More on Tuesdayâ€™s Grant in No. 06-1509, Boulware v. United States
The following summary was written by Shannen Naegel, a tax associate at Akin Gump’s office in Washington, DC.
The Supreme Court on Tuesday agreed to consider whether intent to make a return of capital is required for funds diverted and distributed to a shareholder of a corporation without earnings and profits to qualify as non-taxable return of capital in the context of a criminal trial for tax evasion.
In Boulware, the founder, chairman, and president of Hawaiian Isles Enterprises (HIE), a closely held corporation selling tobacco products, coffee, bottled water, and other goods, was charged with tax evasion and tax fraud in connection with his failure to report funds diverted from HIE. Boulware was convicted on multiple counts, but the Ninth Circuit reversed on the ground that the trial court erroneously excluded evidence of a Hawaii state court's adjudication of property rights of some of the diverted funds from HIE. The taxpayer was also the majority shareholder of HIE; the other shareholder was a trust for the benefit of his son.
On retrial, Boulware was convicted on all counts. In his second appeal to the Ninth Circuit, Boulware argued, in part, that the funds he received from HIE were non-taxable returns of capital rather than income. The Ninth Circuit held that Boulware did not provide sufficient evidence that the funds were intended as a return of capital at the time of distribution to sustain a return-of-capital defense under the Ninth Circuit case, U.S. v. Miller, 545 F.2d 1204 (1976). In Miller, the Ninth Circuit ruled that where the government establishes a prima facie case that a defendant received and failed to report corporate funds, the burden shifts to the defendant to establish that the funds were intended to be a non-taxable return of capital.
Boulware then petitioned the Supreme Court to review two issues "“ whether the Hawaii state court adjudication of some of the diverted funds from HIE is controlling and whether evidence of intent is needed to argue return of capital in a criminal case. The petition highlighted the circuit split between the Ninth Circuit's Miller case and the Second Circuit's holding that no showing of intent is required for a defendant to invoke a return-of-capital defense (U.S. v. D'Agostino, 145 F.3d 69 (1998)).
In its opposition brief, the government argued that this case was not an appropriate vehicle for resolving the circuit conflict as, in the government's view, Boulware would likely not prevail under the Second Circuit's approach because the diversion of funds from HIE to Boulware was unlawful. The D'Agostino case explicitly carves out unlawful distributions from its holding.
The Supreme Court granted Boulware's petition, but limited its review to the question of "[w]hether 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 basiseven if the diversion was not intended as a return of capital." This formulation of the question mirrors that of the government's brief, and is a departure from the question presented in Boulware's petition.
The Petitioner's brief and the reply brief are due Monday, November 5 and Monday, December 3, respectively. The case is expected to be argued in January.