Gilbert v. Commissioner
United States Court of Appeals for the Second Circuit
552 F.2d 478 (2d Cir. 1977)
Edward Gilbert (defendant), president of Bruce, illegally used nearly $2 million of company funds to meet a personal margin call after the 1962 stock market crash, then promptly issued interest-bearing promissory notes and assigned most of his personal property to Bruce in acknowledgment of his obligation to repay; Bruce's board accepted the notes and assignment (though it refused to authorize the withdrawals themselves), and Gilbert was ultimately unable to repay. The IRS commissioner (plaintiff) sought to tax Gilbert on the embezzled funds as income, the Tax Court agreed, and Gilbert appealed.
Whether, for purposes of federal tax law, a taxpayer who receives funds illegally realizes income if there is a recognized obligation for repayment.