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Law School Case Brief

Collins v. Commissioner - 3 F.3d 625 (2d Cir. 1993)


Income received in a form other than cash is taxed at its fair market value at the time of its receipt. Fair market value is defined as the price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.


Appellant taxpayer, who was an off-track betting ticket vendor, was an employee of a betting parlor that accepted bets on horse races. On day, he decided to made wagers on his own behalf with the betting parlor's funds, without paying for them, and used money from winnings to pay back losses. His losses exceeded his winnings. He filed a timely federal income tax return but, as a result of unreported gross income from the theft, he had an income tax deficiency for the year. The taxpayer later pled guilty to grand larceny in the third degree under N.Y. Penal Law § 155.35. The tax court determined that taxpayer's actions resulted in a gambling loss, but ruled that the unpaid bets constituted theft or embezzlement income. To calculate appellant taxpayer's tax liability the tax court deducted the amount of winnings that appellant returned to his employer from the amount bet, and found a deficiency. 


Was the taxpayer liable for a tax deficiency despite his gambling resulting in a loss?




The Court of Appeals for the Second Circuit affirmed, holding that larceny resulting in gain to a wrongdoer was a taxable event. The court found that appellant's situation was the same as that of any other individual who embezzled money from his employer and subsequently lost it at the racetrack. The court found no double penalty in having a taxpayer prosecuted for the crime, and subsequently being required to pay taxes on his illegal gains, because 26 U.S.C.S. § 165 provided that when the taxpayer made restitution, he would be able to deduct the amount of those payments from his gross income.

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