Court Opinion

ID: 9499332
Source: CourtListenerOpinion
Date Created: 2023-08-05 17:45:01.005231+00
Date Added: 2024-06-11T17:59:25.861432
License: Public Domain

THOMAS, Circuit Judge,
concurring:
I agree entirely with the analysis and conclusions of the majority. I write separately only to comment that if we were writing on a clean slate, rather than under the controlling precedent of United States v. Miller, 545 F.2d 1204, 1211-15 (9th Cir.1976), I would adopt the approach of the Second Circuit concerning the return to capital defense. See United States v. Bok, 156 F.3d 157, 162 (2d Cir.1998); United States v. D’Agostino, 145 F.3d 69, 72-73 (2d Cir.1998).
I believe the Second Circuit’s analysis is more consistent with the statutory requirements of criminal tax evasion. The elements of criminal tax evasion under 26 U.S.C. § 7201 are: “(1) the existence of a tax deficiency, (2) willfulness in attempted evasion of taxes, and (3) an affirmative act constituting an evasion or attempted evasion.” United States v. Marabelles, 724 F.2d 1374, 1380 (9th Cir.1984). Thus, an explicit requirement to impose liability under § 7201 is “the existence of a tax deficiency.” As the majority opinion notes, notwithstanding a taxpayer’s wrongful intent regarding diverted income, a sole shareholder of a company cannot be held civilly liable for any distribution that exceeds the earnings and profits of the corporation and that does not exceed the shareholders adjusted basis in the stock— instead such diversions are considered a return of the shareholder’s capital investment. Truesdell v. Commissioner, 89 T.C. 1280, 1294-95, 1987 WL 258105 (T.C.1987) (relying on 26 U.S.C. §§ 301, 306). See also United States v. Miller, 545 F.2d 1204, 1210-12 & n. 5 (9th Cir.1976). Thus, Miller — and now the majority opinion— hold that a defendant may be criminally sanctioned for tax evasion without owing a penny in taxes to the government. Not only does this result indicate a logical fallacy, but is in flat contradiction with the tax evasion statute’s requirement of “the existence of a tax deficiency.” Marabelles, 724 F.2d at 1380. Therefore, without the constriction of Miller, I would hold that the Second Circuit approach to the return to capital defense is the better one, adopting the approach that “the return of capital theory applies equally in both criminal and civil cases, assuming the diversion itself was not unlawful.” Bok, 156 F.3d at 162 (citing D’Agostino, 145 F.3d at 72-73).
I emphasize that even if we were to apply Bok and D'Agostino to the case at hand, the outcome would not be affected. Bok expressly holds that the return to capital defense does not apply if the diversion itself were unlawful. Bok, 156 F.3d at 162. More broadly, the Internal Revenue Service does not consider distributions to be a return to capital if made for unlawful purposes. Truesdell, 89 T.C. at 1298 (only permitting the return to capital defense after determining that the diversions “were not per se unlawful!,] ... not, at least on their face, stolen, embezzled or *939diverted in fraud of creditors”). Because Boulware claimed that the diversions were made to defraud his ex-wife from her share of property in the divorce proceedings, these diversions may be properly considered unlawful. United States v. Boulware, 384 F.3d 794, 801 (9th Cir.2004). In addition, the record indicates that Boul-ware was not a sole shareholder of HIE, which would also likely preclude him from asserting a return to capital defense. See Truesdell, 89 T.C. at 1282 (petitioner was president and sole shareholder of the company from which funds were diverted); Bok, 156 F.3d at 160 (similarly applying the return to capital defense in the context of a sole shareholder).