Court Opinion

ID: 3039945
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:01:57.09215+00
Date Added: 2024-06-11T11:48:56.273340
License: Public Domain

FOR PUBLICATION
  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA,                        No. 05-10752
                Plaintiff-Appellee,
               v.                                  D.C. No.
                                                 CR-99-00239-ER
MICHAEL H. BOULWARE,
                                                    OPINION
             Defendant-Appellant.
                                           
       Appeal from the United States District Court
                for the District of Hawaii
     Edward Rafeedie,* Senior District Judge, Presiding

                   Argued and Submitted
         October 16, 2006—San Francisco, California

                    Filed December 13, 2006

    Before: Pamela Ann Rymer and Sidney R. Thomas,
  Circuit Judges, and Stephen G. Larson,** District Judge.

                   Opinion by Judge Rymer;
                 Concurrence by Judge Thomas

   *The Honorable Edward Rafeedie, Senior District Judge for the Central
District of California, sitting by designation.
   **The Honorable Stephen G. Larson, United States District Judge for
the Central District of California, sitting by designation.

                                19401
                  UNITED STATES v. BOULWARE                19405

                          COUNSEL

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.

                          OPINION

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.
2003) (Boulware I), Michael H. Boulware appeals his convic-
tion 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
19406             UNITED STATES v. BOULWARE
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 Corpora-
tion; 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 eva-
sion and conspiracy counts, all to run concurrently.

  Boulware timely appeals.

                                II

   [1] 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 defi-
                  UNITED STATES v. BOULWARE                19407
ciency 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 “re-
turn 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 defen-
dant 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 prof-
fered 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 earn-
ings 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 trans-
fer.

   [2] Boulware contends that the district court misread Mil-
ler. 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 suffi-
cient 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 Baripind v. Enomoto, 400
F.3d 744, 750-51 (9th Cir. 2005) (holding that what a major-
ity 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. Accord-
19408             UNITED STATES v. BOULWARE
ingly, his alternative position that imposing an intent require-
ment 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 dic-
tate their characterization for purposes of a criminal tax eva-
sion 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 vio-
lated 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),
where the U.S. Tax Court held that funds diverted from a cor-
poration in excess of earnings and profits were returns of cap-
ital, 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 Trues-
dell 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].”).

   [3] 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 consti-
tuted a return of capital. Boulware I, 384 F.3d at 811 (citing
Miller, 545 F.2d at 1215 & n.13). Like the defendant in Mil-
ler, Boulware “presented no concrete proof that the amounts
were considered, intended, or recorded on the corporate
                  UNITED STATES v. BOULWARE                19409
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 allow-
ing 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 earings 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 Sec-
ond Circuit’s rule, which is by no means certain, we are satis-
fied 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 rele-
vance objection to testimony by Boulware’s attorney regard-
ing 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, how-
ever, 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 testi-
19410             UNITED STATES v. BOULWARE
fied that he did not understand the increase in HIE’s income
to have any effect on his own taxes.

   [4] We discern no error. Boulware failed before the district
court to link the excluded testimony about HIE’s tobacco
taxes to his personal income taxes, and fares no better before
us. His suggestion that tobacco tax evidence was probative of
intent lacks factual or legal support. In any event, nothing
about it indicates that Boulware did not have income that he
failed to report on his personal return. Although the court
allowed some exploration of the subject at Boulware’s behest,
it retained discretion to curtail the extent of it. As the subject
itself lacked relevance, the court likewise properly refused to
read HRS 245-7 to the jury; whether or not HIE’s method of
tax recovery was legal under state law had no bearing on
whether Boulware was guilty of federal tax evasion or tax
fraud.

                               IV

   Boulware next asserts that the court’s receipt of a summary
exhibit categorizing and organizing a series of schedules list-
ing each financial transaction pertaining to his taxable income
over the relevant period offended Rule 1006 of the Federal
Rules of Evidence. The government introduced the compila-
tion (Exhibit 3300) through its summary witness, IRS Agent
Randall Tanahara. Boulware objected on the ground that
Exhibit 3300 was cumulative and not allowed of a summary
witness. The court overruled the objection. Later, Boulware
moved to strike the exhibit on the ground that it merely sum-
marized evidence already in the record, which the court
denied. Boulware did not (and does not) dispute the accuracy
of the information contained in the schedules. The jury was
instructed that charts and summaries are only as good as the
underlying supporting material admitted into evidence, and
that the jury should give them only such weight as it thinks
the underlying material deserves.
                  UNITED STATES v. BOULWARE               19411
   [5] Boulware relies on United States v. Wood, 943 F.2d
1048 (9th Cir. 1991), United States v. Soulard, 730 F.2d 1292
(9th Cir. 1984), and United States v. Abbas, 504 F.2d 123 (9th
Cir. 1974), as articulating a bright-line rule against admission
of summary charts as evidence. There is no question that, as
Wood, Soulard, and Abbas indicate, we do not approve of
receiving summary exhibits of material already in evidence;
however, in none of these cases did we reverse for this reason.
Moreover, we have elsewhere recognized a district court’s
discretion under Fed. R. Evid. 611(a) to admit summary
exhibits for the purpose of assisting the jury in evaluating
voluminous evidence. See, e.g., United States v. Poschwatta,
829 F.2d 1477, 1481 (9th Cir. 1987) (holding that admission
of a chart summarizing income figures already admitted into
evidence, while perhaps not the best practice, was not an
abuse of discretion); United States v. Gardner, 611 F.2d 770,
776 (9th Cir. 1980) (holding that admission of a chart summa-
rizing the defendant’s financial status was well within the dis-
cretion of the trial court pursuant to Fed. R. Evid. 611(a)).
Here, the court no doubt believed that it would be helpful to
have the voluminous financial materials reduced to summary
form (even though, as it happens, the summary was 116 pages
long). Nevertheless, we do not need either to embrace or con-
demn the procedure followed in this case because, even if it
were error to allow the summary exhibit into evidence, the
error is harmless given admissibility of the underlying data,
lack of objection to accuracy of the summary, and the limiting
instruction. See United States v. Krasn, 614 F.2d 1229, 1238
(9th Cir. 1980) (holding that charts should not have been
admitted, but that it was harmless error as the defendant had
an opportunity to challenge the facts and data upon which the
charts were based and the court gave a limiting instruction);
Gardner, 611 F.2d at 776 (noting the defendant’s opportunity
to cross-examine the government witness who prepared the
chart and finding no reversible error in admission of chart);
Abbas, 504 F.2d at 125 (same).
19412             UNITED STATES v. BOULWARE
                               V

   The government questioned Boulware during cross-
examination about a letter that he had written to his girlfriend,
Jin Sook Lee, soon after divorcing his wife in 1994. The letter
referred to gifts Boulware had bought for Lee, including a
diamond that he testified was purchased with a credit card.
The letter was not received into evidence. A 1991 invoice
with the name “Gina Lee” reflecting sale of a 5.03 carat dia-
mond for $70,000 was in evidence; this purchase was evi-
dently by cashier’s check. The Assistant United States
Attorney (AUSA) argued in closing that, based on his recol-
lection, Boulware had “lied to you during the course of this
case” about how he bought the diamond and that if he would
lie about how he bought a diamond for $70,000, he would lie
about how he got $10 million. The day after closing argu-
ments were concluded, Boulware moved for a mistrial, or
alternatively, for an instruction about the government’s mis-
statement. The court denied both requests. It found that the
AUSA simply made a mistake in good faith and that, assum-
ing the argument was improper, it was not prejudicial because
it was but a single part of an extensive litany of evidence
showing Boulware’s lack of veracity, it had to do with a
fifteen-year old event, and the AUSA stated that he was only
relating his own recollection.

   [6] Even if the AUSA’s recollection — thus his statement
to the jury — were incorrect, the district court did not clearly
err in its findings or abuse its discretion in denying Boul-
ware’s requests. The inaccuracy of the AUSA’s characteriza-
tion was not immediately apparent, and the record was
somewhat ambiguous given references to different diamond
purchases. Regardless, it is unlikely that the statements mate-
rially affected the trial. The jury was instructed that state-
ments of counsel are not evidence, and that the jury’s
recollection of the evidence controls. See United States v.
Kerr, 981 F.2d 1050, 1053 (9th Cir. 1992) (observing that
“[t]o determine whether the prosecutor’s misconduct affected
                   UNITED STATES v. BOULWARE                 19413
the jury’s verdict, we look first to the substance of a curative
instruction.”). The point was but one of many made in closing
about Boulware’s credability. And the evidence against Boul-
ware was strong. See United States v. Weatherspoon, 410
F.3d 1142, 1151 (9th Cir. 2005) (noting importance of the
strength of the case against a defendant in measuring prejudi-
cial effect of improper statements).

                                VI

   We reversed Boulware’s first conviction because the dis-
trict court had erroneously excluded evidence of a state court
judgment establishing that money Boulware had taken from
HIE and given to Lee was not a gift to her, but rather
belonged to HIE and was being held in trust by Lee. Boulware
I, 384 F.3d at 798, 800. Although we held that the judgment
was relevant, we also rejected Boulware’s argument that it
was controlling on the issue of whether the money held by
Lee belonged to HIE and was therefore not taxable to him.
The district court on retrial received the state court judgment
into evidence, but it instructed the jury that the state court
judgment determined that the money that Boulware trans-
ferred to Lee remained the property of HIE; that this determi-
nation was not binding on the jury; but that the judgment
could be considered in determining the purpose of the transfer
and whether it constituted unreported income to Boulware.

   [7] Boulware now maintains that the state court judgment
resolving the property dispute between Lee and HIE is bind-
ing on the federal courts and, additionally, that Boulware I
was wrong in concluding otherwise. However, Boulware I is
the law of the case, and controlling. Jeffries v. Wood, 114
F.3d 1484, 1489 (9th Cir. 1998) (en banc). Under our man-
date, “the district court did not err in ruling that the state court
judgment does not have preclusive effect as to the ownership
of the monies.” Boulware I, 384 F.3d at 805. The court’s
instructions on remand were faithful to Boulware I, and thus
were not erroneous.
19414             UNITED STATES v. BOULWARE
                              VII

   Boulware’s press for reversal based on cumulative error
fails as there is no accumulation.

                             VIII

   [8] Boulware raises two issues with respect to his sentence.
First, he contends that the court’s imposing a 60-month term
of custody on the tax evasion and conspiracy counts is vindic-
tive given that his original sentence on these counts, before
reversal, was to 51 months. We disagree. Different evidence
was adduced upon retrial. For example, Nathan Suzuki testi-
fied about Boulware’s continuing fraudulent activities even
after he knew about the government’s investigation. Addi-
tional evidence could lead the district judge to find that an
increased sentence was objectively justified. Wasman v.
United States, 468 U.S. 559, 565 (1984).

   Additionally, Boulware argues that his sentence of 60
months on the conspiracy conviction is unreasonable and
must be vacated if the tax counts are reversed. As we affirm
conviction on the tax counts, the premise of Boulware’s chal-
lenge to the conspiracy sentence disappears.

  AFFIRMED.

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 pre-
cedent 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.
                  UNITED STATES v. BOULWARE               19415
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 consti-
tuting 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 earn-
ings 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 (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
19416             UNITED STATES v. BOULWARE
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. Truesdale, 89 T.C. at 1298 (only permit-
ting the return to capital defense after determining that the
diversions “were not per se unlawful[,] . . . not, at least on
their face, stolen, embezzled or diverted in fraud of credi-
tors”). 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 consid-
ered 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 Truesdale, 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).