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Section 61 includes in income "all income from whatever
source derived", including income from an illegal source. James
v. United States, 366 U.S. 213, 219-220 (1961); Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955). It is well settled
that money obtained by means of embezzlement constitutes income
to the perpetrator. Money received without recognition of an
obligation to repay and without restriction as to its disposition
is taxable when it is received, even though the taxpayer may be
required to restore the money later. James v. United States,
supra; North Am. Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932);
Solomon v. Commissioner, 732 F.2d 1459, 1460-1461 (6th Cir.
1984), affg. per curiam T.C. Memo. 1982-603. Moreover, an
embezzler must include embezzled funds in income even though the
funds are lent or given to another. Bailey v. Commissioner, 420
F.2d 777 (5th Cir. 1969), affg. 52 T.C. 115 (1969) (funds
deposited into brother's account); Estate of Geiger v.
Commissioner, 352 F.2d 221 (8th Cir. 1965), affg. T.C. Memo.
1964-153 (funds used to make loans and gifts to others); see also
United States v. Lippincott, 579 F.2d 551 (10th Cir. 1978). A
taxpayer restoring embezzlement income may deduct the repayment
in the year repaid. James v. United States, supra at 220.
Petitioners' argument that they did not have any unreported
income from embezzlement before 1988 is focused on the
disposition of the embezzled money after that money was deposited
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