No. 06-1509

In the Supreme Court of the United States

MICHAEL H. BOULWARE, PETITIONER

v.

UNITED STATES OF AMERICA

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES

PAUL D. CLEMENT
Solicitor General
Counsel of Record
RICHARD T. MORRISON
Acting Assistant Attorney
General
MICHAEL R. DREEBEN
Deputy Solicitor General
DEANNE E. MAYNARD
Assistant to the Solicitor
General
ALAN HECHTKOPF
KAREN QUESNEL
S. ROBERT LYONS
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217

QUESTION PRESENTED

Whether the diversion of corporate funds to a share holder of a corporation without earnings and profits au tomatically qualifies as a nontaxable return of capital up to the shareholder's stock basis, see 26 U.S.C. 301(c)(2), even if the diversion was not intended as a return of capital.

In the Supreme Court of the United States

No. 06-1509

MICHAEL H. BOULWARE, PETITIONER

v.

UNITED STATES OF AMERICA

ON WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The opinions of the court of appeals (Pet. App. 1-14, 27-62) are reported at 470 F.3d 931 and 384 F.3d 794, respectively.

JURISDICTION

The judgment of the court of appeals was entered on December 13, 2006. A petition for rehearing was denied on April 23, 2007 (Pet. App. 63). The petition for a writ of certiorari was filed on May 11, 2007. The petition was granted on September 25, 2007. The jurisdiction of this Court rests on 28 U.S.C. 1254(1).

STATUTORY PROVISIONS INVOLVED

The relevant statutory provisions are set forth in an appendix to this brief. App., infra, 1a-10a.

STATEMENT

Following a jury trial in the United States District Court for the District of Hawaii, petitioner was con victed on five counts of willfully filing false tax returns, in violation of 26 U.S.C. 7206(1); four counts of willfully attempting to evade tax, in violation of 26 U.S.C. 7201; and one count of conspiring to make a false statement to a federally insured financial institution, in violation of 18 U.S.C. 371. The court of appeals, in a prior appeal, af firmed the conspiracy conviction but reversed the tax convictions and remanded for a new trial. Pet. App. 27- 62. This Court denied a petition for a writ of certiorari. 546 U.S. 814 (2005).

On remand, petitioner was again found guilty by a jury on the tax counts, and he was sentenced to 36 months of imprisonment on the false return counts and 60 months of imprisonment on the tax evasion and con spiracy counts, to run concurrently. Pet. App. 2-3. On a second appeal, the court of appeals affirmed both the convictions and the sentence. Id. at 1-14.

1. a. The requirement to pay taxes is set forth in Section 1 of the Internal Revenue Code (Code), which imposes a tax on the taxable income of individuals, es tates, and trusts as determined by the tables set forth in that section. 26 U.S.C. 1 (2000 & Supp. V 2005). Under Section 6151(a) of the Code, "when a return of tax is required under this title or regulations, the person re quired to make such return shall, without assessment or notice and demand from the Secretary, * * * pay such tax at the time and place fixed for filing the return." 26 U.S.C. 6151(a). "Every individual having for the taxable year gross income which equals or exceeds" a statutorily determined amount is obligated to file a tax return. 26 U.S.C. 6012(a)(1)(A).

Under Section 61(a) of the Code, "gross income means all income from whatever source derived." 26 U.S.C. 61(a). That includes lawful and unlawful gains, regardless of whether the taxpayer has any legal right to retain the money. James v. United States, 366 U.S. 213, 219 (1961) (plurality opinion); Rutkin v. United States, 343 U.S. 130, 136-137 (1952).

b. Under Section 7206(1) of the Code, anyone who "[w]illfully makes and subscribes any return * * * which contains * * * a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter" commits a felony punishable by a fine not more than $100,000, or imprisonment of not more than three years, or both, together with the costs of prosecution. 26 U.S.C. 7206(1). To obtain a conviction for filing false returns, the government must establish that the defen dant willfully made and subscribed under penalty of per jury income tax returns that he did not believe to be true and correct as to every material matter. See Neder v. United States, 527 U.S. 1, 16 (1999); United States v. Bishop, 412 U.S. 346, 350 (1973).

Under Section 7201 of the Code, anyone who "will fully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof commits a felony" punishable by a fine of not more than $100,000 or imprisonment of not more than five years, or both, to gether with the costs of prosecution. 26 U.S.C. 7201. To support a conviction for income tax evasion, the govern ment must prove the existence of a tax deficiency, an affirmative act of attempted evasion of tax, and willful ness. See Sansone v. United States, 380 U.S. 343, 351 (1965).

c. Section 301(a) of the Code provides that a distri bution of property "made by a corporation to a share holder with respect to its stock shall be treated in the manner provided in subsection (c)." 26 U.S.C. 301(a). Section 301(c) divides distributions made with respect to stock into three categories: (1) the portion that is a divi dend (as defined by 26 U.S.C. 316) is taxable as ordinary income; (2) any portion that is not a dividend is treated as a return of capital up to the amount of the sharehold er's basis in his stock and is nontaxable, but is "applied against and reduce[s]" the shareholder's "adjusted basis of the stock"; and (3) any amount in excess of the share holder's basis is taxable as a capital gain. 26 U.S.C. 301(c).

Section 316 in turn defines a "dividend" as a distribu tion of property by a corporation to its shareholders "out of its earnings and profits." 26 U.S.C. 316(a)(2). Section 316(a) further provides, with exceptions not pertinent here, that "every distribution is made out of earnings and profits to the extent thereof." 26 U.S.C. 316(a). Read together, Section 301 and Section 316 establish that, if a corporation makes a distribution of funds to its shareholders "with respect to its stock," the tax conse quences of the distribution depend, in part, on whether the corporation has earnings and profits and the amount of the shareholder's adjusted stock basis.

2. Petitioner is the founder, former president, and 50% owner of a closely held corporation, Hawaiian Isles Enterprises (HIE), that deals in tobacco distribution, coffee processing and sales, arcade games, vending ma chines, and bottled water. Pet. App. 2. A trust for the benefit of petitioner's son owns the other 50% of HIE stock. J.A. 82-83, 86-88, 133. Following a six-year inves tigation, the Internal Revenue Service (IRS) determined that, during the period from 1989 to 1997, petitioner had diverted more than $10 million from HIE and failed to report those funds on his personal income tax returns and to pay taxes on that income, and that he had used fraudulent invoices in applying for a bank loan. The scheme to divert money from HIE involved a variety of devices. Petitioner diverted some of the funds by giving HIE checks to friends and employees and instructing them to cash the checks and then return the cash to peti tioner. He diverted other funds by establishing two bank accounts in HIE's name but under petitioner's ex clusive control, then depositing proceeds from HIE sales into the accounts without recording the sales on HIE's books. Petitioner also diverted HIE funds by instruct ing businesses that purchased coffee from HIE to remit payment directly to petitioner. In addition, petitioner used false invoices to obtain a loan from a federally in sured financial institution. Pet. App. 2-3, 29-30; C.A. E.R. 334-339, 459-460, 466-467, 482, 486.

Petitioner laundered some of the diverted funds through companies in the Kingdom of Tonga and Hong Kong, and used the funds to support a lavish lifestyle, giving millions of dollars in HIE funds both to his wife and to his girlfriend. Pet. App. 2-3, 30-31; J.A. 15-17.

3. Petitioner was charged in a superseding indict ment with nine counts of willfully filing false tax returns, four counts of willfully attempting to evade tax, four counts of making false statements to a federally insured financial institution, and one count of conspiracy to make such false statements. Pet. App. 29. The false return counts charged that the returns were false in that they underreported petitioner's total income. J.A. 10-14.1 Petitioner was convicted on five counts of filing a false tax return, four counts of tax evasion, and the conspir acy count. He was acquitted on the four counts of mak ing false statements to a federally insured financial in stitution. Pet. App. 29.

4. The court of appeals affirmed petitioner's convic tion on the conspiracy count, and it reversed his convic tions on the tax counts and remanded for further pro ceedings. Pet. App. 27-62. The court reversed the tax convictions because it concluded that the district court had erred in excluding from evidence a state-court judg ment that had determined, as between petitioner's girl friend and HIE, that the funds petitioner delivered to his girlfriend belonged to HIE. Id. at 33-52.

The court of appeals rejected petitioner's challenge to the sufficiency of the evidence on the tax counts. Pet. App. 52-56. Petitioner contended that the government had failed to establish the existence of a tax deficiency. Id. at 52. He argued, inter alia, that the government had failed to prove that the corporate funds he diverted for his personal use did not constitute nontaxable re turns of capital under 26 U.S.C. 301(c)(2). The court of appeals rejected that argument based on its decision in United States v. Miller, 545 F.2d 1204 (9th Cir. 1976), cert. denied, 430 U.S. 930 (1977), which held that the government demonstrates a deficiency once it proves that the defendant received and failed to report unex plained corporate funds. Pet. App. 54. The court of ap peals also rejected petitioner's argument that, even if the government had established its case, he had "met his burden of going forward with the evidence by testifying that the diversions were loans and were accounted for as such on HIE's books." Id. at 56. The court concluded that there was "ample evidence" from which a rational jury could determine that the diversions were not loans and that petitioner was guilty of tax evasion and willfully submitting false tax returns. Ibid.

5. On retrial of the tax charges, the government's theory of the case, as originally, was that petitioner had embezzled funds from HIE by diverting millions of dol lars in corporate funds to his personal benefit, and that he had failed to report those funds as income on his indi vidual tax returns. C.A. E.R. 815-820 (closing argu ment). In defense, petitioner alternatively claimed that the diverted funds were nontaxable "if they are consid ered to be corporate advances or loans," or "if [peti tioner] used the monies for corporate purposes," J.A. 97, or if they were constructively treated as a return of capi tal. J.A. 97-98.

The district court granted the government's motion in limine to exclude evidence offered by petitioner to establish that the diverted funds should be treated as a constructive return of capital. Pet. App. 22; see id. at 16-19. At a hearing, the court concluded that the gov ernment, by adducing evidence of the receipt by peti tioner of unexplained funds, had demonstrated that peti tioner had unreported income. Id. at 17. The court held that, before petitioner could rely on a return-of-capital defense, petitioner had to make "some demonstration on the part of the taxpayer and/or the corporation that such distributions were intended to be" a return of capital. Ibid. (quoting Miller, 545 F.2d at 1215). The court noted that HIE's comptroller "ha[d] testified that there were no returns of capital during the years in question." Id. at 18; J.A. 46; see Pet. App. 32.

Petitioner subsequently made an offer of proof, stat ing, inter alia, that he would present expert testimony that "as the controlling shareholder, the monies could be deemed a constructive dividend or return of capital to [petitioner] which may or may not be income depending on whether or not HIE had earnings and profits for the years when the monies were obtained by [petitioner]." J.A. 97-98. The district court concluded that this offer of proof was insufficient to lay the necessary foundation for a return-of-capital defense. Pet. App. 21-22. The court observed that "it is not relevant whether the funds could have been classified as a return of capital or a divi dend at the time when they were diverted." Id. at 21. Rather, the defendant "must introduce evidence show ing that, at the time of the transfer, the funds were in fact a return of capital." Id. at 21-22.

At the close of the retrial, the district court in structed the jury that funds acquired "either lawfully or unlawfully, without consensual recognition of an obliga tion to repay, and without restriction on their disposi tion" are income. J.A. 174. It informed the jury of peti tioner's position that the funds he received were "corpo rate assets" of HIE and thus "not reportable income to him," J.A. 173, and petitioner's asserted belief that the funds "were accounted for as assets and/or property of the company, or as officer loans." J.A. 174. It further instructed the jury that "[a] loan is not income," and described the attributes of a bona fide loan. J.A. 174- 175; C.A. E.R. 852-853.

The jury found petitioner guilty on four counts of tax evasion and five counts of filing a false income tax re turn. The district court imposed a concurrent sentence of 36 months of imprisonment on the false return counts and 60 months of imprisonment on the tax evasion and conspiracy counts. Pet. App. 2-3.

6. The court of appeals affirmed. Pet. App. 1-14. The court of appeals held that the district court had cor rectly construed Miller as requiring evidence "not merely that the funds could have been a return of capi tal, but that the funds were in fact a return of capital at the time of the transfer." Id. at 4. The court of appeals also rejected petitioner's argument that requiring a de fendant to demonstrate that a distribution was in fact intended to be a return of capital "unconstitutionally shifts the burden of proof to the defendant." Id. at 5-6. The court held that the government had established un reported income through proof that petitioner had di verted funds from the corporation and failed to report them. Noting the lack of evidence that the funds peti tioner received "were considered, intended, or recorded on the corporate records as a return of capital at the time they were made," id. at 6 (quoting Miller, 545 F.2d at 1215), the court of appeals held that the district court had correctly required petitioner to lay a foundation before allowing him to present his return-of-capital de fense to the jury. Ibid. The court further concluded that the district court had correctly rejected petitioner's proffer as inadequate. Ibid.

The court of appeals acknowledged that its approach conflicted with that of the Second Circuit, which held in United States v. D'Agostino, 145 F.3d 69, 72-73 (1998), that a taxpayer need not show that a lawful diversion of funds was intended as a return of capital when invoking the return-of-capital defense. See Pet. App. 6 (citing D'Agostino and United States v. Bok, 156 F.3d 157, 162 (2d Cir. 1988)). The court noted, however, that it was "by no means certain" that petitioner would prevail even under the Second Circuit's approach. Ibid.2

Judge Thomas concurred. Pet. App. 13-14. He indi cated that, if he were "writing on a clean slate," he would adopt the Second Circuit's approach in Bok and D'Agostino. Id. at 13. He emphasized, however, that "the outcome [in this case] would not be affected" under the Second Circuit's approach, because the diversions here "may be properly considered unlawful" and be cause "the record indicates that [petitioner] was not the sole shareholder of HIE, which would also likely pre clude him from asserting a return [of] capital defense." Id. at 14.

SUMMARY OF ARGUMENT

A defendant is not entitled to present a return-of- capital defense to the jury simply by asserting that he was a shareholder who diverted funds from a corpora tion without earnings and profits (and that he had a stock basis at least equal to the diverted amount). For the diverted funds to be a return of capital, they must have been a distribution "with respect to [the corpora tion's] stock," and the question whether the diverted funds were such a distribution turns on the parties' in tent, as objectively manifested by all of the facts and circumstances.

A. The text of Section 301 of the Internal Revenue Code requires that a payment to a shareholder be a dis tribution by the corporation "with respect to its stock" in order for the payment to be treated as a return of capital under Section 301. 26 U.S.C. 301(a) and (c). The ordinary meaning of the phrase "with respect to its stock" limits return-of-capital treatment to payments that are made to a shareholder by reason of his status as such. Accordingly, a diversion of funds from a corpora tion that lacks earnings and profits to a shareholder who has a sufficient basis in his stock to cover the diversion is not automatically a nontaxable return of capital. Rather, before a corporate payment receives the tax treatment in Section 301, the payment must meet the threshold requirement of having been a distribution "with respect to [the corporation's] stock."

Whether a corporate payment meets that require ment turns on all the facts and circumstances of the case. A payment does not qualify for treatment under Section 301 if the shareholder has received the funds in some capacity other than his capacity as shareholder, for example, as an employee, creditor, or embezzler. In the context here, where a shareholder has taken elaborate steps to hide diverted funds that he now asserts are a nontaxable return of capital, there must be some demon stration that the funds were in fact intended to be such a return before he is entitled to have the jury consider a return-of-capital defense. Just as intent is relevant to whether a payment is made in a nonshareholder capac ity, so too is it relevant to whether it was made in a shareholder capacity.

B. If petitioner were correct that any diversion to a shareholder by a corporation without earnings and prof its constituted a nontaxable return of capital up to the shareholder's basis, it would be an open invitation to tax fraud. Any taxpayer who also happens to be a share holder could divert corporate assets with fraudulent intent and then, years later, when his fraud is discov ered, claim that the diversion was a nontaxable return of capital. And, if he is not discovered, he can, without ac knowledging any previous reduction in his stock basis, subsequently take a recorded return of capital, also tax- free. Nothing in the statute sanctions such a result.

C. Requiring a defendant to adduce evidence that a diversion was intended to be a distribution with respect to stock in order to invoke a return-of-capital defense does not create a disparity between criminal and civil tax cases. In civil tax cases, just as in criminal cases, whether corporate payments were made to a share holder "with respect to [the corporation's] stock" de pends on all of the facts and circumstances, including the intent of the corporation and the parties. What evi dence is necessary to demonstrate that a payment was with respect to stock may vary with the circumstances, and a court may conclude that the purported intent of the corporation or shareholder was not consistent with the economic substance of the transaction. But that does not mean, as petitioner contends, that intent is not relevant; rather, actual intent is highly relevant.

D. Moreover, the approach of the court below does not shift the burden of proof to criminal defendants. The question at issue here is not one of burden of proof, but of the legal elements of the return-of-capital de fense. The government retains at all times the burden of proving the elements of tax evasion beyond a reason able doubt. But once the government proves an unre ported receipt of funds that derive from a likely source of income, it is incumbent on the defendant to adduce some evidence suggesting that the funds were not tax able. Here, petitioner sought to adduce evidence that the funds were a nontaxable return of capital, but he proffered no evidence on the threshold requirement of that defense, namely, that he received the diverted funds by reason of his status as a shareholder.

E. In any event, petitioner cannot prevail even under a rule that any diversion to a shareholder from a corpo ration without earnings and profits is automatically a return of capital up to the amount of the shareholder's basis in his stock. No court has applied such an auto matic rule where, as here, the shareholder unlawfully diverted the corporate funds.

ARGUMENT

THE DIVERSION OF CORPORATE FUNDS TO A SHARE HOLDER OF A CORPORATION WITHOUT EARNINGS AND PROFITS DOES NOT AUTOMATICALLY QUALIFY AS A NONTAXABLE RETURN OF CAPITAL UP TO THE SHARE HOLDER'S STOCK BASIS

An individual can divert money or property from a corporation in which he is a shareholder in various ways, including by having the corporation pay his personal expenses, by "skimming" corporate receipts without ever recording the receipts as income by the corpora tion, or by simply taking corporate funds. Here, the government proved that petitioner diverted approxi mately $10 million from the corporation in all three of those ways. Pet. App. 3; see Pet. App. 30. Those di verted funds were not reported as income by petitioner, and petitioner's failure to report that income on his per sonal tax return formed the basis of the counts in the indictment charging the filing of false returns and eva sion of income taxes. J.A. 10-17.

Among other defenses, petitioner sought to claim that the funds were a nontaxable return of capital under Sections 301 and 316 of the Code, and thus were not re quired to be included in his taxable gross income. J.A. 97-98. Petitioner proffered no evidence, however, that the diversions were in fact a return of capital. Instead, he proffered expert testimony that because he was "the controlling shareholder, the monies could be deemed a constructive dividend or return of capital to [petitioner] which may or may not be income depending on whether or not [the corporation] had earnings and profits for the years when the monies were obtained by [petitioner]." J.A. 98.

Petitioner contends (e.g., Br. 8, 11) that a diversion of corporate funds to a shareholder of a corporation without earnings and profits automatically qualifies as a nontaxable return of capital up to the shareholder's stock basis, regardless of the reasons the shareholder received the funds. That assertion cannot be squared with the text of Section 301 and would sanction tax fraud. It could not, even if correct, justify setting aside the verdict in this case.

A. The Text Of Section 301(a) Requires Evidence That The Pay ments Were In Fact Distributions To The Taxpayer By Rea son Of His Status As A Shareholder

1. Section 301(a) of the Code provides that "a distri bution of property * * * made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c)." 26 U.S.C. 301(a). Under Section 301(c)(2), if a corporation in fact makes a distribution with respect to its stock and has no earnings and profits, the distribution is treated as a nontaxable return of capital up to the amount of the shareholder's adjusted basis in his stock. 26 U.S.C. 301(c)(2); see p. 4, supra. Thus, if a corporation without earnings and profits makes a distribution of funds with respect to its stock, and the amount of funds received by a shareholder does not exceed that shareholder's ad justed basis in his stock, the shareholder does not have to include the amount of those funds in his taxable gross income. The shareholder's basis in the stock, however, would be reduced by the amount of the distribution. 26 U.S.C. 301(c)(2).

For the return-of-capital treatment to apply, how ever, the corporate payment must meet the conditions of Section 301(a). See 26 U.S.C. 301(c) (stating that its terms apply "in the case of a distribution to which sub section (a) applies"). The text of Section 301(a) requires that the corporation's payment must be a "distribution * * * with respect to its stock." 26 U.S.C. 301(a). The plain meaning of that phrase limits the applicability of Section 301's tax treatment to distributions that are made to shareholders qua shareholders, i.e., by reason of the recipients' status as shareholders.

As this Court has often instructed, "the words of statutes-including revenue acts-should be interpreted where possible in their ordinary, everyday senses." Crane v. Commissioner, 331 U.S. 1, 6 (1947); see, e.g., Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000) ("[W]hen the statute's language is plain, the sole function of the courts * * * is to enforce it according to its terms," unless "the dispo sition required by the text is * * * absurd.") (internal quotation marks and citation omitted). In ordinary par lance, the phrase "with respect to" means "with refer ence to," "as regards," and "insofar as concerns." Web ster's Third New International Dictionary of the Eng lish Language 1934 (1993).3 Those definitions all sug gest more than a happenstance connection. Rather, those definitions connote an act that is taken because of a certain connection. Applying those ordinary meanings here, the plain text of Section 301(a) requires that the distribution of property by the corporation be made to a shareholder because of his ownership of its stock.

Consistent with its ordinary meaning, the IRS has consistently interpreted Section 301 as "not applicable to an amount paid by a corporation to a shareholder un less the amount is paid to the shareholder in his capac ity as such." 26 C.F.R. 1.301-1(c) (2007) (emphasis added); see 26 C.F.R. 1.301-1(c) (1955) (same). The leg islative history of the Internal Revenue Code of 1954, which added the phrase "with respect to its stock" to the corporate distribution provisions, likewise supports that conclusion. See S. Rep. No. 1622, 83d Cong., 2d Sess. 231 (1954) ("Subsection (a) accordingly makes clear that section 301 has applicability only to distributions of property to shareholders in their capacity as such."). Distributions made to shareholders in other capacities do not qualify. "For example, a distribution of property to a shareholder who is a creditor of the corporation in satisfaction of his claim against the corporation is not within the scope of section 301." Ibid.

Thus, to fall within the tax treatment in Section 301, it is not enough, as petitioner suggests (Br. 11), to sim ply demonstrate that the corporation had no earnings and profits and that the taxpayer was a shareholder and had a sufficient basis in his stock to cover the amount of the diversions. Instead, before a corporate payment receives such treatment under Section 301(c), the pay ment must meet the threshold requirement of having been a "distribution * * * with respect to [the corpora tion's] stock," 26 U.S.C. 301(a), or, in other words, a pay ment by the corporation to the shareholder "in his ca pacity as such." 26 C.F.R. 1.301-1(c).

Accordingly, a taxpayer cannot maintain that any diversion of corporate funds by a shareholder must auto matically be treated as a return of capital if the corpora tion lacks earnings and profits and the shareholder has a sufficient stock basis. United States v. Miller, 545 F.2d 1204, 1210-1214 (9th Cir. 1976), cert. denied, 430 U.S. 930 (1977). In Miller, the president and sole share holder of a closely held corporation failed to record more than $850,000 in corporate receipts on the corporate books, falsely recording some of the receipts as loans from the defendant to the corporation. Id. at 1209. Over the same period, the corporation paid virtually all of the defendant's personal expenses ("from the mortgage on his home to his 'Book-of-the-Month' Club obligations"), and the defendant falsely characterized the expense payments as repayments of loans. Ibid. Following a bench trial, the district court found that the distribu tions were taxable as salary, and were not constructive corporate distributions under Section 301. Id. at 1212, 1215-1216.

In affirming that judgment, the court of appeals cor rectly concluded that a taxpayer is not entitled to treat diverted corporate funds as a constructive return of cap ital merely because the corporation lacked earnings and profits and the shareholder had a basis in the stock at least equal to the diverted amount. Miller, 545 F.2d at 1211-1212, 1214. Rather, whether a corporate payment is such a distribution "depends on the factual circum stances involved in each case under consideration." Ibid.

A payment does not qualify as a distribution with respect to stock, for example, if the corporation pays an individual shareholder in his capacity as a debtor, credi tor, employee, or vendee, or under other circumstances where the individual's status as a shareholder is inciden tal, such as embezzlement or misappropriation. In the context here, where a shareholder has taken elaborate steps to hide diverted funds that he now claims are a nontaxable return of capital, "there must be some dem onstration on the part of the taxpayer and/or the corpo ration that such distributions were intended to be" a distribution to the shareholder in his capacity as such before the taxpayer can claim the benefit of the return- of-capital tax treatment. Miller, 545 F.2d at 1215; see id. at 1216 ("Such an effort to disguise an allegedly non-taxable event (which a return of capital would nor mally be) raises doubts as to any claim by the defendant that he considered them to be a return of capital."). By looking to objective evidence that the distribution was intended as a return of capital (or dividend or capital gain), rather than, for example, a payment of salary, repayment of a debt, or embezzlement, the standard adopted by the court of appeals ensures that Section 301(c) treatment applies only to distributions made "with respect to" the shareholder's ownership of stock.4

2. Tellingly, petitioner elides the phrase "with re spect to its stock" in his initial discussion of Section 301's "return of capital rule." See Br. 10-13 & n.3. He ultimately acknowledges, however, that the phrase serves to "distinguish money that a taxpayer receives from a corporation in his capacity as a shareholder from money that he receives in some other capacity-as an employee, for example, or as a creditor." Br. 26; see Br. 27 (quoting 26 C.F.R. 1.301-1(c) and the legislative his tory discussed above). And petitioner accepts (Br. 28) that "the intent of the shareholder and the corporation may be significant in determining whether a payment constitutes salary, a loan repayment, or some other form of distribution in a nonshareholder capacity."

But intent is likewise relevant to whether a payment is a "distribution * * * with respect to [a corporation's] stock," 26 U.S.C. 301(a), and thus a payment "to the shareholder in his capacity as such." 26 C.F.R. 1.301- 1(c). Petitioner offers no explanation why intent should be relevant to determining whether a payment was made by reason of a nonshareholder capacity, but not by reason of a shareholder capacity. Often, the questions are opposite sides of the same coin. For example, if a payment is recorded on the corporate books as a loan to a shareholder, but there is no evidence of a contempora neous intent to repay, that suggests that, in reality, it was not a "loan," and that it may have been a distribu tion with respect to the corporation's stock. See, e.g., United States v. Pomponio, 429 U.S. 10, 10, 13 & n.4 (1976) (per curiam) (defendants "caused corporations they controlled to report payments to them as loans, when they knew the payments were really taxable divi dends"); Crowley v. Commissioner, 962 F.2d 1077, 1080- 1085 (1st Cir. 1992) ("The determination whether the parties to the transaction actually intended a loan or a dividend presents an issue of fact."). Similarly, whether payments to a shareholder-employee were compensation or dividends turns, at least in part, on whether there was compensatory intent or an intent to make dividend distributions. See, e.g., Elliotts, Inc. v. Commissioner, 716 F.2d 1241, 1244-1248 (9th Cir. 1983).5

Nevertheless, petitioner essentially seeks (Br. 27-30) a default rule to the effect that any diversion by a share holder of corporate funds is a distribution "with respect to [the corporation's] stock," 26 U.S.C. 301(a), "unless there is evidence to the contrary." Br. 29. But nothing in the statute supports such a rule. Instead, Congress has set forth particular predicates for the tax treatment provided by Sections 301 and 316, one of which is that the payment be a corporate "distribution * * * with respect to its stock." 26 U.S.C. 301(a). Unless there is evidence of a causal link to stock ownership, diversions cannot be so characterized. Moreover, petitioner omits (Br. 28-29) from his examples of evidence that would be "to the contrary" one particularly relevant way in which someone who happens to be a shareholder can receive funds in a nonshareholder capacity: embezzlement. Where, as here, a taxpayer diverts substantial funds from a corporation, "assume[s] control of the funds and then fails to report such funds as income or to make any adjustments in the corporate books to reflect a return of capital," Miller, 545 F.2d at 1214 n.12, there is evidence that the funds were not a distribution by the corporation "with respect to its stock," but were, for example, em bezzled funds. In this context, the court of appeals was correct to require some demonstration that the distribu tion was "intended to be" a distribution with respect to the corporation's stock. Pet. App. 4 (citing Miller, 545 F.2d at 1214-1215). That is particularly true where, as here, there were efforts at concealment that would make little sense in the context of an actual nontaxable distri bution "with respect to stock."6

B. Congressional Purpose Would Be Thwarted If Unexplained Diverted Funds Were Automatically Treated As Distribu tions With Respect To Stock

Petitioner's proposed interpretation of Sections 301 and 316 would thwart congressional purpose and would encourage tax fraud. Congress sought to tax all "acces sions to wealth, clearly realized, and over which the tax payers have complete dominion." James v. United States, 366 U.S. 213, 219 (1961) (plurality opinion) (quot ing Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955)). This includes lawful and unlawful gains, regardless of whether the taxpayer has any legal right to retain the money. Ibid. (holding, in a criminal case, that embezzled funds are taxable); Rutkin v. United States, 343 U.S. 130, 136-137 (1952) (same as to extorted funds). In addition, Congress has established a system for the collection of the income tax that relies "largely upon the taxpayer's own disclosures." Spies v. United States, 317 U.S. 492, 495 (1943). "This system can func tion successfully only if those within and near taxable income keep and render true accounts." Ibid.

Contrary to those congressional goals, the automatic return-of-capital rule advanced by petitioner would "sanction the diversion and non-reporting of corporate and personal funds." Miller, 545 F.2d at 1214. A share holder of a corporation without earnings and profits could divert corporate funds to his own use (up to the amount of his stock basis) with no risk of ever paying taxes on those gains or being found criminally liable un der the tax laws. Such a rule would "permit the tax payer to divert [corporate] funds and if not caught, to later pay out another return of capital; or if caught, to avoid conviction by raising the defense that the sums were a return of capital and hence non-taxable." Id. at 1215.

Moreover, petitioner's rule would create an anomaly, whereby "[a] taxpayer who diverted funds from his close corporation when it was in the midst of financial diffi culty and had no earnings and profits would be immune from punishment (to the extent of his basis in stock) for failure to report such sums as income." Miller, 545 F.2d at 1214. But "that very same taxpayer would be con victed if the corporation had experienced a successful year and had earnings and profits." Ibid. Congress could not have intended such a result.

This case illustrates how petitioner's rule would frus trate Congress's purposes. Petitioner diverted $10 mil lion in corporate funds, and he laundered some of those funds through companies in the Kingdom of Tonga and Hong Kong. Petitioner did not report those funds as income. If petitioner's diversions had never been uncov ered, he could subsequently have recorded a return-of- capital on the corporation's books and removed still more funds from the corporation tax-free. Here, of course, petitioner's diversions were discovered. Since that discovery, he alternatively has contended that the diverted funds still belonged to the corporation (Pet. App. 34-35; J.A. 174), that the funds were used for cor porate purposes (J.A. 59-60, 95), that the funds "were loans" (Pet. App. 56; J.A. 95, 174), and that the funds "could" have been returns of capital (Pet. App. 4). The jury, which was instructed on petitioner's first three claims (J.A. 174-175), necessarily rejected those charac terizations. If petitioner were now able to recharac terize the payments post hoc as nontaxable returns of capital, despite the lack of any evidence that the pay ments were in fact intended to be distributions to him because of his status as a shareholder, that would sanc tion not only his evasion of taxes, but also encourage others to engage in similar behavior.

C. The Approach Of The Court Below Is Consistent With Civil Tax Cases

Contrary to petitioner's assertion (Br. 15-26), the approach of the court below is consistent with the appli cation of Section 301 in civil cases. In the civil context, as in the criminal context, a disbursement of corporate funds to a shareholder is not automatically treated as a distribution "with respect to its stock." In both con texts, whether a payment to a shareholder was because of his status as a shareholder or for some other reason turns on all of the facts and circumstances, including the intent of the corporation and the shareholder.

1. Petitioner relies (Br. 11) on the approach of the Second Circuit, but that approach stems from a faulty assumption that, in civil cases, distributions of corporate funds to a shareholder are automatically treated as dis tributions "with respect to [the corporation's] stock." See United States v. Bok, 156 F.3d 157, 162-163 (1998); United States v. D'Agostino, 145 F.3d 69, 72-73 (1998). In D'Agostino, the Second Circuit held that every distri bution of funds to a shareholder from a corporation without earnings or profits qualifies as a return of capi tal up to the shareholder's stock basis, even if the distri bution was not intended as a return of capital. 145 F.3d at 72-73; see Bok, 156 F.3d at 162-164 (observing that "under certain circumstances monies lawfully withdrawn from a corporation by one of its shareholders may con stitute a nontaxable return of capital," but holding that the defendant failed to meet his burden of coming for ward with evidence of a lack of earnings and profits).

In D'Agostino, shareholders in a closely held corpo ration diverted approximately $400,000 in corporate funds to their personal use and hid the cash in kitchen drawers. The distributions were not intended as repay ments of capital; the court conceded that "[i]t is entirely possible the D'Agostinos intended to evade paying taxes." 145 F.3d at 73. Nonetheless, the court held that because the corporation did not have earnings or profits, the distributions automatically qualified as nontaxable returns of capital, up to the defendants' basis in their stock. Id. at 72-73.7

The Second Circuit considers its approach "better reasoned" because, in its view, inquiring into the intent of the corporation to make a distribution with respect to stock would "place[] greater emphasis on the intent ele ment in criminal tax evasion cases" while "minimiz[ing] the government's burden of proving a tax deficit," and would have the anomalous result of assigning the gov ernment "a higher burden of proof in a civil tax collec tion matter than in a criminal tax evasion prosecution." D'Agostino, 145 F.3d at 73. In reaching that conclusion, however, the Second Circuit misread the Tax Court's decision in Truesdell v. Commissioner, 89 T.C. 1280 (1987), and the IRS's acquiescence in that decision, 1988-2 C.B. 1 (1988), as standing for the proposition that diverted funds in civil cases are automatically treated as distributions "with respect to [the corporation's] stock" under Section 301.8

Neither Truesdell nor the IRS's acquiescence in that decision supports such an automatic rule. In Truesdell, the Tax Court rejected the government's argument that diverted funds are automatically taxable as ordinary income in every case where the taxpayer exercises "do minion and control" over the funds, and that a taxpayer cannot defend on the basis that the funds were distribu tions with respect to stock. 89 T.C. at 1298. But the court also followed Miller in refusing "to apply the con structive distribution rules automatically to shareholder diversions of corporate funds." Id. at 1299-1300 (noting that the case was appealable to the Ninth Circuit). Hav ing rejected the automatic rules urged by both parties, the Tax Court concluded, in its capacity as the finder of fact, that the diversions by the sole shareholder in that case were constructive dividends to the extent that the corporation had earnings and profits, concluding that "the corporation ha[d] conferred a benefit on the share holder in order to distribute available earnings and prof its without expectation of repayment." Id. at 1295 (em phasis added); see id. at 1293-1295, 1300.

In its memorandum recommending acquiescence in the Tax Court's decision, the IRS stated that it would no longer seek automatic application of the "dominion and control" rule with respect to wholly owned corporations. Truesdell, supra, action on decision, 1988-25, 1988 WL 570761 (Sept. 12, 1988) (unpublished). But it reiterated that a diversion of corporate funds cannot qualify as a constructive distribution where "the funds were addi tional salary or otherwise were received in a nonshareholder capacity." Ibid. (emphasis added).

In addition to Truesdell, the Second Circuit based its rule on its earlier decisions in DiZenzo v. Commis sioner, 348 F.2d 122 (1965), and United States v. Leon ard, 524 F.2d 1076 (1975), cert. denied, 425 U.S. 958 (1976). See D'Agostino, 145 F.3d at 72. But the D'Agos tino holding was not required by those cases. In Leon ard, the court did not need to decide whether the di verted funds should automatically be treated as a return of capital, because the court recognized that "[a]cceptance of this still does Leonard no good," be cause he had failed to satisfy his burden of producing "sufficient evidence of an absence of earnings and prof its to warrant submission to the jury" of a return-of-cap ital defense. 524 F.2d at 1083-1084. In DiZenzo, the Second Circuit held that the Tax Court had erred in rul ing that the corporate distribution rules could never apply to diverted corporate funds. 348 F.2d at 125. In terpreting an earlier version of the corporate-distribu tion provisions, the court also concluded that "no reason appears why [the funds] cannot properly be described as 'distribution(s) made by a corporation to its sharehold ers,'" noting that "the government ha[d] not shown that the ordinary meaning" of that language "is inadequate in this instance." Ibid. (quoting 26 U.S.C. 115 (1946)). But that now-superseded statutory provision did not contain the limiting phrase "with respect to its stock," and thus is not support for the D'Agostino rule. Com pare 26 U.S.C. 115 (1946), with 26 U.S.C. 301(a); see DiZenzo v. Commissioner, 23 T.C.M. (CCH) 677, 704 n.10 (1964) (quoting 26 U.S.C. 115 (1946)), rev'd in part, 348 F.2d 122 (2d Cir. 1965).9

Accordingly, in civil cases just as in criminal cases, a distribution of property must have been "made by a cor poration to a shareholder with respect to its stock" in order for the payments to receive dividend/return-of- capital/capital gain treatment under Section 301. 26 U.S.C. 301(a) and (c); see 26 C.F.R. 1.301-1(c). It is thus the Second Circuit's approach, not Miller, that departs from the ordinary rule in civil tax cases.

2. Petitioner's reliance on the "constructive divi dend" cases is similarly unavailing. Petitioner points to cases in which courts have determined that corporate benefits should be treated as dividends, despite the ex pressed contemporaneous intent of the corporation or the taxpayer that the payments be treated otherwise. See Br. 27-28. But those cases are consistent with the approach of the court below.

For example, in Neonatology Associates, P.A. v. Commissioner, 299 F.3d 221 (3d Cir. 2002), two profes sional medical corporations had purchased special life insurance policies, with "artificially inflated premiums," under which an employee could access the excess funds paid by the corporations. Id. at 223-226, 228. In deter mining whether the amount of the excess contributions made by the corporations were constructive dividends (as the IRS claimed) or employer-deductible expenses or compensation (as the corporations claimed), the court considered all the factual circumstances, including the intent of the corporations and employees. It concluded that the contributions were "disguised dividends and not deductible expenses." Id. at 224; see id. at 231-233. In so doing, the court looked behind the form that the pay ments had taken, observing that the substance of the transaction was akin to a dividend, id. at 231-232, that it was "implausible" that the owners of the corporations had knowingly "overpaid substantially for term life in surance," and that only the owners of the corporations, and not non-owner employees, received the benefit. Id. at 229.

Petitioner's reliance (Br. 11, 22 n.8) on Noble v. Com missioner, 368 F.2d 439 (9th Cir. 1966), is misplaced for the same reason. Although the court stated that the intention of the parties is not "controlling" in determin ing whether corporate payments were dividends, id. at 443, it made that statement in rejecting the sharehold ers' contemporaneous treatment, as business expenses, of corporate payments "for painting and repairs on the family residence, travel expense, summer residence ex penses and other items of a personal nature," id. at 441. Upon consideration of all the evidence, the court con cluded that, despite the characterization on the corpo rate books, the corporation had distributed available earnings and profits to the shareholders. Id. at 442- 443.10

The cases cited by petitioner (Br. 27-28) thus do not support petitioner's claim that "[a]part from Miller and its progeny in the criminal context, courts do not define constructive dividends (or other distributions 'with re spect to [a corporation's] stock') in terms of the intent of the corporation or the shareholder." Br. 27. To the con trary, those cases demonstrate that corporate labels are not controlling and that whether a payment by a corpo ration to a shareholder is a distribution "with respect to its stock" depends, just as in Miller, "on the factual cir cumstances involved in each case under consideration," including the intent of the corporation and the taxpayer. Miller, 545 F.2d at 1214.

What evidence is necessary to make that showing will vary according to the circumstances of the case. Where, for example, a corporation has recorded a trans action as a nonshareholder payment, but the evidence indicates that the economic substance of the transaction does not match that characterization, such evidence cre ates an inference that the transaction was in fact in tended to be one in a shareholder capacity. While in such cases a transaction may ultimately be treated dif ferently from the characterized intent of the corporation or the shareholder, it does not follow, as petitioner sug gests (Br. 28), that actual intent is not important in de termining whether a corporate diversion is "with respect to [the corporation's] stock" under Section 301(a).

The "constructive dividend" cases are consistent with the well-established principle that in determining the taxability of a transaction, courts are not bound to the form of the transaction as structured by the taxpayer; rather, courts may determine the taxability of a transac tion based upon the economic substance of the transac tion. See, e.g., Diedrich v. Commissioner, 457 U.S. 191, 197-198 (1982); Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945); Old Colony Trust Co. v. Commis sioner, 279 U.S. 716, 729-731 (1929). But those cases do not suggest that form is irrelevant. This is particularly true where, as here, allowing the taxpayer to retroac tively recharacterize his transaction would encourage tax fraud. Cf., e.g., Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974) (taxpayer "must accept the tax consequences of his choice [of organization of his affairs], whether contem plated or not, * * * and may not enjoy the benefit of some other route he might have chosen to follow but did not").

D. The Approach Of The Court Below Does Not Shift The Bur den Of Proof

Petitioner contends (Br. 20-21) (quoting D'Agostino, 145 F.3d at 73) that the Miller approach "effectively eliminates proof of a tax deficiency as an element" of a Section 7201 violation, and thereby "reduces the prosecu tion's burden of proof." That assertion is incorrect.

It is well settled that the government's introduction of circumstantial evidence of unreported income "may transfer the burden of going forward to the defendant." Leonard, 524 F.2d at 1083; see, e.g., Bok, 156 F.3d at 163 ("[A] defendant does always bear the burden of pro duction-under which the defendant must make an ini tial showing on each key element of the theory-to re ceive an instruction on the return of capital theory."); Miller, 545 F.2d at 1214 & n.12. As Judge Friendly noted in Leonard, 524 F.2d at 1083, that principle fol lows from this Court's decision in Holland v. United States, 348 U.S. 121 (1954). In Holland, the Court held that the government can establish a circumstantial case of criminal tax evasion by proving an increase in net worth that is not reflected in reported income, along with evidence supporting an inference that the increase is attributable to a likely source of income. Id. at 129- 132, 137-138. "[T]he Government is not required to ne gate every possible source of nontaxable income, a mat ter peculiarly within the knowledge of the defendant." Id. at 138. Cf. United States v. Massei, 355 U.S. 595, 595 (1958) (per curiam) (holding that if "all possible sources of nontaxable income [were] negatived, there would be no necessity for proof of a likely source").

Here, the government amply met its burden. It pro duced evidence of $10 million in unexplained funds that petitioner had received and had not reported on his in come tax returns. The government also adduced "proof of a likely source" of that income: namely, that he had diverted funds from the corporation. Holland, 348 U.S. at 137-138. That satisfies the government's burden of proving a deficiency. Having made that showing, the government was not required to "negative all the possi ble nontaxable sources" of petitioner's increase in in come. Holland, 348 U.S. at 137. As the Court has rec ognized, "most assets derive from a taxable source, and * * * when this is not true the taxpayer is in a position to explain the discrepancy." Id. at 126. Thus, although "the ultimate burden of persuasion remains with the gov ernment," Leonard, 524 F.2d at 1083, and "[t]he Govern ment must still prove every element of the offense be yond a reasonable doubt," once the government presents an adequate case of unreported income, the defendant "remains quiet at his peril." Holland, 348 U.S. at 138- 139.

Petitioner acknowledges these principles (Br. 16), and he does not affirmatively contest them. See NACDL Amicus Br. 9-10 (acknowledging that "a defen dant may have the burden of going forward to establish no corporate earnings or profits"). Nor does he contend that the government had to prove that the diversion was not "with respect to [the corporation's] stock" as part of its case in this prosecution. Holland makes clear that it need not do so, until the defendant properly places that matter in issue. 348 U.S. at 138-139.

At bottom, the question here is not about the correct allocation of burdens of proof and production, but rather about the governing legal standard for the return-of- capital defense. The government agrees that it retains the ultimate burden of proving all the elements of its charges beyond a reasonable doubt. But a defendant must adduce sufficient evidence on each element of the return-of-capital defense to warrant submission of that defense to the jury. In the government's view, that de fense has three elements: (1) that the diverted funds were intended to be a distribution "with respect to [the corporation's] stock," (2) that the corporation lacked earnings and profits during the relevant period, and (3) that the defendant had a basis in his stock at least equal to the amount of the diverted funds. Because peti tioner proffered no evidence that the corporate diver sions here were intended to be "with respect to [the cor poration's] stock," he did not sustain his burden of pro duction, and the government was therefore not required to disprove his return-of-capital defense.11

E. Petitioner's Convictions Should Be Affirmed Even If A Lack Of Earnings And Profits, And A Sufficient Stock Basis, Are The Only Elements Of A Return-Of-Capital Defense

1. Even if the Court adopts the Second Circuit's approach, petitioner's convictions should be affirmed. The Second Circuit has qualified its "'no earnings and profits, no income' rule" by maintaining that the rule does not apply in cases "of unlawful diversion, such as embezzlement, theft, a violation of corporate law, or an attempt to defraud third party creditors." D'Agostino, 145 F.3d at 73. It repeated that note of caution in Bok, explaining that D'Agostino had "made clear" that the rule had no application in cases of unlawful diversion. 156 F.3d at 162 n.1 (citing D'Agostino, 145 F.3d at 73). That exception has deep roots in the civil tax cases on which the D'Agostino court relied. See Pet. App. 14 (Thomas, J., concurring); Truesdell, 89 T.C. at 1298 (em phasizing that "petitioner's diversions of income * * * were not per se unlawful" and did not appear to be "sto len, embezzled, or diverted in fraud of creditors"); DiZenzo, 348 F.2d at 125 (emphasizing that "[w]e are not here dealing with sums stolen or embezzled by a tax payer" and that "[t]here has been no suggestion that the diversions in this case were improper as a matter of cor porate law"). It also reflects the common sense notion that the concealment that is the hallmark of such efforts would make little sense in the context of nontaxable dis tributions. See Miller, 545 F.2d at 1216.

In this case, the diversion of corporate funds to peti tioner was unlawful. See Br. in Opp. 13-18. First, peti tioner was not the sole shareholder of the corporation; a trust for the benefit of petitioner's son also holds stock in the corporation. J.A. 82-83, 86-88, 133. Although pe titioner introduced minutes from corporate meetings in 1990 and 1991 purporting to grant him broad authority to use corporate funds, an expert witness for the govern ment testified at trial that those documents had been falsified. 3 Tr. 144-145, 153-155, 157, 159-160, 164. By unilaterally diverting corporate funds to himself and his girlfriend, in excess of his authority, petitioner acted to the detriment of the other shareholder and in breach of his fiduciary duties. See D'Agostino, 145 F.3d at 73 (in dicating that the "no earnings and profits, no income" rule has no application where the diversion of corporate funds was "a violation of corporate law"); DiZenzo, 348 F.2d at 125 (same).12

Second, petitioner's pleadings in the state-court ac tion suggest that he diverted corporate funds to his girl friend for the purpose of preventing his wife from ob taining the portion of the corporation's assets to which she was entitled in their divorce. Pet. App. 14 (Thomas, J., concurring); see id. at 31-32, 34-35. Such diversions "may be properly considered unlawful." Id. at 14 (Thomas, J., concurring); see D'Agostino, 145 F.3d at 73 (indicating that the "no earnings and profits, no income" rule would not apply where corporate funds were di verted in "an attempt to defraud third party creditors"); Truesdell, 89 T.C. at 1298 (same).

2. Petitioner argues (Br. 30-34) that the relevant statutes do not admit of any exception for the unlawful diversion of corporate funds. On this view, a share holder may steal or embezzle corporate funds but still automatically be entitled to treat the diversions for tax purposes as if they were "to a shareholder with respect to [the corporation's] stock" in any subsequent prosecu tion for tax evasion or civil case concerning a tax defi ciency. That again exposes the flaw inherent in peti tioner's argument: he ignores the "with respect to its stock" threshold in Section 301(a), claiming once again that "[t]he characterization of a diversion for tax pur poses turns solely on the factors" identified in Section 301(c), namely, "the amount of earnings and profits, the shareholder's basis in the stock, and the size of the dis tribution." Br. 31. As noted, the "with respect to its stock" language provides a textual basis for concluding that concealed and embezzled funds were not distrib uted to a shareholder qua shareholder (as opposed to qua embezzler).13

Petitioner also argues that a remand for a retrial would be necessary on this point, on the ground that the jury did not find unlawfulness. Although the jury was not expressly instructed to find unlawfulness, a third trial is not warranted. The theory of the government's case was that petitioner had unlawfully diverted the funds from the corporation for his own personal benefit and that the funds were taxable on that basis. C.A. E.R. 815-820 (closing argument). Petitioner countered with his defenses that the funds were not taxable because they were corporate funds, or corporate advances, or loans, and the jury was instructed on those defenses. J.A. 173-175. The jury's verdict necessarily rejected those defenses and accepted the government's theory of the case. The only rational basis for the jury's judgment was a conclusion that petitioner unlawfully diverted the funds; no other lawful basis had any evidentiary support in the record.14

CONCLUSION

The judgment of the court of appeals should be af firmed.

Respectfully submitted.

PAUL D. CLEMENT
Solicitor General
RICHARD T. MORRISON
Acting Assistant Attorney
General
MICHAEL R. DREEBEN
Deputy Solicitor General
DEANNE E. MAYNARD
Assistant to the Solicitor
General
ALAN HECHTKOPF
KAREN QUESNEL
S. ROBERT LYONS
Attorneys

DECEMBER 2007

1 In response to petitioner's motion for severance, the district court required the government to elect between evasion and false-return charges, where the indictment charged both offenses for the same years (i.e., 1994 through 1997). As reflected in the redacted indictment (J.A. 10-18), the government chose to proceed on the evasion counts. The false return counts for 1994 through 1997 were severed and were subsequently dismissed. Pet. App. 29 n.1.

2 The court of appeals also rejected, inter alia, petitioner's attempt to renew his argument, which it had rejected on his first appeal, that the state-court judgment conclusively established that the funds he transferred to his girlfriend were the property of HIE. Pet. App. 11-12. Petitioner raised that issue in his petition for a writ of certiorari, Pet. i, 7-11, but this Court did not grant review of that question.

3 See The Random House Dictionary of the English Language 1640 (2d ed. 1987) ("referring to; concerning"); The Oxford American Dictionary and Language Guide 853 (1999) ("regarding; in reference to; as concerns"); Webster's New International Dictionary of the English Language 2123 (2d ed. 1957) ("[a]s regards; with reference to; as to").

4 Miller stated that its rule was applicable in criminal tax cases even though it accepted that some cases had applied different constructive distribution rules in civil cases. 545 F.2d at 1212-1215. The court expressed the view that "the application of theories established in civil tax cases to problems in criminal tax cases cannot always be made." Id. at 1215. In the government's view, the facts-and-circumstances test articulated in Miller for identifying a corporate distribution with respect to its stock applies in both civil and criminal contexts. See pp. 24-31, infra.

5 The tax treatment of such funds, for both the shareholder and the corporation, depends on the nature of the payment. For example, salary is included in an individual's taxable gross income, as is embez zled money, see 26 U.S.C. 61(a); James v. United States, 366 U.S. 213, 219 (1961) (plurality opinion), whereas a bona fide loan by a corporation to a shareholder is not. See Commissioner v. Tufts, 461 U.S. 300, 307 (1983). And, although a corporation may deduct amounts that are salary (26 U.S.C. 162(a)(1); 26 C.F.R. 1.162-1(a)), or that are stolen (26 U.S.C. 165(e)), it cannot deduct distributions with respect to its stock.

6 Contrary to petitioner's contention (Br. 24-25), the requirement of such a showing is not inconsistent with the fact that current earnings and profits are determined at the close of the corporation's tax year. See 26 U.S.C. 316(a)(2). A defendant can adduce evidence of the requisite intent by showing that, at the time of the diversion, there was evidence that the transfer was intended to be a corporate distribution "with respect to [the corporation's] stock," and that, at the close of the taxable year, when the amount of current earnings and profits became known, the transferred funds were treated as a dividend, return of capital, or capital gain.

7 Although the defendants' stock basis did not exceed the amount that they had diverted, the Second Circuit did not treat the remaining amount as capital gain under Section 301(c)(3). Instead, the court of appeals allowed the taxpayers to treat a portion of the amount diverted as a repayment of a loan, despite the lack of any evidence that it was in fact such a repayment. D'Agostino, 145 F.3d at 71, 73.

8 Both D'Agostino and petitioner cite the acquiescence, reflected in Truesdell, supra, action on decision, 1988-25, 1988 WL 570761 (Sept. 12, 1988) (unpublished), as a proxy for the IRS's position in all civil cases. But the action on decision expressly states that it "is not to be relied upon or otherwise cited as precedent by taxpayers." Ibid. Further, the Internal Revenue Service Cumulative Bulletin listing the acquiescence states that "[c]aution should be exercised in extending the application of the decision to a similar case unless the facts and circumstances are substantially the same" and that "[a]cquiescence in a decision means acceptance by the Service of the conclusion reached, and does not necessarily mean acceptance and approval of any or all of the reasons assigned by the Court for its conclusions." Cumulative List of Announcements Relating to Decisions of the Tax Court Published in the Internal Revenue Service Bulletin from January 1, 1988 Through December 31, 1988, 1988-2 C.B. 1.

9 Petitioner also cites (Br. 12) AJF Transportation Consultants, Inc. v. Commissioner, 77 T.C.M. (CCH) 1244 (1999), aff'd, 213 F.3d 625 (2d Cir. 2000) (Table), and DiLeo v. Commissioner, 96 T.C. 858, 883-885 (1991), aff'd, 959 F.2d 16 (2d Cir.), cert. denied, 506 U.S. 868 (1992), but both of those Tax Court cases were appealable to the Second Circuit, and the Tax Court was following the Second Circuit's DiZenzo decision.

10 Magnon v. Commissioner, 73 T.C. 980 (1980), upon which peti tioner also relies, is similar. See id. at 992-997 (rejecting shareholder's claim that corporation's performance of services on his personal property constituted bona fide loans, where there was no contempora neous intent to repay, and concluding on all the facts, including a lack of intent that the corporation benefit from the services performed, that the services were "distributions to Magnon with respect to his stock").

11 Although petitioner's proffer is insufficient on its face with respect to the other two elements as well, the government did not raise that issue in its opposition to the petition for a writ of certiorari. Nor did the government present the argument in the courts below, except when it argued in opposition to the petition for rehearing in the court of appeals that petitioner's proffer made no assertion that he had a sufficient stock basis to cover the amount of the diverted funds. See Opp. to Petition for Reh'g 10 (filed Feb. 6, 2007).

12 The absence of any similar disbursements to the other shareholder also suggests that the diverted funds were not distributed to petitioner as a shareholder.

13 Contrary to petitioner's suggestion (Br. 33-34), Drybrough v. Com missioner, 238 F.2d 735 (6th Cir. 1956), does not stand for the proposi tion that unlawful funds are automatically entitled to the tax treatment under Section 301. That decision not only interprets the previous version of the corporate distribution statute, which did not contain the current "with respect to its stock" language, see pp. 27-28, supra, it also rejected the claim that the defendants had embezzled the funds. See Drybrough, 238 F.2d at 738.

14 As petitioner expressly acknowledges (Br. 29), neither party contended that the $10 million was salary. No other lawful basis for the payment was suggested beyond the theories the jury rejected.