## Facts

- Michael H. Boulware was the president, founder, and controlling shareholder of Hawaiian Isles Enterprises (HIE), a closely held corporation.
- Over multiple years, Boulware diverted millions of dollars from HIE for personal purposes, including transfers to a mistress.
- In related state litigation, a court determined the recipient held the money in constructive trust for the corporation’s benefit.
- The federal government charged Boulware with criminal tax evasion under 26 U.S.C. § 7201 and with filing a false income tax return, based on treating the diverted amounts as taxable income.
- To contest the “tax deficiency” element of § 7201, Boulware sought to show the diversions were non-taxable returns of capital under 26 U.S.C. §§ 301 and 316 because HIE allegedly lacked “earnings and profits” during the relevant years and he had stock basis.
- The district court excluded return-of-capital evidence and refused a corresponding jury instruction, relying on Ninth Circuit precedent requiring proof that the diversion was intended as a return of capital when made.
- A jury convicted Boulware; the Ninth Circuit affirmed on the same intent-based theory.

## Issues

1. Whether a defendant in a criminal tax evasion case may claim return-of-capital treatment under 26 U.S.C. §§ 301 and 316 without proving that, at the time of distribution, either the shareholder or the corporation intended the payments to be returns of capital.
2. Whether excluding evidence of the corporation’s earnings and profits and the shareholder’s basis—based on an “intent” requirement—improperly prevents the defendant from contesting the tax-deficiency element of 26 U.S.C. § 7201.

## Decision

- The Supreme Court unanimously vacated the Ninth Circuit’s judgment and remanded.
- The Court held that a defendant accused of criminal tax evasion may invoke return-of-capital treatment without producing evidence of contemporaneous intent to treat the distribution as a return of capital.
- The Court concluded that the lower courts erred by applying an intent requirement that is not part of the statutory rules governing distribution characterization.

## Legal Principles

- A “tax deficiency” is an element of tax evasion under 26 U.S.C. § 7201, and deficiency analysis depends on the substantive tax rules that would govern the transaction.
- Under 26 U.S.C. §§ 301 and 316, the tax treatment of a corporate distribution to a shareholder turns on objective criteria, including:
  - whether there was a corporate distribution to a shareholder with respect to stock,
  - the corporation’s earnings and profits, and
  - the shareholder’s stock basis.
- The Code’s dividend/return-of-capital framework does not require proof that the parties intended return-of-capital treatment at the time of payment.
- In criminal tax cases involving diverted corporate funds, courts may not impose an extra-statutory contemporaneous-intent requirement that restricts a defendant’s ability to argue the distributions created no tax deficiency under the governing civil tax rules.

## Conclusion

The Court held that return-of-capital treatment in a criminal tax evasion case depends on the objective statutory conditions in 26 U.S.C. §§ 301 and 316, not on contemporaneous intent, and it vacated the conviction affirmance so the lower courts could reassess tax deficiency under the correct standard.


Boulware v. United States, 552 U.S. 421 (2008)