Rev. Rul. 66-306

Advice has been requested as to the applicability of the income averaging provisions of sections 1301 through 1305 of the Internal Revenue Code of 1954 to embezzled funds.

The taxpayer in the instant case operated a fraudulent conversion scheme whereby he collected certain State sales tax moneys on the sale of cars and did not remit all of these funds to the proper State authorities. During the taxable year 1965, the taxpayer misappropriated for his personal use the funds not remitted.

Section 232 of the Revenue Act of 1964, Public Law 88-272, C.B. 1964-1 (Part 2), 6, at 75, deleted the then existing spreadback provisions and replaced them with an averaging device of general application. The purpose of the new provision was to treat all taxpayers as nearly equally for tax purposes as possible, without regard to fluctuations in their income and without regard to the source of income involved. See, House Report 749, 88th Congress, C.B. 1964-1 (Part 2), 125, at 234; Senate Report 830, 88th Congress, C.B. 1964-1 (Part 2), 505, at 644.

Embezzled funds constitute gross income to the embezzler in the year of embezzlement. James v. United States , 366 U.S. 213 (1961) Ct. D. 1863, C.B. 1961-2, 9; also Rev. Rul. 61-185, C.B. 1961-2, 9. The only items of income which are specifically denied the benefits of the income averaging provisions are enumerated under section 1302(b) of the Code. Embezzled funds are not included in this enumeration.

Accordingly, embezzled funds will be taken into account if a taxpayer chooses the benefits of the income averaging provisions of sections 1301 through 1305 of the Code, provided he otherwise qualifies for the benefits of those sections.