Boulware v. United States – Oral Argument – January 08, 2008

Media for Boulware v. United States

Audio Transcription for Opinion Announcement – March 03, 2008 in Boulware v. United States

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John G. Roberts, Jr.:

We’ll hear argument next in Case 06-1509, Boulware v. United States.

Mr. Cline.

John D. Cline:

Mr. Chief Justice, and may it please the Court: Congress placed the phrase 301(a) of the Internal Revenue Code to make clear that the taxation rules in Section 301(c) do not apply to corporate payments that a shareholder receives in a nonshareholder capacity.

David H. Souter:

May I ask you a question which is going to come up sooner or later?

And it’s kind of a threshold question.

So, if I may, let me interrupt you with it now.

You emphasize the significance of the limiting condition “with respect to the stock”.

But before you get to that phrase, Section 301 refers to a distribution by the corporation.

And my question is this: Let’s assume that we… we accept your… your position that the circuit was wrong in requiring an offer of proof of intent to return capital.

Isn’t it also the case that you would still have an obligation, if you’re going to take advantage of this section, to offer some evidence with respect to the fact that there was a corporate distribution involved?

And as I understand it, your evidence is or the Government’s evidence and yours is that, you know, there was skimming, there was misdirection, et cetera, but there was no indication, there’s no evidence that there was any distribution, in the normal sense of that word, by a corporation.

So it seems to me that if you… if you win the case in the sense of convincing us that the circuit was wrong with respect to the specific intent requirement, you would still be left without a defense because you have not come forward with any evidence that indicates a distribution.

Am I wrong?

John D. Cline:

Yes, Your Honor, I believe you are.

David H. Souter:

I thought you were going to say that.

John D. Cline:

[Laughter]

Although I agree that the question of a distribution is important, and I think implicit in that question, in that term, although the courts have not addressed it, is some sort of corporate action.

Where you have a controlling shareholder, as we do here with Mr. Boulware, who is a 50 percent share owner, he’s the president, he’s the founder, he dominates this company, his action is action on behalf of the corporation.

David H. Souter:

Well, it certainly can be, and there’s no question about that, but isn’t there some point of informality or some point, I guess, of formality or relevance to corporate practice that has to be reached?

In other words, he may keep lousy books, he may be very sloppy, but directing funds to one’s girlfriend is not the act of a corporation.

And it seems to me that the kind of… of actions that he took to get or to direct the payment of moneys could not, by any stretch of the imagination, be regarded as an act of this corporation or of any corporation.

John D. Cline:

With respect, Justice Souter, Justice Souter, I disagree.

There are, I’ve discovered, hundreds of corporate diversion cases involving a very similar fact pattern and a very similar fact pattern to this, where have you a corporation that is really the creature of one person.

It’s formed by one person.

He chose the corporate form, but in effect he is the corporation.

That’s the case of Mr. Boulware and it’s the case in a lot of these diversion cases, and–

David H. Souter:

Well, in this case, he’s a 50 percent owner, as I understand it.

He formed the corporation, but isn’t 50 percent of the stock owned by the trust for the love child of him and the girlfriend?

John D. Cline:

–It is indeed, although it’s important to keep in mind that the girlfriend, according to the Government’s evidence, received a very large chunk of this money.

So in effect what we have here is a situation where you not only have a 50 percent shareholder who dominates the corporation; the other 50 percent… the trustee for the other 50 percent shareholder is the recipient of the money and is certainly knowledgeable about most, if not all, of what’s going on.

John D. Cline:

But in these circumstances where you have a close corporation typically run very informally, as this one was, with one person who dominates it, the courts have uniformly taken the view that, the Tax Court has and for that matter the Government has in every case except this one, that when the controlling dominant shareholder takes money from his corporation, that’s a distribution by the corporation.

And although… Your Honor, I had thought about this question myself before you raised it.

The cases don’t pause on that issue.

They move directly to the question of whether it’s taken in some other capacity, as compensation, for example, or as a loan.

Ruth Bader Ginsburg:

Well, perhaps because… because the Government might very well be on the other side of that question, that is the dominant shareholder takes money from the corporation, gives it to his girlfriend, and the Government is saying that corporation had earnings and profits, we want to tax this as a dividend to you.

John D. Cline:

Well, yes, Justice Ginsburg.

The way this often comes up, the Government usually takes the opposite position–

Ruth Bader Ginsburg:

Yes.

John D. Cline:

–to what it’s taken here.

It usually takes our position, and here’s the reason why: First of all, a lot of times, as in this case, some of the money that is coming toward the corporation is intercepted by the controlling shareholder.

And the question then is, was it ever income to the corporation?

Well, of course, the Government wants to say that it was because they want to tax it twice, at the corporate level and then again at the individual level.

And the issue there again is one of control.

If it’s the controlling shareholder, even though he gets the money before it ever hits the corporate bank account.

It’s considered income to the corporation.

It also comes up when the corporation wants to claim a theft deduction or embezzlement deduction.

That again is a common fact pattern in these cases.

The corporation… everything comes to light, the IRS conducts its investigation, now the corporation wants to avoid its tax.

Sure the individual is going to get taxed, but it wants to avoid its tax.

And so, it claims that there was a theft or an embezzlement by the shareholder and it’s entitled to a deduction and shouldn’t have to pay tax on that money.

And again, the Government uniformly takes the position that a controlling shareholder, such as Mr. Boulware, can’t embezzle from his own corporation, which is essentially the position that we’re taking here.

David H. Souter:

Well, it may be that he cannot embezzle in the sense of committing a separate private act or even a separate, a separate tort that the corporation could object to.

But the question still remains… excuse me… whether the act of, of taking the money in this unorthodox way could be regarded as a corporate act within the meaning of the term “distribution”.

And I think I understand your point, but I guess the only point that I’m making is the fact that it may not qualify as embezzlement, civilly or criminally, does not necessarily answer the objection that I’m raising.

John D. Cline:

I agree with that point, Justice Souter.

But one other point I would emphasize is that I think if you start to say that an act by the controlling shareholder, which is Mr. Boulware, does not constitute a distribution by his corporation, there are going to be unintended consequences of that.

One of which is that in a situation where a controlling shareholder such as Mr. Boulware intercepts money coming into the corporation, you’re going to have the corporation coming in and arguing that that interception, that taking in of money wasn’t an act of the corporation, and so, there is no income to us.

And I think that’s why the courts in a whole series–

David H. Souter:

That explains why I’m making the argument and the Government wasn’t in its brief?

John D. Cline:

–I think it does.

Ruth Bader Ginsburg:

But you did say something about the interception that… your argument is that this corporation had no earnings and profits, so what the shareholder got was a return of capital.

But part of what was involved was he was taking, I thought, receipts for goods that customers were… had paid and giving them to the girlfriend.

In determining whether that corporation had any earnings and profits, wouldn’t you have to credit the corporation?

In other words, did you prove that there was no… that there were no earnings and profits?

You would have to prove that, wouldn’t you?

John D. Cline:

The way I believe it would work with a properly instructed jury in the district court is as follows: I think Mr. Boulware would have the burden of coming forward with some evidence that the corporation did not have earnings or profits and that his basis exceeded the amount of the diversion.

I think at that point, if he comes forward with some evidence, and Bok talks about this, Leonard talks about this–

Antonin Scalia:

For which purpose you’d include the receipts?

John D. Cline:

–I beg your pardon?

Antonin Scalia:

For which purpose you would include the receipts that he sent to his girlfriend instead of putting them in the corporate treasury?

John D. Cline:

Your Honor, I believe that is correct, but I’m not certain.

What I can tell you about earnings and profits and basis as well is this.

It is a very complicated calculation, and I think it would be hotly disputed in the district court.

I would expect the Government to argue that the company did have earnings and profits and that Mr. Boulware’s basis is less than he contends it is.

I think it would ultimately be a question of fact for the jury.

Anthony M. Kennedy:

I also wanted to know whether there is in the record the corporation’s balance sheet?

It was frankly hard for me to believe that this was not in excess of basis.

You don’t usually capitalize corporations for $10 million.

But I don’t have any basis other than just an assumption to make that observation.

Is the corporate balance sheet with the capital structure in the record?

John D. Cline:

I don’t believe so, Your Honor.

But what is in the record, and it’s also in the joint appendix, is the fairly sketchy evidence of both basis and earnings and profits that was introduced.

But there was not a full presentation of those issues.

Anthony M. Kennedy:

Was it introduced by the Government or by the defendant?

John D. Cline:

It came in… I must say it came in more or less by happenstance, because neither party was really looking at the question of earnings and profits or basis because the trial court had ruled those out.

But, for example, on cross-examination I believe of Mr. Boulware’s accountant… this is at page 42 of the joint appendix… Mr. Boulware’s lawyer elicited that the corporation had not had earnings and profits during the years in question.

That was not explored at all.

But there is that statement in the record.

There is also… I’m sorry, Your Honor.

Anthony M. Kennedy:

I’m not, I’m not sure if what the Government is maintaining here is so prejudicial to its position in other cases, which was the earlier discussion we were having.

Anthony M. Kennedy:

Here there is simply nothing on the corporate records to show that this was a distribution with respect to stock.

I don’t care whether this is earnings and profits or in excess of basis.

But there’s just no indication of the distribution with respect to stock, and you have two shareholders.

Under Hawaiian law, can you make a disproportionate distribution to shareholders so one person gets capital back and the other doesn’t and there’s no redemption of shares?

John D. Cline:

I think it is entirely possible that under Hawaiian law a minority shareholder or noncontrolling shareholder who was treated unfairly by the controlling shareholder might have a cause of action under State law.

But I–

Anthony M. Kennedy:

That was, that was the qualification that the Second Circuit made in its D’Agostino case.

It said if there’s a violation of corporate law then our rule doesn’t apply.

John D. Cline:

–Well, except, Your Honor, that the way these cases have played out is that there are numerous cases, dozens of them, where there are minority shareholders oftentimes unwitting of what the majority shareholder is using.

Those minority shareholders certainly have rights.

They can sue under State law.

They can do any number of things.

But their rights and the possible violation of their rights… and I emphasize possible, because no one has ever established that Mr. Boulware did anything wrong with respect to anyone… those don’t drive the Federal tax treatment.

Anthony M. Kennedy:

Well, but that’s the whole point.

The fact that he doesn’t show this as a distribution indicates that he couldn’t do this under Federal law, so it must be something… under State law, so it must be something other than a distribution.

John D. Cline:

I think, Your Honor, that where the controlling shareholder of the corporation does something with corporate funds, and in this case transfers them to himself, I think that’s a distribution.

And I think that it is properly treated under Federal law, under Federal tax law, for purposes of Federal tax law as a distribution by the corporation.

Antonin Scalia:

I’m less concerned with the word “distribution” in the statute than I am with the phrase “with respect to its stock”…

“distribution made by a corporation to a shareholder with respect to its stock. “

Now, the court below held that there had to be a conscious intent to return capital.

Even if I disagree with that and think that that was wrong, isn’t the Government right that it nonetheless is the burden to establish that the distribution here was a distribution with respect to stock, and the distribution was given to the girlfriend who owns no stock in the corporation.

How does it become a distribution with respect to stock?

John D. Cline:

Well, Your Honor, that gets back to where I… to where I began the argument.

The phrase “with respect to stock” has never received in any case or any argument, as far as I know, the significance that the Government is trying to accord it here.

What that phrase… it was put in the 1954 Code.

And the purpose of putting it in the code was simply to distinguish transfers to shareholders in a capacity where the shareholder is effectively returning consideration… shareholder employees, shareholder vendors, shareholder creditors–

Antonin Scalia:

Or girlfriends.

I mean, why doesn’t it distinguish a girlfriend as much as it distinguishes an employee who’s receiving back a loan?

John D. Cline:

–Because the issue, Your Honor, is not the recipient of the funds.

I mean, the money is going to be taxed to Mr. Boulware if it’s taxable regardless of where he diverted it.

John D. Cline:

For example, there are again dozens of these cases where controlling shareholders divert corporate assets to their family members, and the issue is whether it’s a constructive dividend to that corporate shareholder.

Here the question, regardless of where Mr. Boulware–

Antonin Scalia:

And the Government would say yes?

John D. Cline:

–Absolutely.

The Government in every case says yes.

Antonin Scalia:

Yes, they’re really… they’re really between a rock and a hard place on this stuff.

John D. Cline:

Well, because, Your Honor, they want… they want the controlling shareholder, the person in Mr. Boulware’s situation, to pay tax.

And, of course in most cases… in most cases, again, it’s to the Government’s advantage to argue the position that we’re arguing here.

And the reason is most corporations have earnings and profits.

Most shareholders don’t have enough basis to cover their tax until the Government wants to hit it at both levels, it wants the corporate tax and it wants the individual tax.

And so, it argues readily that this is a distribution with respect to stock.

That phrase was… was put in the 1954 Code to distinguish one capacity from another.

The Government has argued that it should receive some sort of a causal type meaning.

There should be a causal link, that Mr. Boulware should have to establish that he received the stock because he was a shareholder.

If that’s the standard, first of all, it’s a different standard than what the district court and the Ninth Circuit required Mr. Boulware to meet.

So he ought to have a chance to satisfy the standard.

Second, that standard doesn’t necessarily require any form of intent.

There’s nothing in the phrase “with respect to stock” that talks about intent.

John G. Roberts, Jr.:

We don’t… and this may be the point that you just made, but I want to clarify it.

We don’t have to decide whether this diversion was with respect to stock, because you put that at issue, and you weren’t allowed to make that–

John D. Cline:

Absolutely, Your Honor.

What–

John G. Roberts, Jr.:

–I suppose it would be open on remand for the Government to argue it was not with respect to stock for the reasons that have come out, that it was just a diversion?

John D. Cline:

–The Government could argue that, but, Mr. Chief Justice, I have to say I–

Antonin Scalia:

You are pretty sure they won’t.

John D. Cline:

–I would be astounded if they took that position, because it would be so contrary to the position they take in every other case.

But to get back to your basic point, yes, Mr. Boulware was asked to meet a standard that no one defends in this Court.

The Government isn’t here defending the intent to have a return of capital standard.

And part of the reason they don’t defend it is it’s an impossible concept.

You don’t know if you have a return of capital until you know if you have a dividend.

John D. Cline:

And you don’t know that until… until the end of the tax year.

Ruth Bader Ginsburg:

What about the… the Government did say that this accountant… what was his name, Monango, or something like that?

John D. Cline:

Monago, yes.

Ruth Bader Ginsburg:

Testified at the trial that there was no return of capital in the relevant year.

John D. Cline:

What Mr. Monago testified to was that there weren’t any payments out of the capital account, and that’s undisputed.

But that’s not the question.

Those sorts of corporate formalities are not determinative, or even particularly helpful, in these constructive dividend types of cases.

Anthony M. Kennedy:

Well, under the Government’s intent test, I suppose if you have a calendar year and the distribution is made in June, that the Government could say: What we want to show… we want you to show that there was an intent to make a distribution with respect to stock at that time.

Whether or not it was a dividend, whether or not it was a return of capital, we won’t know until the end of the year.

I suppose they could try to argue that.

John D. Cline:

That is what they’re arguing.

Now, two things about that Justice Kennedy: First, that’s not the standard Mr. Boulware was required to meet in the district court.

The standard there was intent that it be a return of capital.

And that’s a different thing than an intent that it be with respect to stock.

An intent that it be a return of capital suggests that you know what a return of capital is.

You know about earnings and profits.

You know about basis.

And I can tell you that Mr. Boulware, who was an unsophisticated man, didn’t know any of those things at the time; and so, of course, he couldn’t meet the standard he was required to meet.

If this Court were to agree with the Government that–

Anthony M. Kennedy:

You mean to say the Government can’t argue that this… the Defendant has to show that it was a distribution with respect to stock and that that was his intent.

Whether or not it was a dividend, whether or not it was a return of capital, we wait.

John D. Cline:

–I don’t think that’s the right standard, but even if this Court decides that it is, that’s not the standard Mr. Boulware was required to meet in the trial court.

He was required to show an intent that it be a return of capital, and he couldn’t meet that standard.

If this Court were to decide… and I suggest it would be the wrong standard, but if this court were to decide that the correct standard were an intent that it be with respect to stock, Mr. Boulware could meet that standard.

He was never given the opportunity to meet it before, but he could meet that if this Court were to decide that that was the standard in the sense that he could certainly show that, to the extent he got this money personally, he got it because he was a stockholder.

And he knew he was getting it because he was a stockholder.

But he never had a chance to meet the standard, because it wasn’t the standard that the Government urged in the trial court or even before the panel on appeal.

Unless the Court has further questions, I’d like to reserve the remainder of my time.

John G. Roberts, Jr.:

Thank you, Mr. Cline.

Ms. Maynard.

Deanne E. Maynard:

Mr. Chief Justice, and may it please the Court: In the Government’s view, to make a sufficient proffer of a return of capital defense a Defendant must point to some factual evidence to support three elements: First, that there was a distribution with respect to stock.

Second, that the corporation lacked earnings and profits during the relevant tax years.

And, third, that the Defendant had a sufficient basis in his stock to cover the funds received.

The question before this Court relates to the first element.

Antonin Scalia:

The court below didn’t give him a chance–

Deanne E. Maynard:

No, Your Honor.

Antonin Scalia:

–to establish that.

The court below required him to show an intent to distribute capital.

Deanne E. Maynard:

And the Government here believes that the correct test is the rule of the Ninth Circuit, Your Honor.

The Government believes that before a defendant may present a return of capital defense to the jury, there must be some evidence that the corporation intended, as objectively inferred from all the facts and circumstances, to make a distribution with respect to its stock at the time the funds were taken.

Ruth Bader Ginsburg:

But if it turned out that there were earnings and profits and everything else was the same, would the Government be taking the position that the proper test is: Was this a distribution with respect to stock?

Deanne E. Maynard:

In… in every case, Your Honor, the question about whether or not the Section 301 tax treatment applies, the Government believes that turns on all the facts and circumstances and that there must be some facts and circumstances suggesting that it was a distribution with respect to stock.

Ruth Bader Ginsburg:

Suppose the government… the corporation is rich with earnings and profits.

Would the Government be saying: Oh, aha.

So we have to go through the motions of first seeing was this a distribution with respect to stock?

I thought that the idea of was it

“a distribution with respect to stock. “

refers to was it… was the corporation… was there to be any quid pro quo?

That is, the shareholder gets money from the corporation.

Is the shareholder expected to pay it back, or is it just that it comes out of the corporation into the shareholder’s pocket with no expectation by the corporation to get it back?

I thought that that’s what “with respect to stock” means instead of “with respect to salary”, “with respect to a loan”.

That’s what I thought was the understanding of the term.

Am I wrong about it?

Deanne E. Maynard:

That is half of the understanding of the term.

I do think it is, as Petitioner says, a term of art.

There are two parts to the term of art with respect to stock, Your Honor.

It is, as you say, funds that you receive without consideration.

But it is also funds that you receive solely because of your status as a shareholder.

Antonin Scalia:

But that was… we’re just not on the same page here.

That’s not what the… the decision you’re defending said.

Antonin Scalia:

The decision you’re defending did not say that it was incumbent on the defendant to show that it was with respect to stock.

They said it was incumbent on the defendant to show that it was intended to be a return of capital.

Deanne E. Maynard:

Well, that’s–

Antonin Scalia:

And that’s just a wholly different issue, and it seems to me the best you can get out of this case, the way you’re arguing it, is a remand for them to apply the proper test.

Deanne E. Maynard:

–I think the test that I’m articulating is the Ninth Circuit’s test in this circumstance, Your Honor.

In Miller, which is the genesis of the Ninth Circuit’s test, the court said… and this is on page 545 at 1214…

“We, therefore, conclude that whether diverted funds constitute constructive corporate distributions. “

–and that would include dividends, return of capital, or capital gain…

“depends on the factual circumstances involved in each case under consideration. “

And then it went on to say, before a defendant could proffer a defense of return of capital, the taxpayer had to make some demonstration that this… such distributions were intended to be such a return of capital–

Stephen G. Breyer:

Well, it depends on what you mean by that.

The Ninth Circuit said, quote, about what he has to show, that he has to show not merely that the funds could have been a return of capital, but that the funds were, in fact, the return of capital “at the time of transfer”.

Then, they go on to say, since there was no evidence that they were considered, intended or recorded on the corporate records as a return of capital at the time they were made, then it isn’t a return of capital.

Now, I thought everybody thinks that’s wrong, because you might have an absolute distribution that absolutely counts as a distribution to every shareholder in the corporation.

And at the time they all think the company’s going to make a billion dollars, but it just turns out that they have a loss of a billion dollars, in which case at the end of the tax year that would count as a return of capital if the basis were high enough, and it would not count as a dividend.

Am I wrong?

Deanne E. Maynard:

–No.

You may not know at the time the funds are paid whether or not that–

Stephen G. Breyer:

All right, fine.

So if we do not know, that’s the end of the Ninth Circuit test, isn’t it?

Because the Ninth Circuit test says: What we want to do is to look at the books at the time of the distribution and see if it is entered on those books as a return of capital.

That’s how I read it.

Deanne E. Maynard:

–If you… if you… it would be more accurate to say: At the time, was it intended, as objectively manifested from all the facts and circumstances, to be a distribution–

Stephen G. Breyer:

No.

It was not.

What they thought at the time they distributed it was fabulous dividends because we are going to be rich.

Deanne E. Maynard:

–But if–

Stephen G. Breyer:

My example was they just made a little mistake.

Instead, the corporation is close to bankrupt, so there are no earnings or profits.

Is it then a return of capital or not?

Deanne E. Maynard:

–It could be a return of capital depending on the person’s stock.

Stephen G. Breyer:

The basis?

He has more than enough basis.

He has a $14 trillion basis, okay?

So there is no problem about that.

Deanne E. Maynard:

But here he… the defendant–

Stephen G. Breyer:

All right.

And so it is a return of capital.

So, therefore, the test is wrong.

Deanne E. Maynard:

–It would be a return… but the point, Your Honor, is that the test is whether or not at the time the funds were taken, the corporation intended to be making a distribution with respect to its stock.

David H. Souter:

Well, aren’t you… aren’t you saying not that the… that the test of intent that the Ninth Circuit used is, in itself, a sufficient test; but that, rather… and correct me if I’m wrong, because I thought this was the basis really of your argument.

I thought the Government, in effect, was saying in order to treat it as a return of capital, it is a necessary condition that it be intended to be treated as a return of capital.

But that is not a sufficient condition, because if, in fact, it turns out, as in Justice Breyer’s example, that there are no earnings, then under 301 it can’t be treated as… as a dividend.

And only then, under 301, would it be treated as a return of capital.

So the conditions are, No. 1 necessary intent; No. 2, a determination at the end of the year that, in fact, there were no earnings.

Conversely, if at the end of the year there are profits, even though the first necessary condition, intent, was satisfied, under 301 that would not be enough; and the Government would treat it as income.

Isn’t that the nub of your position?

Deanne E. Maynard:

If it were with respect to stock and there were–

David H. Souter:

Yes.

Deanne E. Maynard:

–earning profits, and it was then income–

Antonin Scalia:

I doubt that.

Then… then, you would say, when it is not a criminal prosecution for failure to pay taxes, so long as somebody, when they take the money, intended it to be a return of dividends, it does not become a return of capital.

Are you sure you’re willing to live with that intent requirement?

Deanne E. Maynard:

–If at the time the corporation made a distribution, Your Honor–

Antonin Scalia:

At the time… is it important for the tax treatment that at the time of the distribution it be intended to be either a return of capital or dividends?

Does that make the difference as to whether you’re going to be able to tax it or not?

Deanne E. Maynard:

–It depends in all cases, in both criminal and civil cases… and in that sense the Government doesn’t agree with the Ninth Circuit’s reasoning… in all cases whether or not something gets the tax treatment set forth in 301(a) depends on whether or not it’s a distribution with respect to stock.

Antonin Scalia:

Well, I’m not… we are not talking about distribution.

Deanne E. Maynard:

Okay, I’m sorry.

I misunderstood your question.

Antonin Scalia:

We are talking about the intent that it be a return of capital or not.

Deanne E. Maynard:

If it… if the Government… if it was intended at the time it was paid out to either be a dividend or return of capital or a capital gain–

Antonin Scalia:

Either one.

Deanne E. Maynard:

–that would be enough to satisfy the… with respect to stock–

Antonin Scalia:

It could be anything at all.

So in other words, there is no preliminary requirement that you intend that it be a return of capital.

Right.

So if the Court of Appeals said that here, it was wrong.

Deanne E. Maynard:

–I think if the court chooses to read their test that rigidly, I don’t believe that the Petitioner understood it that way.

David H. Souter:

Well I… let me… I just want to get clear on how you understand it.

I gave you one alternative in which you defend the Ninth Circuit.

Justice Scalia has given you another alternative in which you don’t defend the Ninth Circuit.

Which… which are you going to take?

Deanne E. Maynard:

I must not understand.

There are three elements.

I want to make clear there is an additional element, Your Honor, to the defense than the two you laid out.

That there would also… the taxpayer must have a sufficient basis in his stock to cover the amount of the diverted funds for it to be treated as a return of capital.

Stephen G. Breyer:

Can I try a third example?

Because I think an example might help.

Let us imagine that the company distributes $10,000 on June 1 to every shareholder.

Let us imagine that every shareholder has a basis of a trillion dollars in his stock.

There is no problem about basis.

There is no problem about the nature of the distribution.

Let us imagine they put in the corporate records on June 1: This is a very valuable corporation; we are going to make a fortune; and this is a dividend.

They write it down.

Now, unfortunately, four weeks later the bottom falls out of the market, and it is not a dividend for the reason that they have no profits that year.

Now, is it not under ordinary tax law a return of capital?

Deanne E. Maynard:

Yes, Your Honor.

Stephen G. Breyer:

Okay.

Deanne E. Maynard:

If–

Stephen G. Breyer:

If that… once you say yes, then the Ninth Circuit must be wrong because the Ninth Circuit said we do not look to see what happens.

Deanne E. Maynard:

–If that’s how–

Stephen G. Breyer:

A month later, we look just to see how it’s characterized by the corporation at the moment of the transfer.

Deanne E. Maynard:

–If one reads the Ninth Circuit’s test that rigidly–

Stephen G. Breyer:

Well, that’s what they said.

Deanne E. Maynard:

–perhaps that would be right.

But I believe if one looks back to Miller, you can see that the Ninth Circuit is talking about whether or not it was a constructive distribution.

David H. Souter:

Yes, but why talk about that at all?

I mean, on Justice Breyer’s third and simplest example, he is basically saying let Section 301 make the determination, in effect, at the end of the year, when we know what the actual situation of the corporation is.

If you wait and see, 301 takes care of it, and you don’t have to get into the… sort of the metaphysics of intent.

Deanne E. Maynard:

Well, there is a threshold requirement to 301 treatment, Your Honor.

David H. Souter:

Yes.

Distribution with… distribution with respect to stock.

Deanne E. Maynard:

Right.

And there–

David H. Souter:

And I think he was assuming and I’m assuming that… that that condition is met.

But, in order to meet that condition, you don’t have to have a specific intent that the… on the part of the corporation that the distribution either be a return of capital or that the distribution either be a dividend.

It simply has to be a distribution to this guy because he is a stockholder.

Deanne E. Maynard:

–That’s right, Your Honor.

We agree with that.

David H. Souter:

Okay.

Deanne E. Maynard:

If he had testified here that he believed he was receiving a dividend at the time he took these funds, we believe that would be sufficient to meet the threshold requirement.

Antonin Scalia:

He wants a chance to argue that.

He was not given a chance to argue that.

Deanne E. Maynard:

I believe you can tell from his proffer, Your Honor, that he understood his test was to show that these were intended to be some sort of constructive distributions.

Ruth Bader Ginsburg:

Was there anything in the tax court at all that used the words as having any significance for this determination whether there was a tax evasion here with respect to this stock?

Was there any… any hint that those… those words were controlling?

Deanne E. Maynard:

In the Ninth Circuit?

Ruth Bader Ginsburg:

In the tax court originally.

Was this a… this was in the tax court?

Deanne E. Maynard:

No, Your Honor.

Ruth Bader Ginsburg:

This is a criminal case.

Deanne E. Maynard:

A criminal case, yes.

Ruth Bader Ginsburg:

Okay.

In the trial court first.

Deanne E. Maynard:

In… in… the rule has been clear in the Ninth Circuit since 1976 that you had to make a showing that there was an intent at the time the moneys were paid to make a constructive distribution.

So, no, there was no need to go back to first principles and argue where in the statute that rule was grounded; but the Government has made this argument and made it in seeking an en banc prehearing in D’Agostino, in 1998.

This is not a new argument.

When… when the issue was reopened and they sought en banc review, the Government–

John Paul Stevens:

Can I can ask you sort of an elementary, stupid question?

What is the Government’s theory as to what this money was?

Is it the theory that it was a dividend or that it was salary?

Deanne E. Maynard:

–The Government’s theory of the case, Your Honor… but I’d like to step back and explain it after I tell you what it was.

The Government’s theory of the case was that this money was stolen from the corporation.

But in a criminal case, in order to show tax a deficiency for purposes of tax evasion or–

John Paul Stevens:

So your theory, just to be sure I understand, it was not salary; it was not a dividend; it was the proceeds of an embezzlement?

Deanne E. Maynard:

–That was as we argued it to the jury, Your Honor.

But there is no need in… for the Government to characterize in a tax… for the purposes of a criminal case, this Court’s decision in Holland makes clear that in order to prove the tax deficiency element of a tax evasion case, or here a false statement with respect to income for the false return counts, the Government need prove only two things: One, that the Defendant received a substantial amount of funds that he did not report on his income taxes.

And, two, that the funds came from a likely source of taxable income.

John Paul Stevens:

It does not have to prove that it was income.

Deanne E. Maynard:

It has to prove that it came from a likely source of taxable income.

I mean, to prove that here, Your Honor–

John Paul Stevens:

I just want to be sure I have the right answer.

You do not have to prove that it was income?

Deanne E. Maynard:

–That is a proof… that it’s income.

We don’t have to label what type of income it is.

David H. Souter:

It’s income to him.

You would be taking a different position if you thought you could attribute it to the corporation and tax the corporation, too.

Deanne E. Maynard:

The fact that it’s… it’s income to him.

It may or may not be income to the corporation.

Deanne E. Maynard:

We also believe that it was income to the corporation.

David H. Souter:

Right.

And if you want to go after the corporation, you are specifically going to take the position in this guy’s case that, in fact, it was income to the corporation.

If there is no income to the corporation, then you don’t care, and that’s the situation you’re in here.

Deanne E. Maynard:

It was income to the corporation, Your Honor, even here.

David H. Souter:

But it was not profits; it was not taxable income.

Deanne E. Maynard:

Yes.

It should have been income to the corporation, and–

David H. Souter:

It was not taxable income.

Deanne E. Maynard:

–Yes, it should have been.

Yes, Your Honor, it should have been taxable income to the corporation, income that was coming to the corporation that he diverted before it hit the corporate… just before it hit the corporation’s books.

In other instances, he took money from the corporation and put it to his personal use.

Anthony M. Kennedy:

Under your response to Justice Stevens, once you show that it was from a likely source of income that he received it, it’s unreported, then it’s the defendant’s burden to go ahead and show this was a 301 distribution, that I had a basis that absorbed it, that there were no earnings and profits.

That’s all for the defendant.

Deanne E. Maynard:

The Government retains the ultimate burden of proof at all times, Your Honor.

John G. Roberts, Jr.:

Well, the court didn’t let the taxpayer submit evidence.

He came forward and said: Look, there’s an issue here despite the return of capital.

I would have thought at that point the burden shifted to you again.

That burden… having met that burden of production or at least tried to, the burden would shift to you to show, no, it’s not a return of capital, it’s a dividend.

Deanne E. Maynard:

Here he… in order to make the… to make out a case, to be allowed to present a defense to the jury, Your Honor, that the funds are nontaxable, the defense must have some basis in fact.

And here he proffered nothing to show that this was a dividend or a return of capital at the time it was made.

John G. Roberts, Jr.:

He said in his proffer that he would present expert testimony that this… the corporation didn’t have profits and earnings, and therefore it was a return of capital.

And the district court said no, you don’t get to do that.

Deanne E. Maynard:

It is… I think this is, in his proffer, the relevant portion of it, is in the JA on page 97.

John G. Roberts, Jr.:

Right.

Deanne E. Maynard:

And it says:

“Alternatively, the expert will explain that if the moneys were not loans or advances or if Boulware did not use the moneys for corporate purposes, then as the controlling shareholder, the moneys could be deemed a constructive return… a constructive dividend or return of capital to Boulware, which may or may not be income, depending on whether or not HIE. “

–the corporation…

“had earnings and profits for the years when the moneys were obtained by Boulware. “

That’s all he proffered, an expert who would testify that it could have been either dividends, Justice Breyer, or a return of capital.

Deanne E. Maynard:

So he did realize that he needed to show–

John G. Roberts, Jr.:

No.

I mean, the district court… the district court said that’s not relevant, it’s not relevant whether they could be classified as dividends.

I’m quoting from your brief on page 8:

“It is not relevant whether the funds could have been classified as a return of capital or a dividend at the time when they were diverted. “

because, he said, what was relevant is… is the intent, whether they were in fact treated as return of capital.

Deanne E. Maynard:

–That’s right, Your Honor, and our position is that in both civil and criminal cases before something can be treated under the tax treatment in 301(c), it must meet 301(a), which requires that, under all the facts and circumstances it in fact be a distribution, either a dividend or return of capital.

And all his proffer testifies… all his proffer offered is that it theoretically could be deemed a dividend or theoretically could be deemed a return of capital.

David H. Souter:

I think maybe he was simply getting at the fact that under 301, assuming the possibilities of non-301 treatment are excluded, under 301 it will be treated either as a dividend or as a return of capital, depending on the corporate books for that year, and he wasn’t making a proffer at that point precisely as to what those corporate books would show, but he was making a proffer that, under 301, it would either be classified as a dividend or as a return of capital.

And wasn’t that enough to… to get him… get him the right to introduce the evidence?

Deanne E. Maynard:

No, Your Honor.

In our view, 301(a), the language with respect to stock, and the regulations have so interpreted it and the legislative history makes clear that it was added to the 1954 Code specifically to show that, before distributions can receive that treatment.

Regardless of what the facts are about E and P and regardless of what the facts are about the basis, it had to have been a corporate distribution with respect to stock.

John G. Roberts, Jr.:

Well, but if he is making a profit and it depends upon whether or not there’s adequate earnings or not, isn’t he plainly saying that that means it’s with respect to my stock?

Because if he were getting it, for example, as an employee for consideration, it wouldn’t matter whether there was sufficient earnings or not.

But when he says it depends on whether there’s sufficient earnings, it seems to me that that’s clearly notifying you that he’s saying it’s with respect to his stock.

Deanne E. Maynard:

This proffer also has factual proffers in it, Your Honor, and none of the factual proffers go to the fact that it was with respect to stock.

The Petitioner testified–

Antonin Scalia:

He said… and it seems to me that this is enough to put you on notice…

“Boulware will present further evidence that all of the alleged unreported income was either a loan or advance or was used by Boulware for corporate purposes or for the benefit of HIE. “

Deanne E. Maynard:

–He–

Antonin Scalia:

Now, “for corporate purposes” would include either a return of capital or a dividend, payment out to shareholders.

Deanne E. Maynard:

–No, Your Honor.

No, Your Honor, it wouldn’t.

For corporate purposes… and he testified here, and he testified as to those three things.

He testified that he thought the moneys were always corporate moneys.

In other words, that he’d been given them to use them to buy coffee and do other things that were for the corporation.

He testified that, alternatively, he thought they were loans to him and that he was going to pay them.

And alternatively he thought that they were corporate advances to him.

The jury was instructed on all those things and rejected them in convicting him.

Deanne E. Maynard:

But he did not testify that he thought he was being paid a dividend.

He did not testify that he thought he was being paid a return of capital.

And the reason he proffered an expert is because he doesn’t believe there is this first element of the defense, at bottom, that the Government believes that there is, and that in 301(a) the threshold requirement, with respect to stock… and if you trace back the civil cases, and the basis in the D’Agostino rule is based on civil cases interpreting the old code–

Ruth Bader Ginsburg:

Tell me about the civil case?

There would be a tax deficiency, and wouldn’t the Government have to say what were the elements of the tax deficiency?

You said in a criminal case they don’t have to characterize it at all.

You just say he got… he has money on which tax hasn’t been paid, and there was a likely source of income.

But now you’re in a deficiency mode, and the Government asserts a deficiency.

Doesn’t it have to say what the elements of the deficiency are?

And what would it say in this case?

Deanne E. Maynard:

–Well, in this case the Government’s position at bottom is that he stole these funds, but that… but in the criminal case it didn’t need to characterize it.

I think… and if I can take a common criminal… a common civil situation, Your Honor, where a corporation comes in and tries to deduct a salary that it pays to a controlling shareholder and/or to, say, the spouse of the controlling shareholder who is also a shareholder, and the services that that person has provided, the corporation has called it a salary and deducted it as necessary business expenses, and the Service comes in and says that’s… we’re going to disallow that deduction and then that’s litigated in Tax Court.

In that situation, the Government does often argue that that… the excess… you know, say this person at home is providing $10,000 in bookkeeping services to the corporation, when in fact a net value, a net worth, fair market value of $10,000 of services, but being paid $500,000, and the corporation is deducting it as a necessary business expense of $500,000.

The issue in that case will turn on whether or not there was an intent to compense for services, whether or not the services are reasonable, and the Government may well come in and say–

Ruth Bader Ginsburg:

Well, let’s take this case.

Let’s take this case and not some hypothetical, and where… on the civil side… the Government is asserting a deficiency.

Just change one thing.

The corporation is rich with earnings and profits.

What would the notice of deficiency say?

Deanne E. Maynard:

–You know, I… to be honest with you, Your Honor, I don’t know, but the–

Ruth Bader Ginsburg:

Wouldn’t the Government want to take the position that this is a dividend and not something else, if that were the case?

Deanne E. Maynard:

–The Government–

Ruth Bader Ginsburg:

If there were earnings and profits.

Deanne E. Maynard:

–The Government might want to take that position, Your Honor.

On the facts of this case, the Government’s position is that he stole these funds.

But in a hypothetical situation like this case, if the Government wanted to take a position, it is our view here and certainly if you adopt the rule that we’re arguing for, that 301(a)… that there must be… the facts and circumstances must suggest that the moneys were taken out with respect to the stock because of the person’s status as a shareholder.

John Paul Stevens:

Ms. Maynard, may I just go back to your hypothetical for a second?

In the closely held corporation situation you describe where they pay a huge salary to the wife of the president and they decide you can’t deduct that, that’s really a dividend… that’s what the Government normally does in that situation.

And don’t they decide it’s a dividend irrespective of the intent of the company making the distribution?

Deanne E. Maynard:

Well, in that situation–

John Paul Stevens:

So there’s no attempt on the part of them to satisfy with “respect to stock” requirement?

Deanne E. Maynard:

–Well, the express intent, Your Honor, is belied by all the facts and circumstances.

I mean, just to be clear, the Government is arguing for an objective test here–

John Paul Stevens:

No, but the only fact and circumstance in your hypothetical is they paid them a million dollars when they only earned $100,000?

Deanne E. Maynard:

–Right.

John Paul Stevens:

And it’s clearly with respect to stock–

Deanne E. Maynard:

Yes.

John Paul Stevens:

–regardless of intent?

Deanne E. Maynard:

No, Your Honor.

All the facts and circumstances would show that the expressed intent was not the actual intent and that the… what’s really going on… and that’s what you’re asking in all these cases, what’s really going on?

In what way did this person get the payment, and why did they get the payment?

Why did the corporation make a payment to this person?

Antonin Scalia:

Surely he is entitled to try to prove that.

And I’m still hung up on your assertion that he made no proffer on it below.

Here’s another portion of the joint appendix.

The expert, his expert, he says, will further explain that if Boulware used… this is on page 97, bottom of 97:

“If Boulware used the moneys for corporate purposes, the moneys were not income to Boulware. “

“Alternatively, the expert will explain that if the moneys were not loans or advances or if Boulware did not use the moneys for corporate purposes, then as the controlling shareholder, the moneys could be deemed a constructive dividend or a return of capital to Boulware, which may or may not be income depending on whether or not HIE had earnings. “

That seems to me presenting the claim that he asserts he should have been given an opportunity to present.

Deanne E. Maynard:

That’s the language on which I rely to show that he’s proffered nothing in basis in facts, Your Honor.

In order to present a defense to the jury–

John G. Roberts, Jr.:

This is a criminal case.

He’s presented the argument, but don’t you have the burden of showing as an element of tax deficiency that what he’s proffering there is not true?

Deanne E. Maynard:

–The Government doesn’t… it’s clear under Holland… have to refute every hypothetical nontaxable source.

The defendant in the Second Circuit’s Leonard decision and in Bok makes this clear… there must be some basis on fact.

And this is just an expert proffer.

He already knows that.

Anthony M. Kennedy:

Let me get something clear.

They wish to introduce evidence.

And you say, oh, well, the proffer is no good because there is no basis, so there was no evidence.

Anthony M. Kennedy:

I don’t understand that.

Deanne E. Maynard:

They wish to introduce expert evidence that it could be deemed, as a legal matter–

Anthony M. Kennedy:

Oh, I see.

Deanne E. Maynard:

–They don’t have–

Anthony M. Kennedy:

And you say there was no other evidence in the record that the expert could use for that testimony?

Deanne E. Maynard:

–Exactly, Your Honor.

In fact, the Ninth Circuit decision, on Pet.

App. 6, makes that clear.

Boulware presented no concrete proof that the amounts were considered, intended.

Or recorded on the corporate records as a return on capital.

John G. Roberts, Jr.:

That’s not right.

He says right here that it may or may not be income depending on a fact, not an expert’s opinion, whether or not HIE had earnings and profits for the years when the moneys were obtained by Boulware.

That’s a question of fact.

You look at the corporate books.

You get the accountant on to testify.

It’s not an expert’s view on what’s legally relevant.

Deanne E. Maynard:

But that fact goes to the second element.

And what we’re disputing is sufficiency on the first element, which is that it must have been a corporate distribution with respect to the corporation’s–

John G. Roberts, Jr.:

It’s not totally relevant if the question he is trying to submit, whether they are earnings or profits or not, which will affect its treatment.

It’s only relevant if it’s with respect to stock.

Deanne E. Maynard:

–Right, Your Honor.

And he presented absolutely no factual basis–

Stephen G. Breyer:

But we don’t… we are not certain on that one, I think, because of the cases he said before would this be a possible holding.

If it was a distribution in respect to the stock, and if he had sufficient basis, then if there were no earnings and profits in the corporation during the year, it would be treated as a tax deficiency… no tax deficiency or it would be a return of capital.

Insofar as as the Ninth Circuit says something to the contrary, it is wrong.

Now, if we remand to decide whether the… whether he intended to prove and produced enough to show they didn’t have the earnings and profits and also to consider the question of whether this was a distribution in respect to stock.

Deanne E. Maynard:

–If you were… if you are going to remand, Your Honor–

Stephen G. Breyer:

Does the Government have any objection to what I just said?

Deanne E. Maynard:

–Well, if you’re going to remand, Your Honor, all three elements should be opened.

The Government’s view is that he knew that he needed… that the Ninth Circuit’s rule required him to proffer on the first element, that, in other words, that it was intended to be a constructive corporate distribution by somebody, that is any evidence… this is not a high burden.

Deanne E. Maynard:

He could have testified he thought it was a constructive distribution intent.

Either he could have testified it was a dividend, or he could have testified he thought it was a return of capital.

Mr. Monago also testified, Your Honor, that it was not… there were no dividends during the relevant period.

So there is testimony in the Government’s case that there were no dividends in the relevant period and no returns of capital during the relevant period.

And he proffered no basis in fact to believe that what happened here nor did any of the facts that suggest what happened here, unlike in our excessive salary case, Your Honor, where the government books it as a deductible business expense, and one can infer from the fact that it’s such an unreasonable salary that it must have been earnings and profits.

Here the facts of record are that–

John G. Roberts, Jr.:

Well, please–

Deanne E. Maynard:

–There is no way to infer from the way in which he diverted these funds that these funds were with respect to stocks.

John G. Roberts, Jr.:

–Thank you, Ms. Maynard.

Mr. Cline, you have four… ten minutes remaining.

John D. Cline:

Your Honor, I just want to make a few quick points.

The phrase “with respect to stock” was never discussed in the district court at all.

It was never discussed before the court of appeals panel at all.

It was never the basis in the lower courts for the Government’s position that Mr. Boulware could not assert a return of capital defense.

The Government’s sole argument, from the time it moved to exclude Mr. Boulware’s testimony on this issue and his evidence on this issue to the time that it sought to prevent him from getting a jury instruction on this issue, the Government’s only argument was Miller, and in particular the Miller requirement that there be an intent, a contemporaneous intent that the distribution be a return of capital.

Samuel A. Alito, Jr.:

Do you think–

Antonin Scalia:

Even so, no harm no foul, if, in fact, you hadn’t proffered any evidence that would enable you to meet the… in respect to stock requirement.

Now, what do you say to the contention that you hadn’t proffered anything?

John D. Cline:

I say several things, Justice Scalia.

First of all, I think there was an adequate proffer at page 97 of the joint appendix.

Second, at pages 62 through 66 of the joint appendix, Mr. Boulware specifically invokes Truesdell and the… and the D’Agostino no earnings, no profits–

Anthony M. Kennedy:

Well, at 97, are you saying that the expert would have brought with him financial records to show earnings and profits and basis?

Because I interpret the Government as saying there was nothing for him to testify to because there was no other… the basic value was not in the record.

John D. Cline:

–Justice Kennedy, there actually is a fair amount of basis data in the record.

And I can quickly refer the Court to the portions of the joint appendix.

There is testimony, for example, that Mr. Boulware contributed a water company value of roughly $1.7 million to HIE.

That’s at joint appendix 70 through 73, 116 through 23, 147 through 51.

There’s evidence that he contributed a coffee processing and wholesaling business valued at roughly $1.8 million.

That’s at joint appendix 123 through 27, 151 through 53.

There was evidence that he spent money on coffee beans for–

Stephen G. Breyer:

But those are different.

Those are whether that’s a corporate purpose.

I think the question here is, as I started, I thought that this expert was going to testify that there were no earnings and profits in the relevant year.

Having read it more closely, it seems to me that that is not what the expert is going to testify.

Rather, he’s going to say if there were no earnings and profits, then it is a return of capital if the basis is high enough.

He’s going to testify to that legal proposition.

So, my question is, is there any proffer of evidence here where the taxpayer says I want a chance to show there were no earnings or profits?

John D. Cline:

–Justice Breyer–

Stephen G. Breyer:

Where is it?

John D. Cline:

–That’s how I read the portion of the joint appendix at pages 62 through 66 that I referred to where Mr. Boulware invokes that rule.

Now, the problem here was that at no point… from the very beginning, the Government brought this issue to fore by filing a motion in limine.

And the sole focus of the Government’s motion in limine was the Miller contemporaneous intent rule, and that was the sole focus of the discussion.

That’s all anyone talked about in the district court.

And so, Justice Breyer, the proffer is not as wholesome as I might hope, but it’s clear that Mr. Boulware sought the opportunity to present earnings and profits and basic information through expert testimony.

Ruth Bader Ginsburg:

Do you recognize that he would have the burden?

If he said this corporation had no earnings and profits so what I got was a return of capital, it would be his burden to show that?

John D. Cline:

I think, Justice Ginsburg, that under the rule in Bok and under the rule that the parties proceeded under in the district court in this case, whether or not it’s the correct rule, Mr. Boulware had the burden of producing some evidence, some evidence of the earnings and profits and the basis issues.

Then the burden of persuasion–

Ruth Bader Ginsburg:

Coming forward, he had the burden of coming forward?

John D. Cline:

–Just the burden of coming forward with some evidence, even if it’s weak evidence or not credible evidence, just to put the issue in play.

Then the burden of persuasion beyond a reasonable doubt rests with the Government.

John G. Roberts, Jr.:

Where is that evidence?

If he has the burden of coming forward with it, I assume that means in the proffer.

And where is it?

John D. Cline:

The evidence, Your Honor, is in the record where I have previously identified.

John G. Roberts, Jr.:

Justice Breyer’s point is that that isn’t directed to that issue.

It’s directed to the issue of whether he was using the funds for a corporate purpose.

John D. Cline:

Actually, Your Honor, it was… it was… the evidence that came into the record came into the record more or less by happenstance because the district court had prohibited any evidence of return of capital.

John G. Roberts, Jr.:

And that evidence came in after the proffer, didn’t it?

John D. Cline:

No.

John D. Cline:

It came in throughout the trial.

John G. Roberts, Jr.:

Well, this is a motion in limine which is before the trial.

John D. Cline:

No.

The motion was actually filed June 30th, which is, I think, the third day of trial.

The issue was litigated continuously throughout the trial up until, I think, July 11th, which was a day or two before it ended.

This issue came up repeatedly throughout the trial.

Stephen G. Breyer:

So what did happen there?

I’ve been looking at page 62 through 66.

They are dancing around the issue.

It’s fair to say that they wouldn’t be having these four pages unless they are thinking of return of capital as a defense, but they don’t actually say it.

John D. Cline:

Justice Breyer, had the issue not been limited to the Miller–

Stephen G. Breyer:

They would have raised it.

John D. Cline:

–I believe that Mr. Boulware would have presented expert testimony that would, in fact, have at least put into play the issue of earnings and profits and basis.

David H. Souter:

Well am I… am I right that all he would have to do in order to satisfy that burden would be this: He would have the option, which I gather he availed himself of, to show that, in fact, the… the funds were loans or non-income to him.

And he would also have had the option to follow that by putting on the corporate accountant saying: This guy is a stockholder.

It’s what the corporate books show.

In fact, that’s not in dispute.

No. 2, the corporation didn’t have any profits that year.

No. 3, if the money was diverted, if the money was corporate funds, the only thing left under 301 is to treat it as a return of capital.

And if, in fact, the funds exceeded his basis, to treat it as a capital gain.

So all he had to do, in effect, to make the proffer, as I understand it, is to say: If you don’t believe me that this was non-income like a loan, then all I have to do is to put in the evidence that the corporation didn’t have any… any profits that year, and Section 301 will take care of the rest of it.

Because you have to conclude that it’s either a return of capital or a capital gain.

Is that fair?

Is that correct?

John D. Cline:

I think that’s basically right, Justice Souter, and–

Antonin Scalia:

Well, wait.

Doesn’t he have to show, still show, that it’s with respect to stock?

John D. Cline:

–Yes, but–

Antonin Scalia:

That one little element: That he has to show the distribution was not because this was his girlfriend, but it was with respect to stock, and the record is… is that the intent?

David H. Souter:

But doesn’t… doesn’t he suffice, on a going forward burden, simply to show that he is a stockholder?

John D. Cline:

–I think so, Justice Souter, and I think–

David H. Souter:

I mean I agree with Justice Scalia, but doesn’t he make it at least to the point of putting the Government to its proof by showing that he is a stockholder?

John D. Cline:

–That he is a stockholder, and that he did not receive this money in any nonstockholder capacity.

David H. Souter:

Yes.

John D. Cline:

For example, for income or something like that.

And I think the record is probably adequate as it stands.

Now, he was clearly a stockholder.

He would not have received this money had he not been a stockholder.

John G. Roberts, Jr.:

Well, it’s kind of hard to say it’s with respect to stock when the other stockholder doesn’t get any.

John D. Cline:

Chief Justice Roberts, the cases, again, are uniform… and we cite them, I think, at footnote 8 of our reply brief… that you can have a constructive distribution even if there are no corporate formalities, even if it’s a disproportionate distribution, even if other stockholders don’t share it.

And, again, that’s a position that the Government argues.

John G. Roberts, Jr.:

What page in your brief did you say?

John D. Cline:

I believe it is… the cases are cited, I believe, at footnote 8 of our reply brief.

Let me just make sure.

John G. Roberts, Jr.:

Of your reply brief?

John D. Cline:

It’s footnote 3… I’m sorry.

It’s footnote 3 on page 8, and there is a whole series of cases.

And, again, as far as I know, Mr. Chief Justice, there is no law to the contrary, and this is a position that the Government, itself, argues.

Antonin Scalia:

The issue is whether the Government wants to convict more… more malfeasors or whether it wants to collect more money, and the latter obviously prevails in the cases, right?

John D. Cline:

But, Justice Scalia, it seems to prevail only in this case, and I would be astonished if counsel argues that the Government views Mr. Boulware as having stolen this money from the corporation.

I would be astonished if the Government would accept a theft deduction, if HIE argued for it, when the Government seeks to collect these… the corporate income from HIE.

Unless the court has further questions–

John G. Roberts, Jr.:

Thank you, counsel.

The case is submitted.