Supreme Court: Tax Obstruction Conviction Requires Awareness of Pending Proceeding

(Parker Tax Publishing April 2018)

The Supreme Court reversed the Second Circuit and held that, in order to secure a conviction under Code Sec. 7212(a) for interference with the administration of the Internal Revenue Code, the government must show a nexus between the taxpayer's obstructive conduct and a particular administrative proceeding, such as an investigation, audit, or other targeted administrative action. The Court found that broadly applying the statute to the routine administration of the Code, including the processing and review of tax returns, would conflict with the language, history, and context of the statute and fail to give taxpayers fair warning of what conduct is subject to criminal prosecution. Marinello v. U.S., 2018 PTC 77 (U.S. 2018).

Background

Between 2004 and 2009, the IRS investigated the tax activities of Carlo Marinello, the owner of a courier business. In 2012, Marinello was charged with violating several criminal tax statutes including the "omnibus clause" of Code Sec. 7212(a), which makes it a felony to corruptly or by force obstruct or impede the due administration of the Internal Revenue Code. The government claimed Marinello failed to maintain corporate books and records, failed to provide his tax accountant with complete and accurate tax information, destroyed business records, hid income, and paid employees with cash.

Marinello was tried before a jury. After the trial, the judge instructed the jury on the elements of the omnibus clause. However, the jury was not told that it had to find that Marinello knew he was under investigation and intended to corruptly interfere with the investigation. The jury subsequently convicted Marinello on all counts.

Taxpayer and Government Arguments

Marinello appealed to the Second Circuit. He argued that under Code Sec. 7212(a), the government had to show that he tried to interfere with a pending IRS proceeding, such as a particular investigation. The Second Circuit disagreed, holding that the omnibus clause does not require awareness of a particular IRS action or investigation. Marinello petitioned for certiorari and, in light of a split among the circuits courts, the Supreme Court granted Marinello's petition.

The government argued that the administration of the Code referred to in Code Sec. 7212(a) includes not just a specific investigation of a taxpayer but the routine work of the IRS, including the processing and review of tax returns. According to the government, the need to prove that the obstructive conduct was done "corruptly" would cure any overbreadth problem in the statute. It also argued that the scope of the statute would be effectively narrowed by prosecutorial discretion. The omnibus clause had been used sparingly, the government said, and where more punitive and less punitive criminal provisions both applied, charges were typically brought under the more punitive provision. The government further argued that previous Supreme Court cases interpreting obstruction provisions, including U.S. v. Aguilar, 515 U.S. 593 (1995), should be ignored because of differences in the language and history of those statutes.

Supreme Court's Decision

The Supreme Court agreed with Marinello and held that to secure a conviction under the omnibus clause, the government must prove the taxpayer was aware of a pending tax proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would begin. The Court began by analyzing its decision in Aguilar, where it interpreted the obstruction of justice provision under 18 U.S.C. Sec. 1503. In that case, which involved an attempt to mislead an investigating agent, the Court found that the statute required a nexus between the defendant's act and judicial proceedings. The Court set forth two reasons for finding that such a nexus was required. First, it felt compelled to defer to the prerogatives of Congress. Second, the Court was concerned that fair warning should be given of what the law intends to do if a certain line is crossed.

Turning to Code Sec. 7212(a), the Court noted that although the language of the omnibus clause is neutral, the choice of words and legislative history showed that Congress did not intend for the clause to apply to every administrative task undertaken by the IRS. The Court reasoned that the statute refers specifically to efforts to intimidate or impede any officer or employee of the United States. In that context, the omnibus clause is a catchall for such obstructive conduct, and not for every violation that interferes with the administration of the Code. The Court also reviewed the legislative history and found that Congress was concerned with threatening acts against agents, officers and other employees of the IRS; nothing in the statute's history suggested to the Court that Congress intended the omnibus clause to apply to routine processing of tax returns.

The Court also found that the government's broad reading of the omnibus clause was unwarranted when considered in the broader context of the Code. The Court reasoned that the Code creates numerous misdemeanors, such as willful failure to furnish statements to employees and failure to keep required records. A broad reading of the omnibus clause could potentially transform many if not all of these misdemeanor provisions into felonies, in the Court's view. The Court recognized that some overlap and redundancy in criminal provisions is inevitable. But the Court found no cases interpreting a statutory provision that would create overlap and redundancy to the degree that would result from the government's broad reading of Code Sec. 7212, especially considering that other provisions of the same statute would be rendered superfluous.

The Court also found that a broad interpretation would create the same fair warning problem that was identified in Aguilar. According to the Court, a taxpayer who paid a babysitter in cash without withholding taxes, or failed to keep receipts for every charitable donation, might believe that an IRS rule had been violated, but the Court doubted that such a taxpayer would expect a felony prosecution for tax obstruction. In the Court's view, if Congress intended that outcome it would have spoken with more clarity than it did in Code Sec. 7212(a).

The Court was not persuaded that the government's need to prove the obstructive conduct was done "corruptly" would cure the overbreadth problem, and was likewise skeptical that prosecutorial discretion could be relied on to narrow the statute's scope. While the government argued that "corruptly" means acting with specific intent to obtain an unlawful advantage, the Court struggled to imagine a scenario where a taxpayer would willfully violate the Code without intending to obtain an unlawful advantage for him or herself or another. The Court further reasoned that trusting prosecutorial discretion to narrow the statute would place great power in prosecutors and could result in nonuniform enforcement. The Court found that it had traditionally exercised restraint in assessing the reach of a federal criminal statute for these reasons.

The government's argument that previous decisions interpreting similar statutes narrowly should be ignored due to differences in statutory language and history was also rejected. The Court pointed out that Congress relied on the language of 18 U.S.C. Sec. 1503 when it enacted Code Sec. 7212, and found that given the similarity between the two statutes it was helpful to consider how the former had been interpreted.

The Court concluded with a clarification that, in addition to the nexus requirement, the government must show that the proceeding was pending or at least foreseeable when the taxpayer engaged in the obstructive conduct. According to the Court, it is not enough for the government to claim the taxpayer knew the IRS might eventually catch on to the unlawful scheme.

In a dissenting opinion, Justices Thomas and Alito would have held that, based on the statute's plain language, the omnibus clause applies to all efforts to obstruct the administration of the Code and is not limited to a particular proceeding.

For a discussion of the criminal penalty for interference with administration of the Code, see Parker Tax ¶265,148.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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