Boulware v. United States
Boulware was convicted in federal court for filing a false tax return. The Government alleged that Boulware had diverted more than $10 million from Hawaiian Isles Enterprises (HIE), a corporation which he founded and was the majority shareholder of, and had failed to pay taxes on this income. Boulware argued that the funds he received from HIE were not taxable income, but were instead a nontaxable “return of capital,” representing the return of capital that he had invested in the corporation which was not currently earning any money or profits.
The Ninth Circuit affirmed the conviction, holding that in cases of criminal tax evasion, unlike in those of civil tax liability, if a taxpayer has violated tax evasion statutes by filing a false return, it does not matter whether “that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course.” Once the government showed that Boulware diverted funds from HIE and failed to report them, the burden of proof shifted to Boulware to prove that the funds were in fact designated as a “return of capital” at the time of the diversion, and not merely that they could have been characterized as such after the fact.
Question Presented:
Whether the diversion of corporate funds to a shareholder of a corporation without earnings and profits automatically qualifies as a non-taxable return of capital up to the shareholder's stock basis, see 26 U.S.C. 301(c)(2), even if the diversion was not intended as a return of capital.
