and Carlton, and the cashier's checks represented their life
savings. Petitioner further testified that he was the sole payee
of each cashier's check simply for reasons of administrative
convenience given his responsibility to manage the financial
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