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The U.S. Supreme Court unanimously made it easier for taxpayers who divert money from their own companies to defend themselves when the Internal Revenue Service takes them to court. Boulware v. U.S., No. 06-1509. The decision came in the case of Michael Boulware, who failed to pay taxes on millions of dollars that he transferred from the company he controlled, Hawaiian Isles Enterprises Inc. A Hawaii federal court convicted Boulware on tax charges and sentenced him to five years in prison. At his trial, Boulware was prevented from arguing that the money he took out was simply a return of capital that he had invested in his own unprofitable company and that the funds were therefore not taxable. In order to make that argument, the court said, Boulware would first have to show that, at the time he moved the money out of the company, he intended the transactions as a return of capital. The 9th Circuit affirmed, saying the test is “whether the defendant has willfully attempted to evade the payment or assessment of a tax.” Because Boulware had “presented no concrete proof that the amounts were considered, intended, or recorded on the corporate records as a return of capital at the time they were made,” his proffer was properly rejected as inadequate. The justices vacated. Writing on behalf of the court, Justice David H. Souter said that Boulware should have been allowed to make the argument to the jury. “Sections 301 and 316(a) of the Internal Revenue Code set the conditions for treating certain corporate distributions as returns of capital, nontaxable to the recipient . . . .The question here is whether a distributee accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that either he or the corporation intended a capital return when the distribution occurred. We hold that no such showing is required.”

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