In this case, a shareholder who received funds from his corporation and failed to report them as income was convicted of tax evasion. As his defense, the shareholder argued that the funds should be treated as the non-taxable return of the capital he had invested, since there were no other means of returning his capital in light of the corporation’s inability to distribute dividends because it had made no earnings or profits.
On 03/03/08, the Supreme Court unanimously held that a shareholder receiving funds in this manner and accused of criminal tax evasion may claim return-of-capital treatment without producing evidence that, when the distribution occurred, either he or the corporation intended a return of capital. The lower court must now decide on remand whether the diversions in this case were actually non-taxable returns of capital.