The Supreme Court was called upon to determine whether the receipt of embezzled funds was income taxable to the wrongdoer, despite an obligation to repay.

The Court noted that the scope of the Sixteenth Amendment was not limited to "lawful" income, a distinction that had been found in the Revenue Act of 1913.

The absence of the "lawful" modifier indicated that the framers of the Sixteenth Amendment had intended no safe harbor for illegal income.

The Court expressly overruled Commissioner v. Wilcox and ruled that James was liable for the federal income tax that was due on his embezzled funds.

Justice Clark wrote a brief concurrence, also agreeing with the overruling of Wilcox but also stating that James's conviction should have been upheld.