Boulware v. United States
128 S. Ct. 1168 (2008)
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Rule of Law:
In a criminal tax evasion prosecution, a defendant may claim that a corporate distribution was a non-taxable return of capital based on the corporation's lack of earnings and profits, without needing to produce evidence that the distribution was intended as a return of capital at the time it was made.
Facts:
- Michael Boulware was the president, founder, and controlling shareholder of a closely held corporation, Hawaiian Isles Enterprises (HIE).
- Over several years, Boulware systematically diverted millions of dollars from HIE to support his personal lifestyle, including giving large sums to his girlfriend and wife.
- Boulware diverted the funds by writing checks to employees and friends who then returned the cash to him, diverting customer payments, and submitting fraudulent invoices to HIE.
- Boulware did not report any of the diverted funds as income on his personal income tax returns for the years in question.
Procedural Posture:
- The United States charged Michael Boulware in the U.S. District Court (trial court) with tax evasion and filing false tax returns.
- The government filed a motion in limine to bar Boulware from presenting evidence that his corporation lacked earnings and profits, which would support his return-of-capital defense.
- The District Court granted the government's motion, preventing the jury from hearing evidence on or being instructed on the return-of-capital theory.
- The jury found Boulware guilty on nine counts.
- Boulware (as appellant) appealed to the U.S. Court of Appeals for the Ninth Circuit.
- The Ninth Circuit, as an intermediate appellate court, affirmed the conviction, holding that its precedent required proof of a contemporaneous intent to treat the funds as a return of capital.
- The U.S. Supreme Court granted certiorari to resolve a split among the circuit courts.
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Issue:
Does the Internal Revenue Code require a defendant in a criminal tax evasion case to prove a contemporaneous intent to treat a corporate distribution as a return of capital to argue that the distribution was non-taxable?
Opinions:
Majority - Justice Souter
No. The tax consequences of a corporate distribution are determined by objective economic realities under Internal Revenue Code §§ 301 and 316(a), not by the subjective, contemporaneous intent of the shareholder or the corporation. The crime of tax evasion under § 7201 requires the government to prove the existence of a tax deficiency beyond a reasonable doubt. Whether a distribution is a taxable dividend or a non-taxable return of capital depends entirely on whether the corporation has earnings and profits, a factual determination independent of intent. The Ninth Circuit's previous rule in United States v. Miller, which imposed an intent requirement, incorrectly conflated the element of willfulness with the separate and essential element of a tax deficiency. That rule created an illogical disconnect between civil and criminal tax law and would punish a defendant for bad intentions even if no tax was actually owed, which contradicts the plain language of the tax evasion statute. The statutes governing corporate distributions apply the same way in criminal and civil contexts, and their application depends on a computational analysis of the corporation’s financial status, not the parties' state of mind.
Analysis:
This decision harmonizes the standard for characterizing corporate distributions in both civil and criminal tax law, rejecting a subjective intent test in favor of an objective, fact-based inquiry. It solidifies the principle that a tax deficiency is an indispensable element of criminal tax evasion, meaning the government cannot secure a conviction based solely on a defendant's willful or deceptive conduct if no tax was actually due. By focusing on the economic substance of the transaction as dictated by the Internal Revenue Code, the Court prevents the creation of a special, more punitive rule for criminal defendants and ensures that tax liability is determined consistently across the board. This holding protects taxpayers from being convicted for evading a non-existent tax, reinforcing that bad acts without an actual tax loss do not constitute criminal tax evasion.
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