Embezzlement - Tax Consequences

Tax Consequences

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year. Under U.S. tax law, lawful as well as unlawful gains are includable in gross income and that it is inconsequential that an embezzler may lack title to the sums he appropriates.” When the embezzler returns the victim’s funds either directly or indirectly (i.e. restitution) then the embezzler may have a reduction in taxable income.

However, at least one case has held that if a corporate embezzler can show four things, then the embezzler need not include the embezzled funds in income:

"Where a taxpayer withdraws funds from a corporation

1. which he fully intends to repay
2. which he expects with reasonable certainty he will be able to repay
3. where he believes that his withdrawals will be approved by the corporation
4. where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals under the James test."