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AN E-BULLETIN
LEGAL INFORMATION INSTITUTE -- CORNELL LAW SCHOOL
lii.law.cornell.edu
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552 U.S. ____ (2008) (06-1498 Percuriam)
http://www.law.cornell.edu/supct/html/06-1498.ZPC.html
BOULWARE v. UNITED STATES (06-1509 Syllabus)
http://www.law.cornell.edu/supct/html/06-1509.ZS.html
(L022908B Orders)
http://www.law.cornell.edu/supct/html/022908.ZR.html
(L030308 Orders)
http://www.law.cornell.edu/supct/html/030308.ZOR.html
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BOULWARE v. UNITED STATES (No. 06-1509)
Web-accessible at:
http://www.law.cornell.edu/supct/html/06-1509.ZS.html
Argued: January 8, 2008 -- Decided: March 3, 2008
Opinion author: Souter
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One element of tax evasion under 26 U. S. C. sec.7201 is
"the existence of a tax deficiency." Sansone v. United
States, 380 U. S. 343 . Petitioner Boulware was charged
with criminal tax evasion and filing a false income tax
return for diverting funds from a closely held corporation,
HIE, 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, see 26 U. S. C. sec.sec.301 and
316(a). Under sec.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 [sec.301(c)]."
Section 301(c) provides that the portion of the distribution
that is a "dividend," as defined by sec.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 the Ninth Circuit's Miller decision
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 under Miller because he offered no proof that
the amounts diverted were intended as a return of capital
when they were made.
Held: 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. Pp. 6-17.
(a) Tax classifications like "dividend" and "return of
capital" turn on a transaction's "objective economic realities,"
not "the particular form the parties employed." Frank Lyon
Co. v. United States, 435 U. S. 561 . In economic reality,
a shareholder's informal receipt of corporate property
"may be as effective a means of distributing profits among
stockholders as the formal declaration of a dividend,"
Palmer v. Commissioner, 302 U. S. 63 , or as effective
a means of returning a shareholder's capital, see ibid.
Economic substance remains the touchstone for characterizing
funds that a shareholder diverts before they can be recorded
on a corporation's books. Pp. 6-8.
(b) Miller's view that a return-of-capital defense requires
evidence of a corresponding contemporaneous intent sits
uncomfortably not only with the tax law's economic realism,
but also with the particular wording of sec.sec.301 and
316(a). As these sections are written, the tax consequences
of a corporation's distribution made with respect to stock
depend, not on anyone's purpose to return capital or get
it back, but on facts wholly independent of intent: whether
the corporation had earnings and profits, and the amount
of the taxpayer's basis for his stock. The Miller court
could claim no textual hook for its contemporaneous intent
requirement, but argued that it avoided supposed anomalies.
The court, however, mistakenly reasoned that applying sec.sec.301
and 316(a) in criminal cases unnecessarily emphasizes the
deficiency's amount while ignoring the willfulness of the
intent to evade taxes. Willfulness is an element of the
crimes because the substantive provisions defining tax
evasion and filing a false return expressly require it,
see, e.g., sec.7201. Nothing in sec.sec.301 and 316(a)
relieves the Government of the burden of proving willfulness
or impedes it from doing so if there is evidence of willfulness.
The Miller court also erred in finding it troublesome that,
without a contemporaneous intent requirement, a shareholder
distributee would be immune from punishment if the corporation
had no earnings and profits but convicted if the corporation
did have earning and profits. An acquittal in the former
instance would in fact result merely from the Government's
failure to prove an element of the crime. The fact that
a shareholder of a successful corporation may have different
tax liability from a shareholder of a corporation without
earnings and profits merely follows from the way sec.sec.301
and 316(a) are written and from sec.7201's tax deficiency
requirement. Even if there were compelling reasons to extend
sec.7201 to cases in which no taxes are owed, Congress,
not the Judiciary, would have to do the rewriting. Pp.
8-12.
(c) Miller also suffers from its own anomalies. First,
sec.sec.301 and 316 are odd stalks for grafting a contemporaneous
intent requirement. Correct application of their rules
will often become possible only at the end of the corporation's
tax year, regardless of the shareholder or corporation's
understanding months earlier when a particular distribution
may have been made. Moreover, sec.301(a), which expressly
provides that distributions made with respect to stock
"shall be treated in the manner provided in [sec.301(c)],"
ostensibly provides for all variations of tax treatment
of such distributions unless a separate Code provision
requires otherwise. Yet Miller effectively converts the
section into one of merely partial coverage, leaving the
tax status of one class of distributions in limbo in criminal
cases. Allowing sec.61(a) of the Code, which defines gross
income, "[e]xcept as otherwise provided," as "all income
from whatever source derived," to step in where sec.301(a)
has been pushed aside would sanction yet another eccentricity:
sec.301(a) would not cove
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