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Saturday, March 08, 2008


A shareholder of a corporation wrote checks from the corporation to his wife and girlfriend. He did not report any income from such transfers. The government asserted that this was tax evasion and obtained a criminal conviction. The shareholder appealed, claiming that he should have been able to present evidence that the corporation had no earnings and profits and that the distributions were thus not taxable up to the shareholder's basis in his shares, applying the general rules of Sections 301 and 316 (relating to corporate nonliquidating distributions). Under those rules, the recipient of a distribution from a corporation that has no current or accumulated earnings and profits will not be taxed as having received a taxable dividend.

The government had been able to exclude such evidence based on the precedent of United States v. Miller, 545 F2d 1204 (9th Cir. 1976). There, the court held that in a criminal tax evasion case, a diversion of funds may be deemed a return of capital only if there is some evidence that the distribution was intended by the corporation or shareholder as a return of capital. Since the defendant in the current case could not show such evidence, it ended up that the defendant was convicted of tax evasion when there was no evidence presented that any tax was actually due.

Clearly, a conviction of criminal tax evasion when no tax is due is an absurd result. However, the 9th Circuit Court of Appeals affirmed the conviction. Thankfully for the defendant, the U.S. Supreme Court disagreed, and reversed the conviction so as to allow in evidence of earnings and profits to determine if the distribution was in fact taxable as a dividend. The Court noted that Miller inserted an intent test into dividend treatment that is nowhere present in the statute or law - Sections 301 and 316 are mechanical rules based on the presence or absence of earnings and profits. Likewise, it had big problems with a tax fraud conviction when there may have been no taxes evaded.

Boulware v. U.S., 552 U.S. ___ (2008)

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