Posted by: Robert Horwitz | March 23, 2018

Supreme Court Reins in Criminal Tax Prosecutions by Robert S. Horwitz

 

Did you ever fail to keep complete and accurate records? Pay someone in cash? Not give an accountant all your records? Deposit a business check in a personal account? Thanks to the Supreme Court’s March 21 decision in Marinello v United States, 584 U.S. ___, you won’t have to worry that these acts can lead to your being charged with a tax crime (at least if they didn’t occur while you  knew you were the subject of an IRS audit or investigation).

The tax obstruction statute, Internal Revenue Code sec. 7212(a), makes it a crime to use force or threats of force against a federal employee in order to obstruct the “due administration” of the Internal Revenue Code. The omnibus clause of that statute criminally penalizes anyone who ʺcorruptly . . . obstructs or impedes, or endeavors to obstruct or impede, the due administration ofʺ the Internal Revenue Code in ways not addressed by other specific provisions of the statute.  For many years the omnibus clause was rarely used in criminal tax prosecutions.  This changed in the mid 1990s, when it became a way to beef up a tax prosecution.

A case in point: Carlos Marinello, who operated a courier service. He lived off of income from his business.  From 1992 to 2010 he failed to file individual or corporate income tax returns. He destroyed bank statements and business records.  In the early 2000s the IRS began an investigation of Marinello but closed the case because it could not determine whether he owed tax.  Marinello never learned of this investigation.

In 2009, the IRS reopened its investigation of Marinello. Special agents showed up at his home and he consented to an interview.  He admitted not filing returns, living off income from his business and destroying records.  A slam-dunk case of willful failure to file tax returns.  The problem from the Government’s point of view is that willful failure to file is only a misdemeanor.  And the IRS apparently failed to gather enough evidence to prove felony tax evasion.

To fix the problem, the Government indicted Mr. Marinello on 8 counts of willful failure to file and one count of violating the omnibus clause. The acts that supported the omnibus clause count: a) failing to keep business books and records; b) shredding bank statements; c) cashing checks from business clients; d) paying employees in cash; e) failing to provide his accountant with complete books and records; f) putting business income in his personal bank account; and g) putting assets in nominee names.

A jury convicted Marinello on all nine counts. The trial judge rejected Marinello’s proposed instruction that to convict for violation of the omnibus clause count the Government must prove he was aware of an IRS investigation when he committed these allegedly obstructive acts.  The trial judge sentenced the 69-year-old Marinello to 36 month in prison, one year supervised release and payment of over $350,000 restitution.  The Second Circuit affirmed.  Joining the First, Ninth and Tenth Circuit, and rejecting the reasoning of the Sixth Circuit in US v. Kassouf, 144 F.3rd 952 (6th Cir. 1998), the Second Circuit held that the Government does not need to show that the defendant was aware of an on-going IRS audit or investigation in order to convict under sec. 7212(a).

Because of a split in the circuits, the Supreme Court granted Marinello’s petition for certiorari. In a 7-2 opinion, the Supreme Court reversed the Second Circuit.  The Court put the question before it and the answer in the following terms:

The question here concerns the breadth of that statutory phrase. Does it cover virtually all governmental efforts to collect taxes? Or does it have a narrower scope? In our view, “due administration of [the Tax Code]” does not cover routine administrative procedures that are near-universally applied to all taxpayers, such as the ordinary processing of income tax returns. Rather, the clause as a whole refers to specific interference with targeted governmental tax-related proceedings, such as a particular investigation or audit.

The Court looked to its decision in United States v. Aguilar, 515 U.S. 593 (1995), which involved similar wording in the obstruction of justice statute.    In Aguilar the Court held to convict under that omnibus clause of the obstruction of justice statute the Government must prove the defendant intended to influence a judicial or grand jury proceeding and that his acts had a temporal, causal or logical relationship with the proceeding.  The reasons for its narrow reading in Aguilar were deference to Congress and concerns about giving “fair warning … of what the law intends to do if a certain line is crossed.”

The Court observed that the words “obstruct or impede” are broad. The objective phrase is “due administration of this title.”  The omnibus clause occurs in the context of language dealing with the obstruction of an officer or employee or the forcible rescue of property after seizure, acts “against individual, identifiable persons or property.”  According to the Court the omnibus clause is a “catchall” to the types of obstructive conduct set out in sec. 7212(a), not to all interference with what the Government termed “the continuous, ubiquitous and universally known” administration of the internal revenue laws.

Following its textual analysis, the Court turned to the legislative history of sec. 7212(a). It found that both House and Senate Reports made it clear that Congress meant to limit the scope of sec. 7212(a)’s omnibus clause.  The Court could find nothing in the legislative history to indicate an intent to make the omnibus clause a catchall for routine filing, return processing and similar activities under the Internal Revenue Code.

The Court also expressed concern that application of the omnibus clause to the full panoply of the Internal Revenue Code would potentially transform misdemeanors into felonies. The Government’s broad reading would create overlaps and redundancies and run the risk of potentially applying to such actions as paying a babysitter without withholding tax, not keeping all receipts for charitable contributions, or failing to give all records to an accountant.  Limiting the reach of the omnibus clause to acts done “corruptly” wouldn’t help since corruptly means “acting with the specific intent to obtain an unlawful advantage.” The Court said it could not image a person willfully violating the Code without intending to gain some advantage.  In the world of taxation no one is altruistic, I guess.

The Court rejected the Government’s argument that it could rely on prosecutorial discretion. Not only had the Government expanded the use of the omnibus clause since the 1990s, but relying on prosecutorial discretion would place too much power in the hands of prosecutors and police, lead to inconsistent application of the law and allow the law to be used arbitrarily.

The Court concluded:

… to secure a conviction under the Omnibus Clause, the Government must show (among other things) that there is a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. That nexus requires a “relationship in time, causation, or logic with the [administrative] proceeding.” Aguilar, 515 U. S., at 599 (citing Wood, 6 F. 3d, at 696). By “particular administrative proceeding” we do not mean every act carried out by IRS employees in the course of their “continuous, ubiquitous, and universally known” administration of the Tax Code. Brief in Opposition 9. While we need not here exhaustively itemize the types of administrative conduct that fall within the scope of the statute, that conduct does not include routine, day- to-day work carried out in the ordinary course by the IRS, such as the review of tax returns. The Government contends the processing of tax returns is part of the administration of the Internal Revenue Code and any corrupt effort to interfere with that task can therefore serve as the basis of an obstruction conviction. But the same could have been said of the defendant’s effort to mislead the investigating agent in Aguilar. The agent’s investigation was, at least in some broad sense, a part of the administration of justice. But we nevertheless held the defendant’s conduct did not support an obstruction charge. 515 U. S., at 600.  In light of our decision in Aguilar, we find it appropriate to construe §7212’s Omnibus Clause more narrowly than the Government proposes. Just because a taxpayer knows that the IRS will review her tax return every year does not transform every violation of the Tax Code into an obstruction charge.

In addition to satisfying this nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant. See Arthur Andersen, 544 U. S., at 703, 707–708 (requiring the Government to prove a proceeding was foreseeable in order to convict a defendant for persuading others to shred documents to prevent their “use in an official proceeding”). It is not enough for the Government to claim that the defendant knew the IRS may catch on to his unlawful scheme eventually. To use a maritime analogy, the proceeding must at least be in the offing.

Associate Justice Thomas, joined by Associate Justice Alito, dissented. They opined that the majority reading transformed the meaning of the text from obstructing “the due administration of” the Code to “the due administration of some of” the Code.  The plain language of the text made the omnibus clause applicable to the entire Code, from to information gathering to return preparation to return processing to assessment, collection, audit and investigation, not just a to few specific provisions of the Code.  That a broad reading may be redundant is irrelevant.  Since the omnibus clause doesn’t require that a specific proceeding be ongoing, the dissent believed that the majority erred in reading it into the statute.  It would have affirmed the Second Circuit.

So you can sleep easier tonight even if you didn’t issue a 1099 or W-2 to your babysitter or paid cash for a meal or dumped some receipts. Unless of course you know that the IRS is auditing or investigating you.

For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

 

 

 

 


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

Categories

%d bloggers like this: