Forward by David Selig
IRC
Section 7201: Any person who willfully attempts in any manner to evade or defeat
any tax imposed by this title or the payment thereof shall, in addition to
other penalties provided by law, be guilty of a felony and, upon conviction
thereof, shall be fined not more than $100,000 ($500,000 in the case of a
corporation), or imprisoned not more than 5 years, or both, together with the
costs of prosecution.
JUSTICE SOUTER delivered the opinion of the Court. Sections
301 and 316(a) of the Internal Revenue Code set the conditions for treating
certain corporate distributions as returns of capital, nontaxable to the
recipient. 26 U. S. C. §§
301, 316(a)
(2000 ed. and Supp. V.). The question here is whether a distributee accused of
criminal tax evasion may claim return-of-capital treatment without producing
evidence that either he or the corporation in tended a capital return when the
distribution occurred. We hold that no such showing is required.
I
"[T]he
capstone of [the] system of sanctions . . . calculated to induce . . .
fulfillment of every duty under the income tax law," Spies v. United
States, 317 U. S. 492,
497 (1943), is 26 U. S. C. §
7201, making it a felony willfully to "attemp[t] in any manner
to evade or defeat any tax imposed by" the Code. One element of tax
evasion under § 7201 is "the existence of a tax deficiency," Sansone
v. United States, 380 U. S. 343,
351 (1965); see also Lawn v. United States, 355 U. S. 339,
361 (1958), which the Government must prove beyond a reasonable
doubt, see ibid. ("[O]f course, a conviction upon a charge of
attempting to evade assessment of income taxes by the filing of a fraudulent
return cannot stand in the absence of proof of a deficiency").
A related
provision, 26 U. S. C. §
7206(1), criminalizes the willful filing of a tax return believed to
be materially false. See n. 9, infra.
"[T]he
elements of § 7201 are willfulness[,] the existence of a tax deficiency, . . .
and an affirmative act constituting an evasion or attempted evasion of the
tax." Sansone v. United States, 380 U. S. 343,
351 (1965). The Courts of Appeals have divided over whether the
Government must prove the tax deficiency is "substantial," see United
States v. Daniels, 387 F. 3d 636, 640-641,
and n. 2 (CA7 2004) (collecting cases); we do not address that issue here.
Any deficiency
determination in this case will turn on §§ 301 and 316(a) of the Code.
According to § 301(a), unless another provision of the Code requires otherwise,
a "distribution of property" that is "made by a corporation to a
shareholder with respect to its stock shall be treated in the manner provided
in [§ 301(c)]." Under § 301(c), 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 gain on the sale or exchange of stock, ordinarily taxable to the
shareholder as a capital gain. Finally, § 316(a) defines "dividend"
as "any distribution of property made by a corporation to its shareholders
—
"(1) out
of its earnings and profits accumulated after February 28, 1913, or
"(2) out
of its earnings and profits of the taxable year (computed as of the close of
the taxable year without diminution by reason of any distributions made during
the taxable year), without regard to the amount of the earnings and profits at
the time the distribution was made."
Sections 301 and
316(a) together thus make the existence of "earnings and profits" the
decisive fact in determining the tax consequences of distributions from a
corporation to a shareholder with respect to his stock. This
requirement of "relating the tax status of corporate distributions to
earnings and profits is responsive to a felt need for protecting returns of
capital from tax." 4 Bittker Lokken ¶ 92.1.1, p. 92-3.
Although the
Code does not "comprehensively define 'earnings and profits,'" 4 B.
Bittker L. Lokken, Federal Taxation of Income, Estates and Gifts ¶ 92.1.3, p.
92-6 (3d ed. 2003) (hereinafter Bittker Lokken), the "[p]rovisions of the
Code and regulations relating to earnings and profits ordinarily take taxable
income as the point of departure," id., at 92-9.
II
In this
criminal tax proceeding, petitioner Michael Boulware was charged with several
counts of tax evasion and filing a false income tax return, stemming from his
diversion of funds from Hawaiian Isles Enterprises (HIE), a closely held
corporation of which he was the president, founder, and controlling (though not
sole) shareholder. At trial, the United States sought to establish that
Boulware had received taxable income by "systematically divert[ing] funds
from HIE in order to support a lavish lifestyle." 384 F. 3d 794, 799 (CA9
2004). The Government's evidence showed that
"[Boulware]
gave millions of dollars of HIE money to his girlfriend . . . and millions of
dollars to his wife . . . without reporting any of this money on his personal
income tax returns. . . . [H]e siphoned off this money primarily by writing
checks to employees and friends and having them return the cash to him, by
diverting payments by HIE customers, by submitting fraudulent invoices to HIE,
and by laundering HIE money through companies in the Kingdom of Tonga and Hong
Kong." Ibid.
The trial at
issue in this case was actually Boulware's second trial on §§ 7201 and 7206(1)
charges, his convictions on those counts in an earlier trial having been
vacated by the Ninth Circuit for reasons not at issue here, see 384 F. 3d 794 (2004). In
that earlier trial, Boulware was also convicted of conspiracy to make false
statements to a federally insured financial institution, in violation of 18 U. S. C. §
371. The Ninth Circuit affirmed Boulware's conspiracy conviction
that first time around, however, so the present trial did not include a
conspiracy charge.
In defense,
Boulware sought to introduce evidence that HIE had no retained or current
earnings and profits in the relevant taxable years, with the consequence (he
argued) that he in effect received distributions of property that must have
been returns of capital, up to his basis in his stock. See § 301(c)(2). Because
the return of capital was nontaxable, the argument went, the Government could
not establish the tax deficiency required to convict him.
The Government
moved in limine to bar evidence in support of Boulware's
return-of-capital theory, on the grounds of "irrelevan[ce] in [this]
criminal tax case," App. 20. The Government relied on the Ninth Circuit's
decision in United States v. Miller, 545 F. 2d 1204
(1976), in which that court held that in a criminal tax evasion case, a
diversion of funds may be deemed a return of capital only after "some
demonstration on the part of the taxpayer and/or the corporation that such [a
distribution was] intended to be such a return," id., at 1215.
Boulware, the Government argued, had offered to make no such demonstration.
App. 21.
The District
Court granted the Government's motion, and when Boulware sought "to
present evidence of [HIE's] alleged over-reporting of income, and an offer of
proof relating to the issue of . . . dividends," id., at 135, the
District Court denied his request. The court said that "[n]ot only would
much of [his proffered] evidence be excludable as expert legal opinion, it is
plainly insufficient under the Miller case," id., at 138, and
accordingly declined to instruct the jury on Boulware's return-of-capital
theory. The jury rejected his alternative defenses (that the diverted funds
were nontaxable corporate advances or loans, or that he used the moneys for
corporate purposes), and found him guilty on nine counts, four of tax evasion
and five of filing a false return.
The Ninth
Circuit affirmed. 470 F. 3d 931
(2006). It acknowledged that "imposing an intent requirement creates a
disconnect between civil and criminal liability," but thought that under Miller,
"the characterization of diverted corporate funds for civil tax purposes
does not dictate their characterization for purposes of a criminal tax evasion
charge." 470 F. 3d, at
934. The court held the test in a criminal case to be "whether
the defendant has willfully attempted to evade the payment or assessment of a
tax." Ibid. Because Boulware "'presented no concrete proof
that the amounts were considered, intended, or recorded on the corporate
records as a return of capital at the time they were made,'" id.,
at 935 (quoting Miller, supra, at 1215), the Ninth Circuit held
that Boulware's proffer was "properly rejected . . . as inadequate," 470 F. 3d, at 935.
Judge Thomas
concurred because the panel was bound by Miller, but noted that " Miller
— and now the majority opinion — hold that a defendant may be criminally
sanctioned for tax evasion without owing a penny in taxes to the
government." 470 F. 3d, at
938. That, he said, not only "indicate[s] a logical fallacy,
but is in flat contradiction with the tax evasion statute's requirement . . .
of a tax deficiency." Ibid. (internal quotation marks omitted).
Judge Thomas
went on to say that the Government would prevail even without Miller's
rule because, in his view, Boulware's diversions were "unlawful," and
the return-of-capital rules would not apply to diversions made for unlawful
purposes. See 470 F. 3d, at 938-939.
We granted
certiorari, 551 U. S. ___ (2007), to resolve a split among the Courts of
Appeals over the application of §§ 301 and 316(a) to informally transferred or
diverted corporate funds in criminal tax proceedings. We now vacate and remand.
As noted, the
Ninth Circuit holds that §§ 301 and 316(a) are not to be consulted in a
criminal tax evasion case until the defendant produces evidence of an intent to
treat diverted funds as a return of capital at the time it was made. See 470 F. 3d 931 (2006) (case
below). By contrast, the Second Circuit allows a criminal defendant to invoke
§§ 301 and 316(a) without evidence of a contemporaneous intent to treat such
moneys as returns of capital. See United States v. Bok, 156 F. 3d 157, 162 (1998)
("[I]n return of capital cases, a taxpayer's intent is not determinative
in defining the taxpayer's conduct"). Meanwhile, the Third, Sixth, and
Eleventh Circuits arguably have taken the position that §§ 301 and 316(a) are
altogether inapplicable in criminal tax cases involving informal distributions.
See United States v. Williams, 875 F. 2d 846,
850-852 (CA11 1989); United States v. Goldberg, 330 F. 2d 30, 38
(CA3 1964); Davis v. United States, 226 F. 2d 331,
334-335 (CA6 1955); but see Brief for Petitioner 16 ("[T]hese
cases can be read to address the allocation of the burden of proof on the
return of capital issue, rather than the applicable substantive
principles").
The colorful
behavior described in the allegations requires a reminder that tax
classifications like "dividend" and "return of capital"
turn on "the objective economic realities of a transaction rather than . .
. the particular form the parties employed," Frank Lyon Co. v. United
States, 435 U. S. 561,
573 (1978); a
"given result at the end following a devious path," Minnesota Tea
Co. v. Helvering, 302 U. S. 609,
613 (1938).
As for distributions with respect to stock, 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, 69
(1937), or as effective a means of returning a shareholder's capital, see ibid.
Accordingly, "[a] distribution to a shareholder in his capacity as such .
. . is subject to § 301 even though it is not declared in formal fashion."
B. Bittker J. Eustice, Federal Income Taxation of Corporations and Shareholders
¶ 8.05[1], pp. 8-36 to 8-37 (6th ed. 1999) (hereinafter Bittker Eustice); see
also Gardner, The Tax Consequences of Shareholder Diversions in Close
Corporations, 21 Tax L. Rev. 223, 239 (1966) (hereinafter Gardner)
("Sections 316 and 301 do not require any formal path to be taken by a
corporation in order for those provisions to apply").
We have also
recognized that "[t]he legal right of a taxpayer to decrease the amount of
what otherwise would be his taxes, or altogether avoid them, by means which the
law permits, cannot be doubted." Gregory v. Helvering, 293 U. S. 465,
469 (1935). The rule is a two-way street: "while a taxpayer is
free to organize his affairs as he chooses, nevertheless, once having done so,
he must accept the tax consequences of his choice, whether contemplated or not,
. . . and may not enjoy the benefit of some other route he might have chosen to
follow but did not," Commissioner v. National Alfalfa
Dehydrating Milling Co., 417 U. S. 134,
149 (1974); see also id., at 148 (referring to "the
established tax principle that a transaction is to be given its tax effect in
accord with what actually occurred and not in accord with what might have
occurred"); Founders Gen. Corp. v. Hoey, 300 U. S. 268,
275 (1937) ("To make the taxability of the transaction depend
upon the determination whether there existed an alternative form which the
statute did not tax would create burden and uncertainty"). The question
here, of course, is not whether alternative routes may have offered better or
worse tax consequences, see generally Isenbergh, Review: Musings on Form and
Substance in Taxation, 49 U. Chi. L. Rev. 859 (1982); rather, it is
"whether what was done . . . was the thing which the statute[, here §§ 301
and 316(a),] intended," Gregory, supra, at 469.
While they
"never even pass through the corporation's hands," Bittker Eustice ¶
8.05[9], p. 8-51, even diverted funds may be seen as dividends or capital
distributions for purposes of §§ 301 and 316(a), see Truesdell v. Commissioner,
89 T. C. 1280 (1987)
(treating diverted funds as "constructive" distributions in civil tax
proceedings). The point, again, is that "taxation is not so
much concerned with the refinements of title as it is with actual command over
the property taxed — the actual benefit for which the tax is paid." Corliss
v. Bowers, 281 U. S. 376,
378 (1930); see also Griffiths v. Commissioner, 308 U. S. 355,
358 (1939).
Thus in the
period between this Court's decisions in Commissioner v. Wilcox, 327 U. S. 404
(1946) (holding embezzled funds to be nontaxable to the embezzler) and James
v. United States, 366 U. S. 213 (1961)
(overruling Wilcox, holding embezzled funds to be taxable income), the
Government routinely argued that diverted funds were "constructive
distributions," taxable to the recipient as dividends. See generally
Gardner 237 ("While Wilcox was good law, the safest way to insure
that both the corporation and the shareholder would be taxed on their
respective gain from the diverted funds was to label them dividends"); 4
Bittker Lokken ¶ 92.2(7), p. 92-23, n. 37.
B
Miller's view that a criminal
defendant may not treat a distribution as a return of capital without evidence
of a corresponding contemporaneous intent sits uncomfortably not only with the
tax law's economic realism, but with the particular wording of §§ 301 and
316(a), as well.
As those
sections are written, the tax consequences of a "distribution by a
corporation with respect to its stock" depend, not on anyone's purpose to
return capital or to 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. Cf. Truesdell v. Commissioner,
Internal Revenue Service (IRS) Action on Decision 1988-25, 1988 WL 570761
(Sept. 12, 1988) (recommendation regarding acquiescence); IRS Non Docketed
Service Advice Review, 1989 WL 1172952 (Mar. 15, 1989) (reply to request for
reconsideration) ("[I]ntent is irrelevant. . . . [E]very distribution made
with respect to a shareholder's stock is taxable as ordinary income, capital
gain, or not at all pursuant to section 301(c) dependent upon the corporation's
earnings and profits and the shareholder's stock basis.
When the Miller
court went the other way, needless to say, it could claim no textual hook for
the contemporaneous intent requirement, but argued for it as the way to avoid
two supposed anomalies. First, the court thought that applying §§ 301 and
316(a) in criminal cases unnecessarily emphasizes the exact amount of
deficiency while "completely ignor[ing] one essential element of the crime
charged: the willful intent to evade taxes. . . ." 545 F. 2d, at
1214. But there is an analytical mistake here. Willfulness is an
element of the crimes charged because the substantive provisions defining tax
evasion and filing a false return expressly require it, see § 7201 ("Any
person who willfully attempts . . ."); § 7206(1) ("Willfully makes
and subscribes . . ."). The element of willfulness is addressed at trial
by requiring the Government to prove it. Nothing in §§ 301 and 316(a) as
written (that is, without an intent requirement) relieves the Government of
this burden of proving willfulness or impedes it from doing so if evidence of
willfulness is there. Those two sections as written simply address a different
element of criminal evasion, the existence of a tax deficiency, and both
deficiency and willfulness can be addressed straightforwardly (in jury
instructions or bench findings) without tacking an intent requirement onto the
rule distinguishing dividends from capital returns.
Second, the Miller
court worried that if a defendant could claim capital treatment without showing
a corresponding and contemporaneous intent,"[a] taxpayer who diverted
funds from his close corporation when it was in the midst of a financial
difficulty and had no earnings and profits would be immune from punishment (to
the extent of his basis in the stock) for failure to report such sums as
income; while that very same taxpayer would be convicted if the corporation had
experienced a successful year and had earnings and profits." 545 F. 2d, at
1214.
"Such a
result," said the court, "would constitute an extreme example of form
over substance." Ibid. The Circuit thus assumed that a taxpayer
like Boulware could be convicted of evasion with no showing of deficiency from
an unreported dividend or capital gain.
But the
acquittal that the author of Miller called form trumping substance would
in fact result from the Government's failure to prove an element of the crime.
There is no criminal tax evasion without a tax deficiency, see supra, at
1-2, and there is no deficiency owing to a distribution (received with respect
to a corporation's stock) if a corporation has no earnings and profits and the
value distributed does not exceed the taxpayer-shareholder's basis for his
stock. Thus the fact that a shareholder distributee of a successful corporation
may have different tax liability from a shareholder of a corporation without
earnings and profits merely follows from the way §§ 301 and 316(a) are written
(to distinguish dividend from capital return), and from the requirement of tax
deficiency for a § 7201 crime. Without the deficiency there is nothing but some
act expressing the will to evade, and, under § 7201, acting on "bad intentions,
alone, [is] not punishable," United States v. D'Agostino, 145 F. 3d 69, 73 (CA2
1998).
Boulware was
also convicted of violating § 7206(1), which makes it a felony
"[w]illfully [to] mak[e] and subscrib[e] any return, statement, or other
document, which contains or is verified by a written declaration that it is
made under the penalties of perjury, and which [the taxpayer] does not believe
to be true and correct as to every material matter." He argues that if the
Ninth Circuit erred, its error calls into question not only his § 7201
conviction, but his § 7206(1) conviction as well. Brief for Petitioner 15-16.
Although the Courts of Appeals are unanimous in holding that § 7206(1)
"does not require the prosecution to prove the existence of a tax
deficiency," United States v. Tarwater, 308 F. 3d 494, 504 (CA6
2002); see also United States v. Peters, 153 F. 3d 445,
461 (CA7 1998) (collecting cases), it is arguable that "the
nature and character of the funds received can be critical in determining
whether . . . § 7206(1) has been violated, [even if] proof of a tax deficiency
is unnecessary," 1 I. Comisky, L. Feld, S. Harris, Tax Fraud Evasion ¶
2.03[5], p. 21 (2007); see also Brief for Petitioner 15-16. The Government does
not argue that Boulware's §§ 7201 and 7206(1) convictions should be treated
differently at this stage of the proceedings, however, and we will accede to
the Government's working assumption here that the §§ 7201 and 7206(1)
convictions stand or fall together.
It is neither
here nor there whether the Miller court was justified in thinking it
would improve things to convict more of the evasively inclined by dropping the
deficiency requirement and finding some other device to exempt returns of
capital. Even if there were compelling reasons to extend § 7201 to cases in
which no taxes are owed, it bears repeating that "[t]he spirit of the
doctrine which denies to the federal judiciary power to create crimes
forthrightly admonishes that we should not enlarge the reach of enacted crimes
by constituting them from anything less than the incriminating components contemplated
by the words used in the statute," Morissette v. United States,
342 U. S. 246,
263 (1952) (opinion for the Court by Jackson, J.). If § 301, §
316(a), or § 7201 could stand amending, Congress will have to do the rewriting.
"A better
[method of exempting returns of capital from taxation] could no doubt be
devised." 4 Bittker Lokken ¶ 92.1.1, p. 92-3; see ibid.
(suggesting, for example, that "all receipts from a corporation could be
treated as taxable income, and a correction for any resulting overtaxation
could be made in computing gain or loss when stock is sold, exchanged, or
becomes worthless"); see also Andrews, "Out of its Earnings and
Profits": Some Reflections on the Taxation of Dividends, 69 Harv. L. Rev.
1403, 1439 (1956) (criticizing the earnings and profits concept "[a]s a
device for separating income from return of capital," and suggesting that
"[d]istributions which ought to be treated as return of capital [could] be
brought within the concept of a partial liquidation by special
provision").
C
Not only is Miller
devoid of the support claimed for it, but it suffers the demerit of some
anomalies of its own. First and most obviously, §§ 301 and 316 are odd stalks
for grafting a contemporaneous intent requirement, given the fact that the
correct application of their rules will often become known only at the end of
the corporation's tax year, regardless of the shareholder's or corporation's
understanding months earlier when a particular distribution may have been made.
Section 316(a)(2) conditions treating a distribution as a constructive dividend
by reference to earnings and profits, and earnings and profits are to be
"computed as of the close of the taxable year . . . without regard to the
amount of the earnings and profits at the time the distribution was made."
A corporation may make a deliberate distribution to a shareholder, with
everyone expecting a profitable year and considering the distribution to be a
dividend, only to have the shareholder end up liable for no tax if the company
closes out its tax year in the red (so long as the shareholder's basis covers
the distribution); when such facts are clear at the time the reporting forms
and returns are filed, the shareholder does not violate § 7201 by paying no tax
on the moneys received, intent being beside the point. And since intent to make
a distribution a taxable one cannot control, it would be odd to condition
nontaxable return-of-capital treatment on contemporaneous intent, when the
statute says nothing about intent at all.
Sometimes these
facts are not clear, and in certain circumstances a corporation may be required
to assume it is profitable. For example, the instructions to IRS Form 1099-DIV
provide that when a corporation is unsure whether it has sufficient earnings
and profits at the end of the taxable year to cover a distribution to
shareholders, "the entire payment must be reported as a dividend."
See http://www.irs.gov/pub/irs-pdf/i1099div.pdf (as visited Feb. 15, 2008, and
available in Clerk of Court's case file).
The intent
interpretation is strange for another reason, too (a reason in some tension
with the Ninth Circuit's assumption that an unreported distribution without
contemporaneous intent to return capital will support a conviction for
evasion). The text of § 301(a) ostensibly provides for all variations of tax
treatment of distributions received with respect to a corporation's stock
unless a separate provision of the Code requires otherwise. Yet Miller
effectively converts the section into one of merely partial coverage, with the
result of leaving one class of distributions in a tax status limbo in criminal
cases. That is, while § 301(a) expressly provides that distributions made by a
corporation to a shareholder with respect to its stock "shall be treated
in the manner provided in [§ 301(c)]," under Miller, a distribution
from a corporation without earnings and profits would fail to be a return of
capital for lack of contemporaneous intent to treat it that way; but to the
extent that distribution did not exceed the taxpayer's basis for the stock (and
thus become a capital gain), § 301(a) would leave the distribution unaccounted
for.
It is no answer
to say that § 61(a) of the Code would step in where § 301(a) has been pushed
out. Although § 61(a) defines gross income, "[e]xcept as otherwise
provided," as "all income from whatever source derived," the
plain text of § 301(a) does provide otherwise for distributions made with respect
to stock. So using § 61(a) as a stopgap would only sanction yet another
eccentricity: § 301(a) would be held not to cover what its text says it
"shall" (the class of distributions made with respect to stock for
which no other more specific provision is made), while § 61(a) would need to be
applied to what by its terms it should not be (a receipt of funds for which tax
treatment is "otherwise provided" in § 301(a)).
The
implausibility of a statutory reading that either creates a tax limbo or forces
resort to an a textual stopgap is all the clearer from the Ninth Circuit's
discussion in this case of its own understanding of the consequences of Miller's
rule: the court openly acknowledged that "imposing an intent requirement
creates a disconnect between civil and criminal liability," 470 F. 3d, at 934. In
construing distribution rules that draw no distinction in terms of criminal or
civil consequences, the disparity of treatment assumed by the Court of Appeals
counts heavily against its contemporaneous intent construction (quite apart
from the Circuit's understanding that its interpretation entails criminal
liability for evasion without any showing of a tax deficiency).
Miller erred in requiring a
contemporaneous intent to treat the receipt of corporate funds as a return of
capital, and the judgment of the Court of Appeals here, relying on Miller,
is likewise erroneous.
IV
The Government
has raised nothing that calls for affirmance in the face of the Court of Appeals's
reliance on Miller. The United States does not defend differential
treatment of criminal and civil cases, see Brief for United States 24, and it
thus stops short of fully defending the Ninth Circuit's treatment. The
Government's argument, instead, is that we should affirm under the rule that
before any distribution may be treated as a return of capital (or, by a parity
of reasoning, a dividend), it must first be distributed to the shareholder
"with respect to . . . stock." Id., at 19 (internal quotations
omitted). The taxpayer's intent, the Government says, may be relevant to this
limiting condition, and Boulware never expressly claimed any such intent. See ibid.
("[I]ntent is . . . relevant to whether a payment is a 'distribution . . .
with respect to [a corporation's] stock'"); but see Tr. of Oral Arg. 44
("[J]ust to be clear, the Government is arguing for an objective test
here").
The Government
is of course correct that "with respect to . . . stock" is a limiting
condition in § 301(a). See supra, at 2-3. As the Government variously
says, it requires that "the distribution of property by the corporation be
made to a shareholder because of his ownership of its stock," Brief for
United States 16; and that "'an amount paid by a corporation to a
shareholder [be] paid to the shareholder in his capacity as such,'" ibid.
(quoting 26 CFR § 1.301-1(c) (2007) (emphasis deleted)).
Another
limiting condition is that the diversion of funds must be a
"distribution" in the first place (regardless of the "with
respect to stock" limitation), see supra, at 6-8, though the
Government is content to assume that § 301(a)'s "distribution"
language is capacious enough to cover the diversions involved here, and that if
Boulware bears the burden of production in going forward with the defense that
the funds he received constituted a "distribution" within the meaning
of § 301(a), see n. 14, infra, that burden has been met.
Nor does the
Government dispute that Boulware offered sufficient evidence of his basis and
HIE's lack of earnings and profits. See Brief for United States 34,
n. 11.
This, however,
is not the time or place to home in on the "with respect to . . .
stock" condition. Facts with a bearing on it may range from the
distribution of stock ownership to conditions of
corporate employment (whether, for example, a shareholder's efforts on behalf
of a corporation amount to a good reason to treat a payment of property as
salary). The facts in this case have yet to be raked over with the stock
ownership condition in mind, since Miller seems to have pretermitted a
full consideration of the defensive proffer, and if consideration is to be
given to that condition now, the canvas of evidence and Boulware's proffer
should be made by a court familiar with the whole evidentiary record.
See, e.g.,
Truesdell v. Commissioner, IRS Non Docketed Service Advice Review,
1989 WL 1172952 (Mar. 15, 1989) ("We believe a corporation and its
shareholders have a common objective — to earn a profit for the corporation to
pass onto its shareholders. Especially where the corporation is wholly owned by
one shareholder, the corporation becomes the alter ego of the shareholder in
his profit making capacity. . . .
[B]y passing
corporate funds to himself as shareholder, a sole shareholder is acting in
pursuit of these common objectives"). We note, however, that
although Boulware was not a sole shareholder, the Tax Court has taken it as
"well settled that a distribution of corporate earnings to shareholders
may constitute a dividend," and so a return of capital as well,
"notwithstanding that it is not in proportion to stock holdings." Dellinger
v. Commissioner, 32 T. C. 1178,
1183 (1959); see ibid. (noting that because other
stockholders did not complain when a taxpayer received unequal property,
"under the circumstances they must be deemed to have ratified the
distribution"); see also Crowley v. Comissioner, 962 F. 2d 1077 (CA1 1992);
Lengsfield v. Commissioner, 241 F. 2d 508
(CA5 1957); Baird v. Commissioner, 25 T. C. 387
(1955); Thielking v. Commissioner, 53 TCM 746 (1987), ¶ 87, 227,
P-H Memo TC.
Boulware does not
dispute that he bears the burden of producing some evidence to support his
return-of-capital theory, including evidence that the corporation lacked
earnings and profits and that he had sufficient basis in his stock to cover the
distribution. See Tr. of Oral Arg. 53. He instead argues that, as to the
"with respect to . . . stock" requirement, it suffices to show
"[t]hat he is a stockholder, and that he did not receive this money in any
nonstockholder capacity." Id., at 57. The Government, for its part,
on the authority of Holland v. United States, 348 U. S. 121
(1954) and Bok, 156 F. 3d, at
163-164, argues that Boulware must offer more evidence than that. We
express no view on that issue here, just as we decline to consider the more
general question whether the Second Circuit's rule in Bok, which places
on the criminal defendant the burden to produce evidence in support of a
return-of-capital theory, is authorized by Holland and consistent with Sandstrom
v. Montana, 442 U. S. 510
(1979), and related cases.
As a more
specific version of its "with respect to . . . stock" position, the
Government says that the diversions of corporate funds to Boulware were in fact
unlawful, see Brief for United States 34-37; see also n. 5, supra, and
it argues that §§ 301 and 316(a) are inapplicable to illegal transfers, see
Brief for United States 34-37; see also D'Agostino, 145 F. 3d, at 73
("[T]he 'no earnings and profits, no income' rule would not necessarily
apply in a case of unlawful diversion, such as embezzlement, theft, a
violation of corporate law, or an attempt to defraud third party
creditors" (emphasis in original)); see also n. 8, supra. The
Government goes so far as to claim that "[t]he only rational basis for the
jury's judgment was a conclusion that [Boulware] unlawfully diverted the
funds." Brief for United States 37.
But we decline
to take up the question whether an unlawful diversion may ever be deemed a
"distribution . . . with respect to [a corporation's] stock," a
question which was not considered by the Ninth Circuit. We do, however, reject
the Government's current characterization of the jury verdict in Boulware's
case. True, the jurors were not moved by Boulware's suggestion that the
diversions were corporate advances or loans, or that he was using the funds for
corporate purposes. But the jury was not asked, and cannot be said to have
answered, whether Boulware breached any fiduciary duty as a controlling
shareholder, unlawfully diverted corporate funds to defraud his wife, or
embezzled HIE's funds outright.
V
Sections §§ 301
and 316(a) govern the tax consequences of constructive distributions made by a
corporation to a shareholder with respect to its stock. A defendant in
a criminal tax case does not need to show a contemporaneous intent to treat
diversions as returns of capital before relying on those sections to
demonstrate no taxes are owed. The judgment of the Court of Appeals is vacated,
and the case is remanded for further proceedings consistent with this opinion. It
is so ordered.
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