Mark D. Collins v. Commissioner of Internal Revenue
1993 U.S. App. LEXIS 22320, 72 A.F.T.R.2d (RIA) 5838, 3 F.3d 625 (1993)
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Rule of Law:
Unlawfully appropriated property constitutes taxable gross income to the thief in the year of the theft, measured by its fair market value, even if the property is subsequently used in a manner that results in a net financial loss. A unilateral intention to repay is insufficient to transform the theft into a non-taxable loan without consensual recognition of the debt by the lender.
Facts:
- Mark D. Collins was employed as a ticket vendor at an Off-Track Betting (OTB) parlor, which had a strict policy against employee betting.
- On July 17, 1988, Collins used his computer to generate $80,280 in betting tickets for himself without paying for them.
- Collins used the tickets to wager on a series of horse races, losing heavily throughout the day.
- By the end of the day, Collins' winning tickets totaled $42,175, leaving a shortfall of $38,105 from the tickets he had generated.
- Collins placed his $42,175 in winning tickets in his OTB drawer.
- At the end of his shift, Collins confessed his actions to his supervisor.
- Collins' unauthorized wagers were electronically transmitted to the racetrack, affecting the betting pools and making OTB liable to the track for the bets placed.
Procedural Posture:
- Mark D. Collins filed his 1988 federal income tax return without reporting any income related to the OTB incident.
- The Internal Revenue Service (IRS) issued a notice of deficiency, initially asserting that Collins had unreported gambling winnings.
- Collins filed a petition for relief in the United States Tax Court.
- In its reply, the IRS asserted an alternative theory that Collins had gross income from theft and embezzlement.
- The Tax Court, a court of first instance for tax disputes, ruled in favor of the IRS, finding Collins had $38,105 in unreported income from theft (the value of tickets stolen less the amount returned).
- Collins, as the appellant, appealed the Tax Court's final decision to the United States Court of Appeals for the Second Circuit, with the Commissioner of Internal Revenue as the appellee.
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Issue:
Does the face value of misappropriated betting tickets constitute taxable gross income to the thief in the year of the theft, even if the thief ultimately loses money on the wagers made with those tickets?
Opinions:
Majority - Cardamone, Circuit Judge
Yes, the face value of the misappropriated betting tickets constitutes taxable gross income. All unlawful gains that create an economic benefit and are under the taxpayer's complete dominion are considered gross income in the year they are acquired. The court's reasoning distinguished between the act of theft and the subsequent act of gambling. The taxable income was realized at the moment Collins misappropriated the tickets, thereby gaining an economic benefit—the opportunity to gamble, which others must pay for. This gain is valued at the tickets' fair market value, which is their retail price. What Collins subsequently did with that gain—losing it through gambling—is a separate transaction and does not negate the initial income from the theft. The court rejected Collins' argument that this was a non-taxable loan, applying the test from James v. United States, which requires 'consensual recognition' of an obligation to repay. Collins' unilateral intent to repay was irrelevant because OTB never agreed to lend him the money or tickets. The court further distinguished this case from Gilbert v. Commissioner, where the taxpayer had a reasonable expectation of repaying and believed his actions would be ratified, none of which applied to Collins. Finally, the $42,175 in winning tickets Collins returned to the drawer was treated as a restitution payment made in the same tax year, which could be deducted from the total theft income of $80,280.
Analysis:
This decision solidifies the broad definition of gross income under Internal Revenue Code § 61, particularly as applied to illegal gains established in James v. United States. The court's key contribution is the clear separation of the income-generating event (theft) from the subsequent disposition of the stolen property (gambling loss). This prevents taxpayers from using losses from illegal activities to erase income realized from a separate illegal act. The case serves as a strong precedent that the taxability of a theft is determined at the moment of misappropriation, establishing that the 'accession to wealth' is the dominion and control over the stolen property, not the ultimate financial outcome of its use.
