U.S. v. Boulware

• Decision Date: 13 December 2006
• Docket Number: No. 05-10752.,05-10752.
• Citation: 470 F.3d 931
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Michael H. BOULWARE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

470 F.3d 931

UNITED STATES of America, Plaintiff-Appellee, v. Michael H. BOULWARE, Defendant-Appellant.

No. 05-10752.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 16, 2006.

Filed December 13, 2006.

John D. Cline, Jones Day, San Francisco, California, for the defendant-appellant.

Alan Hechtkopf (signed the brief) and Karen M. Quesnel, Department of Justice, Tax Division, Washington, D. C., for the plantiff-appellee.

Appeal from the United States District Court for the District of Hawaii Edward Rafeedie,^* Senior District Judge, Presiding. D.C. No. CR-99-00239-ER.

Before: RYMER and THOMAS, Circuit

Judges, and LARSON,^** District Judge.

RYMER, Circuit Judge.

In a return trip following retrial after we reversed his first conviction, United States v. Boulware, 384 F.3d 794 (9th Cir. 2004) (Boulware I), Michael H. Boulware appeals his conviction and sentence for filing a false tax return in violation of 26 U.S.C. § 7206(1), tax evasion in violation of 26 U.S.C. § 7201, and conspiracy to make a false statement to influence a financial institution in violation of 18 U.S.C. § 1014. We conclude there is no reversible error, and affirm.

I

Without belaboring the background recited in our prior opinion, Boulware is the founder, former President, and majority owner of a closely held corporation, Hawaiian Isles Enterprises (HIE). HIE dealt in tobacco distribution, coffee processing and sales, arcade games, vending machines, and bottled water. A second superceding indictment charged Boulware with thirteen (later reduced to nine) counts of tax evasion and tax fraud in connection with his failure to report funds diverted from HIE as income for the years 1989-97; one count of conspiracy to make a false statement to influence a financial institution in connection with HIE's use of false invoices in applying for a loan from GECC Finance Corporation; and four counts of making a false statement to influence a financial institution in connection with the false invoices. Boulware was convicted on the tax counts and the conspiracy count, which we reversed on the ground that the district court had erroneously excluded evidence of a Hawaii state court's adjudication of property rights in certain funds diverted from HIE. Boulware I, 384 F.3d at 800-09. On retrial as originally, the government's theory was that during the period 1989-1997, through a number of different devices, Boulware diverted more than $10 million from HIE and failed to report or pay taxes on this income; and that he used fraudulent invoices in applying for a bank loan. He was convicted on all counts. The district court again sentenced Boulware to 36 months' imprisonment on the false return counts, but increased the sentence from 51 to 60 months on the tax evasion and conspiracy counts, all to run concurrently.

Boulware timely appeals.

II

Boulware first claims that the district court erred in excluding evidence that he contends would have shown that the funds he took from HIE were nontaxable returns of capital rather than income. An essential element of the crime of tax evasion is the existence of a tax deficiency. Boulware I, 384 F.3d at 810. However, for purposes of civil tax liability, when a distribution from a corporation to its shareholder constitutes a return of capital, that distribution is normally not taxable. 26 U.S.C. §§ 301, 306; United States v. Miller, 545 F.2d 1204, 1210-12 & n. 5 (9th Cir.1976). Hence, to negate the tax deficiency element, Boulware sought to show that the money he received from HIE constituted returns of the capital he had invested as the corporation was, at the time, without earnings or profits. The government moved in limine to preclude a "return of capital" defense, relying on Miller. There, we held that constructive distribution rules applicable in the civil arena could not be automatically applied to a criminal tax matter in the absence of some demonstration on the part of the defendant or corporation that distributions were intended to be a return of capital. Id. at 1214-15. In response, Boulware argued that whether corporate funds could be characterized as a return of capital is a question of fact for the jury, and he proffered testimony of an expert who would explain that if the monies transferred from HIE to Boulware were not loans or advances, or if Boulware did not use those funds for corporate purposes, then the transfer could be deemed a constructive dividend or return of capital to Boulware which may or may not be income to him depending upon whether HIE had earnings and profits for the years when the transfers occurred. The district court ruled that this offer of proof did not meet the Miller threshold because the defendant must show not merely that the funds could have been a return of capital, but that the funds were in fact a return of capital at the time of the transfer.

Boulware contends that the district court misread Miller. In his view, the issue in Miller was whether the evidence was sufficient to convict the taxpayer in spite of his return of capital defense, not whether the taxpayer had made a sufficient initial showing to introduce evidence pertaining to that defense; thus, the rest of Miller—upon which the district court relied—is dicta. We disagree that any part of Miller's reasoning can be disregarded. See Barapind v. Enomoto, 400 F.3d 744, 750-51 (9th Cir.2005) (holding that what a majority opinion says regarding an issue presented for review is the law of the circuit, regardless of whether or not it is "in some technical sense `necessary' to the disposition in the case"). Boulware concedes that Miller controls if this is so. Accordingly, his alternative position that imposing an intent requirement creates a disconnect between civil and criminal liability necessarily fails. We held in Miller that the characterization of diverted corporate funds for civil tax purposes does not dictate their characterization for purposes of a criminal tax evasion charge; rather, the appropriate characterization for criminal purposes is whether the defendant has willfully attempted to evade the payment or assessment of a tax. 545 F.2d at 1214. As we explained, "[w]here the taxpayer has sought to conceal income by filing a false return, he has violated the tax evasion statutes. It does not matter that that amount could have somehow been made non-taxable if the taxpayer had proceeded on a different course." Id. Boulware's reliance on Truesdell v. Commissioner, 89 T.C. 1280, 1987 WL 258105 (1987), where the U.S. Tax Court held that funds diverted from a corporation in excess of earnings and profits were returns of capital, is misplaced because Truesdell was a civil proceeding and thus inapposite given Miller's explicit holding that civil classifications of diverted corporate funds do not control in criminal cases. See also United States v. Williams, 875 F.2d 846, 849-52 (11th Cir.1989) (approving Miller despite Truesdell and distinguishing between civil and criminal contexts); United States v. Schmidt, 935 F.2d 1440, 1446 (4th Cir.1991) (noting that "[t]he important distinction between civil and criminal tax cases concerning the key element to be focused upon is compellingly set out in [Miller].").

Boulware also posits that requiring a defendant in a criminal case to show that a distribution was intended to be a return of capital unconstitutionally shifts the burden of proof to the defendant, but again, we held in Miller and Boulware I that once the government has shown that the taxpayer diverted funds from the corporation and failed to report them, the burden shifts to the taxpayer to show that the funds constituted a return of capital. Boulware I, 384 F.3d at 811 (citing Miller, 545 F.2d at 1215 & n. 13). Like the defendant in Miller, Boulware "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." Id. at 1215. Nor were any adjustments made to HIE's books showing a return of capital to Boulware, or to his co-shareholder. See id. at 1214 n. 12. Accordingly, the district court properly required a foundation to be laid before allowing the asserted defense to go forward, and properly rejected Boulware's proffer as inadequate.

Finally, Boulware points out that accepting the district court's interpretation of Miller puts us in conflict with the Second Circuit, which has held that a taxpayer need not show that the distribution was characterized as a return of capital at the time of the transaction. See 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) (holding that a showing that a corporation had no earnings and profits is sufficient to support a return of capital defense, but acknowledging that this is a departure from the prevailing view among federal courts). Whether or not the facts in this case would implicate the Second Circuit's rule, which is by no means certain, we are satisfied that the district court correctly interpreted and applied Miller by which it, and we, are bound.

III

Secondly, Boulware challenges exclusion of evidence that he believes would have shown that HIE overpaid tobacco taxes and was simply making up for the overpayment by under-reporting income. The district court sustained a relevance objection to testimony by Boulware's attorney regarding advice he had given Boulware about payment of these taxes, and to testimony by HIE's controller regarding tax adjustments made on HIE's books. Boulware himself, however, was allowed to testify that HIE had been overpaying its tobacco taxes and had tried to recoup these overpayments by underpaying in subsequent periods and adjusting its books accordingly. He admitted that this was "self-help," and testified that he did not understand the increase in HIE's income to have any effect on his own taxes.

We discern no error. Boulware failed before the...