Cases & Deals

Michael Boulware obtains unanimous victory before the U.S. Supreme Court in criminal tax evasion case

Client(s) Michael Boulware

Jones Day continued its record of success before the U.S. Supreme Court in the October 2007 Term. Jones Day represented petitioner Michael Boulware in Boulware v. United States (No. 06-1509). Mr. Boulware was convicted of criminal tax evasion and filing false income tax returns for diverting funds from a closely held corporation, Hawaiian Isles Enterprises (HIE), of which he was the president, founder, and controlling shareholder. At trial, Mr. Boulware sought to present evidence that because HIE had no earnings and profits during the relevant taxable years, the funds he received from HIE were nontaxable returns of capital under 26 U.S.C. 301 and 316(a). The trial court prevented Mr. Boulware from presenting evidence supporting his return-of-capital theory, relying on a prior Ninth Circuit decision holding 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 at the time. In affirming Mr. Boulware's conviction, the Ninth Circuit held that his evidence was properly rejected under the prior Ninth Circuit decision because he offered no proof that the funds were intended as a return of capital when they were distributed. In a unanimous opinion authored by Justice Souter, the Court held on March 3, 2008 that a distributee accused of criminal tax evasion may claim nontaxable return-of-capital treatment without producing evidence that, when the distribution occurred, either he or the corporation intended a return of capital. In vacating the Ninth Circuit's judgment and rejecting its rationale, the Court found that "economic substance remains the right touchstone for characterizing funds received when a shareholder diverts them before they can be recorded on the corporation's books." Thus, criminal tax defendants "do[] not need to show a contemporaneous intent to treat diversions as returns of capital before relying on [26 U.S.C. 301 and 316(a)] to demonstrate no taxes are owed."

Boulware v. United States (U.S. March 3, 2008)