High Court: No Evasion Without Deficiency


The U.S. Supreme Court vacated a conviction for criminal tax evasion, holding that the taxpayer could argue that distributions he received were a nontaxable return of capital. If they were so characterized, then the taxpayer had no tax deficiency, which is a required element of tax evasion, the court pointed out. In doing so, the court also rejected a 1976 case’s requirement that any such distributions must have been intended as a return of capital when they were made. The Supreme Court remanded the instant case to the Ninth Circuit, which had also decided the earlier case.

Petitioner Michael H. Boulware’s conviction on several counts of criminal tax evasion and filing false income tax returns had been affirmed by the Ninth Circuit (98 AFTR2d 2006-8206). The Ninth Circuit had upheld the government’s contention that monies diverted from Hawaiian Isles Enterprises Inc. (HIE), a closely held corporation of which Boulware was the founder, president and controlling shareholder, were taxable distributions. Boulware sought to introduce evidence that HIE had no earnings and profits during the years in question, and therefore funds he received constituted nontaxable returns of capital. But relying on its own decision in U.S. v. Miller , 39 AFTR2d 77-364, the Ninth Circuit did not allow Boulware to present evidence supporting his return-of-capital theory.

Miller held that a diversion of funds may be deemed a return of capital only if the taxpayer could demonstrate that the distribution, at the time it was made, was intended to be a return of capital and not a constructive dividend. Other circuits had ruled differently on the application of IRC §§ 301 (distributions) and 316(a) (dividends) to informally transferred or diverted corporate funds in criminal tax proceedings. The Supreme Court granted certiorari in Boulware to resolve the split.

The government cited Miller ’s intent requirement and argued that section 301(a)’s requirement that a distribution be made “with respect to stock” obviates any possibility a diversion of funds could qualify as a return of capital. But the latter issue should be determined by the facts of the case, reviewed by a court “familiar with the whole evidentiary record,” the Supreme Court said. In any event, the question was not considered by the Ninth Circuit, it said. As for Miller , the Ninth Circuit erred in requiring contemporaneous intent and only compounded its error with Boulware , the Supreme Court said.

Rather, the Supreme Court viewed as essential to distribution of a dividend its source specified by section 316, earnings and profits. And economic substance, such as the lack of earnings and profits, is the touchstone for characterizing funds received by a shareholder, rather than intent, it said. Since the money could therefore be considered a return of capital, there was no tax deficiency, which the court noted is a required element of criminal tax evasion under IRC § 7201 (the other elements are a willful attempt to evade tax and an affirmative act to that end).

Justice David Souter’s opinion for the unanimous decision quoted Ninth Circuit Judge Sidney R. Thomas, who in a separate opinion concurring with that court’s majority—only because, Thomas said, it was bound by its own decision in Miller—nonetheless deplored that court’s holding that “a defendant may be criminally sanctioned for tax evasion without owing a penny in taxes.”

Boulware v. U.S ., 101 AFTR2d 2008-1065

Prepared by Alice A. Upshaw , CPA, MPA, instructor of accounting, and Darlene Pulliam , CPA, Ph.D., McCray Professor of Business and professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.


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