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Mr. Boulware was convicted of criminal tax evasionand filing false income tax returns for diverting funds from a closelyheld corporation, Hawaiian Isles Enterprises (HIE), of which he was thepresident, founder, and controlling shareholder. At trial, Mr. Boulwaresought to present evidence that because HIE had no earnings and profitsduring the relevant taxable years, the funds he received from HIE werenontaxable returns of capital under 26 U.S.C. 301 and 316(a).
Thetrial court prevented Mr. Boulware from presenting evidence supportinghis return-of-capital theory, relying on a prior Ninth Circuit decisionholding that a diversion of funds in a criminal tax evasion case may bedeemed a return of capital only if the taxpayer or corporationdemonstrates that the distributions were intended to be such a returnat the time. In affirming Mr. Boulware's conviction, the Ninth Circuitheld that his evidence was properly rejected under the prior NinthCircuit decision because he offered no proof that the funds wereintended as a return of capital when they were distributed.
Ina unanimous opinion authored by Justice Souter, the Court held on March3, 2008 that a distributee accused of criminal tax evasion may claimnontaxable return-of-capital treatment without producing evidence that,when the distribution occurred, either he or the corporation intended areturn of capital. In vacating the Ninth Circuit's judgment andrejecting its rationale, the Court found that "economic substanceremains the right touchstone for characterizing funds received when ashareholder diverts them before they can be recorded on thecorporation's books." Thus, criminal tax defendants "do not need toshow a contemporaneous intent to treat diversions as returns of capitalbefore relying on [26 U.S.C. 301 and 316(a)] to demonstrate no taxesare owed."
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