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Monday, March 03, 2008

Boulware v. United States - Return of Capital Defense to Tax Evasion

Boulware was charged with criminal tax evasion and filing a false income tax return for diverting funds from a closely held corporation, of which he was the president, founder, and controlling shareholder. One element of tax evasion under 26 U. S. C. §7201 is “the existence of a tax deficiency.” Sansone v. United States, 380 U. S. 343. To support his argument that the government could not establish the tax deficiency required to convict him, Boulware sought to introduce evidence that the corporation 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. See 26 U. S. C. §§ 301 and 316(a). Under §301(a), unless the Internal Revenue Code requires otherwise, a “distribution of property” “made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in [§301(c)].” Section 301(c) provides that the portion of the distribution that is a “dividend,” as defined by §316(a), must be included in the recipient’s gross income; and the portion that is not a dividend is, depending on the shareholder’s basis for his stock, either a nontaxable return of capital or a taxable capital gain. Section 316(a) defines “dividend” as a “distribution” out of “earnings and profits.” The District Court granted the government’s in limine motion to bar evidence supporting Boulware’s return-of-capital theory, relying on Ninth Circuit’s precedent holding 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 and declined to instruct the jury on his theory. 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. The Supreme Court reversed, holding 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.