Boulware v. United States (Decision Summary)

A unanimous Supreme Court overturned the Miller decision of the 9th Circuit Court of Appeals and held that the Circuit's "contemporaneous intent" test to determine whether corporate money was (nontaxable) return of capital or (taxable) dividends or capital gain did not agree with the language of Sections 301 and 316 of the US Tax Code. This essay summarizes some of the language of Justice Souter, who wrote the opinion for a unanimous Court. If you want some colorful facts, however, read my summary of the case.

Summary of Relevant Points of the Decision

After reviewing the facts of the case and the underlying principles of sections 301 and 316, Justice Souter said the following, which is really the heart of the decision:

"Miller's view that a criminal defendant may not treat a distribution as a return of capital without evidence of a corresponding contemporaneous intent sits uncomfortably not only with the tax law's economic realism, but with the particular wording of §§ 301 and 316(a), as well. As those sections are written, the tax consequences of a “distribution by a corporation with respect to its stock” depend, not on anyone's purpose to return capital or to get it back, but on facts wholly independent of intent: whether the corporation had earnings and profits, and the amount of the taxpayer's basis for his stock. Cf. Truesdell v. Commissioner, Internal Revenue Service (IRS) Action on Decision 1988-25, 1988 WL 570761 (Sept. 12, 1988) (recommendation regarding acquiescence); IRS Non Docketed Service Advice Review, 1989 WL 1172952 (Mar. 15, 1989) (reply to request for reconsideration) (“[I]ntent is irrelevant.... [E]very distribution made with respect to a shareholder's stock is taxable as ordinary income, capital gain, or not at all pursuant to section 301(c) dependent upon the corporation's earnings and profits and the shareholder's stock basis. The determination is computational and not dependent upon intent”)."

The Supreme Court's textual approach contrasted with that in the Miller case, a mid-1970s case when theory rather than close textual analysis tended to guide many courts. Justice Souter went on:

"When the Miller court went the other way, needless to say, it could claim no textual hook for the contemporaneous intent requirement, but argued for it as the way to avoid two supposed anomalies. First, the court thought that applying §§ 301 and 316(a) in criminal cases unnecessarily emphasizes the exact amount of deficiency while “completely ignor[ing] one essential element of the crime charged: the willful intent to evade taxes....” 545 F.2d, at 1214. But there is an analytical mistake here. Willfulness is an element of the crimes charged because the substantive provisions defining tax evasion and filing a false return expressly require it, see § 7201 (“Any person who willfully attempts ...”); § 7206(1) (“Willfully makes and subscribes ... ”). The element of willfulness is addressed at trial by requiring the Government to prove it. Nothing in §§ 301 and 316(a) as written (that is, without an intent requirement) relieves the Government of this burden of proving willfulness or impedes it from doing so if evidence of willfulness is there. Those two sections as written simply address a different element of criminal evasion, the existence of a tax deficiency, and both deficiency and willfulness can be addressed straightforwardly (in jury instructions or bench findings) without tacking an intent requirement onto the rule distinguishing dividends from capital returns."

But the goverment has to be able to show a tax deficiency in order for the statues to come into play. Without the deficiency, there is no liability. This the government didn't show.

After arguing that the Miller decision wasn't grounded in the text of the statute, the Court continued its frontal assault on that decision:

"Not only is Miller devoid of the support claimed for it, but it suffers the demerit of some anomalies of its own. First and most obviously, §§ 301 and 316 are odd stalks for grafting a contemporaneous intent requirement, given the fact that the correct application of their rules will often become known only at the end of the corporation's tax year, regardless of the shareholder's or corporation's understanding months earlier when a particular distribution may have been made. Section 316(a)(2) conditions treating a distribution as a constructive dividend by reference to earnings and profits, and earnings and profits are to be “computed as of the close of the taxable year ... without regard to the amount of the earnings and profits at the time the distribution was made.” A corporation may make a deliberate distribution to a shareholder, with everyone expecting a profitable year and considering the distribution to be a dividend, only to have the shareholder end up liable for no tax if the company closes out its tax year in the red (so long as the shareholder's basis covers the distribution); when such facts are clear at the time the reporting forms and returns are filed, the shareholder does not violate § 7201 by paying no tax on the moneys received, intent being beside the point. And since intent to make a distribution a taxable one cannot control, it would be odd to condition nontaxable return-of-capital treatment on contemporaneous intent, when the statute says nothing about intent at all."

Thus, in summary, the Court concluded:

"Sections §§ 301 and 316(a) govern the tax consequences of constructive distributions made by a corporation to a shareholder with respect to its stock. A defendant in a criminal tax case does not need to show a contemporaneous intent to treat diversions as returns of capital before relying on those sections to demonstrate no taxes are owed."

The 9th Circuit's decision was vacated and the case was remanded, but I am not sure whether it will be dismissed by the lower court or whether the case will continue on other theories that the government brought forth before the Supreme Court but were not dealt with by the Court (Section IV of the opinion).

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