Section of Taxation Publications

VOL. 63
NO. 2

Contents | TTL Home


Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.


Tax Evasion—To Convict or Collect? Can the Government Have It Both Ways Under the Expanded Definition of "With Respect to Stock" in Section 301 After Boulware v. United States?

Hayley T. J. Tozeski

I. Introduction

In seeking to impose civil and criminal sanctions on a taxpayer who improperly diverted corporate funds without reporting any income, the government’s arguments in Boulware v. United States forced the government between a “rock and a hard place.” At oral argument, Justice Scalia suggested that where the government once had it both ways when it came to funds diverted from a closed corporation, the government must now choose whether to “convict more or collect more money.” In fact, the government need not choose one sanction to the exclusion of the other. This can be accomplished so long as the “with respect to stock” limiting condition in section 301 precludes the characterization of improperly diverted funds as constructive distributions.

. . . .

Part II of this Note discusses Boulware, the applicable law, the facts, and the reasoning in that case. Part III.A. discusses the flaw in the Code resulting from the Boulware Court’s opinion, one that is accused of creating a shield from tax liability for a controlling shareholder who embezzles funds up to her basis in the stock from a corporation without accumulated earnings and profits. Part III.B. discusses how that loophole may be closed thereby pulling the government out from “between a rock and a hard place.”

The government’s positions in Boulware do not require it to choose between conviction and collection so long as courts properly interpret the “with respect to stock” language in section 301. First, the presumption that a corporation makes a payment to a shareholder per se because of her status as a shareholder must fail. Where a controlling shareholder improperly diverts corporate funds, the taxpayer typically obtains those funds by virtue of his physical and managerial control over the closed corporation, not because of his status as a shareholder. Second, constructive distribution treatment applies only to lawful distributions. Third, diverted funds are properly characterized as “income from whatever source derived,” not embezzled funds. Thus, the government may continue to pursue both civil and criminal tax liability against shareholders who improperly divert corporate funds and fail to pay taxes on the amounts diverted.


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


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