On January 8th the Supreme Court heard oral arguments in the criminal tax appeal of Michael Boulware. The case involved the return of capital theory in criminal tax evasion cases. To make a long story shorter, Boulware was convicted of tax evasion in violation of Internal Revenue Code § 7201. Basically, he took money from his closely held corporation, and didn’t report it as income on his personal tax return.
In the District Court he argued that the funds he received were a return of capital he had invested in the corporation, and therefore were not income, and thus there was no tax deficiency. Of course if there was no tax due Boulware could not be convicted of tax evasion. The District Court precluded Boulware’s evidence on this point, and he appealed to the Ninth Circuit Court of Appeals. The 9th Circuit upheld conviction.United States v. Boulware, 470 F.3d 931, 933 (9th Cir. 2006).
The Ninth Circuit’s view was that a defendant in a criminal tax evasion case must show at the time the payments were made by the corporation there was a contemporaneous intent that they be a return of capital. This is despite the fact that the Ninth Circuit admitted that in a civil tax case there is no requirement of contemporaneous intent. The Second Circuit has ruled that no such proof of intent is required. United States v. D’Agostino, 145 F.3d 69, 72-73 (2d Cir. 1998); United States v. Bok, 156 F.3d 157, 162 (2d Cir. 1998). The Supreme Court agreed to hear the case to resolve the conflict.
The Ninth Circuit’s opinion in Boulware, which is based on it’s previous holding in United States v. Miller, 545 F.2d 1204 (9th Cir. 1976). Despite the fact that Miller has been on the books for over 30 years its implications are quite shocking. It appears that under the Ninth Circuit’s decisions Boulware could be go to prison, and yet ultimately the U.S. Tax Court could conclude that he owed no taxes. This leads to another question. Generally the sentencing guidelines are based upon the tax loss to the government. If there is no civil tax loss to the government shouldn’t the sentence be very low? Apparently not since Boulware was sentenced to 51 to 60 months on tax evasion and conspiracy charges.
Stay tuned to find out what the Supreme Court decides.