The Supreme Court has unanimously overturned a decision by the Ninth Circuit court in a criminal tax evasion case.
In the case, Boulware v. United States, Michael Boulware was charged with criminal tax evasion and filing a false income tax return for diverting funds from a closely held corporation, Hawaiian Isles Enterprises, of which he was the president, founder and controlling shareholder.
To support his argument that the government could not establish the tax deficiency required to convict him, Boulware sought to introduce evidence that HIE had no earnings and profits in the relevant taxable years, so he in effect received distributions of property that were returns of capital, up to his basis in his stock, which are not taxable under Sections 301 and 316(a) of the Tax Code.
The District Court granted the government's motion to bar evidence supporting Boulware's return-of-capital theory, relying on the Ninth Circuit's decision in an earlier case, Miller v. United States, that a diversion of funds in a criminal tax evasion case may be deemed a return of capital only if the taxpayer or corporation demonstrates that the distributions were intended to be such a return.
The court later found Boulware's proffer of evidence insufficient under Miller and declined to instruct the jury on his theory. In affirming his conviction, the Ninth Circuit held that Boulware's proffer was properly rejected because he offered no proof that the amounts diverted were intended as a return of capital when they were made.
However, the Supreme Court held that a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that, when the distribution occurred, either he or the corporation intended a return of capital.
"Sections 301 and 316(a) govern the tax consequences of constructive distributions made by a corporation with respect to its stock," Justice David Souter wrote in the court's majority opinion. "A defendant in a criminal tax case does not need to show a contemporaneous intent to treat diversions as returns of capital before relying on those sections to demonstrate no taxes are owed."