In the Courts

The U.S. Supreme Court unanimously vacated the Ninth Circuit's opinion in United States v. Boulware, 470 F. 3d 931 (2006) and held that a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. The Ninth Circuit, relying on United States v. Miller, 545 F. 2d 1204 (1976), had held that in a criminal tax evasion case, a diversion of funds may be deemed a non-taxable return of capital only after the tax payer and/or corporation demonstrates that a return was intended. Writing for the Court, Justice Souter explained that the text of ” 301 and 316(a) of the Internal Revenue Code did not support the lower court's intent requirement. The relevant inquiry under the Internal Revenue Code, the Court held, was whether the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock. Those factors, not the intent of the party making the distribution, determine whether the distribution was a non-taxable return of capital or a taxable capital gain. The Court's opinion ends a split among the U.S. Courts of Appeals. See Boulware v. United States, No. 06-1509, slip op. (U.S. Mar. 3, 2008).