The U.S. Supreme Court has agreed to consider two tax cases, one arising out of a criminal case and the other a business case.
The first case, Michael Boulware v. the United States, revolves around the question of whether the diversion of corporate funds to a shareholder of a corporation without earnings and profits automatically qualifies as a non-taxable return of capital up to the shareholder's stock basis, even if the diversion was not intended as a return of capital.
Boulware founded a company called Hawaiian Isles Enterprises that sold coffee, bottled water and other products. Beginning in 1987, he allegedly transferred approximately $4.5 million from HIE to his girlfriend, Jin Sook Lee. She later sued him and the company, claiming that they had improperly obtained money and property from her, but the jury found that the monies were not gifts and belonged to HIE. The judge also found that Lee had held the money in a constructive trust for HIE.
However, in 2001, the government indicted Boulware, charging him with tax evasion and tax perjury. He unsuccessfully tried to use the state court judgment about the constructive trust in his defense. Later, in a retrial, he argued that the money he received from HIE constituted nontaxable returns of capital he had invested in the company. But because he could not show that the corporate distributions were intended as returns of capital at the time they were made, the court would not allow this argument. The jury found Boulware guilty and sentenced him to 60 months in prison.
The other case, Meadwestvaco v. Illinois Department of Revenue, involves the sale of legal and tax information publisher LexisNexis. The court will decide the question of whether the attempt by Illinois to tax an approximately $1 billion gain is in direct conflict with court decisions in several earlier cases involving AlliedSignal, F.W. Woolworth and Asarco.
Meadwestvaco, the successor company to Mead Corp., contends that Illinois cannot tax the gain because the non-domiciliary company's investment served as an investment, as opposed to an operational function.
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