Boulware v. United States - 552 U.S. 421, 128 S. Ct. 1168 (2008)

Rule:

Willfulness is an element of the crimes charged because the substantive provisions defining tax evasion and filing a false return expressly require it. 26 U.S.C.S. §§ 7201 and 7206(1). The element of willfulness is addressed at trial by requiring the government to prove it. Nothing in 26 U.S.C.S. §§ 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. 

Facts:

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. Under § 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 [ § 301(c)]." Section 301(c) provides that 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 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.

Issue:

Is the Court’s ruling under Miller that a criminal defendant may not treat a distribution as a return of capital without evidence of a corresponding contemporaneous intent still good law?

Answer:

No.

Conclusion:

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.

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 . . . ." There is an analytical mistake therein. 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." "Such a result," said the court, "would constitute an extreme example of form over substance." 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, 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." 

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”. If § 301, § 316(a), or § 7201 could stand amending, Congress will have to do the rewriting.