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12/6/2017

SCOTUS Oral Arguments Rundown: Marinello v. United States

Today the Supreme Court heard argument in Marinello v. United States No. 16-1144.  As we’ve noted before here and at the Federalist Society blog this case considers what level of knowledge a tax payer has to have to be subject to the omnibus felony penalties of 26 U.S.C. § 7212(a) .  Petitioner (Marinello) was represented by Matthew S. Hellman, Esq. and the government by Robert Parker.  From my perch, the Court showed enormous skepticism towards the Government’s position that virtually any act or omission, no matter how slight, could subject one to felony conviction, even though the particular tax code penalties for those actions are misdemeanors.  Justice Sottomayor, an active questioner in this case, seemed open to the view that the Government’s case was overcriminalizing acts that Congress had set out lesser penalties for but she seemed equally hesitant to adopt Petitioner’s solution-there can be no “corrupt” obstruction without knowledge by the Defendant that there is an IRS investigation.  She and Justice Gorsuch teamed up to offer Petitioner another way out, that there must be some affirmative interaction with the IRS.  Mr. Hellman appeared to resist this at first but, upon reflection, and most clearly in rebuttal, stated such a ruling would be acceptable (while continuing to press Petitioner’s view).

The Justices, including Justice Kagan, seemed troubled by the Petitioner’s proposed “fix” of the Government’s overreach on the statute because they could not square it with the text of Section 7212(a).  Even so, Justice Kagan, unprompted, called the statute “ungodly borad.”  Justices Breyer, Alito and Roberts, pressed the Government on the danger of common behaviors, such as using cash, that could become felonies under the Government’s construction.  Justice Breyer was concerned that paying a gardener or snow shoveler in cash could be felonious.  Justice Alito posited that a lower price for services if cash was paid is “known” to be for the purposes of not reporting income, and Justice Kagan agreed.  (This universal interpretation among the Justices is belied by what a small business owner once told me “Cash don’t bounce.”).  Justice Gorsuch took issue with the IRS position that it is a “brooding omnipresence” always collecting taxes and so a taxpayer should know throwing out receipts or keeping sloppy records will, as Justice Alito noted “impede” the IRS in administering the tax code.

Mr. Parker for the Government attempted to convince the Justices that the IRS and the Government were circumspect in the use of the omnibus provision.  Justice Kagan pounced.  Attorney General Sessions has famously issued a directive that the Justice Department charge the highest crime, with the most penalties possible in every case.  Mr. Parker’s attempt to lean on prosecutorial discretion was undermined as he had to admit the Justice Department policy to both Justices Kagan and Roberts who were concerned about it and obviously eager to make sure that policy was in the record and admitted by the Government.  Justice Ginsberg, whose late husband, Martin was a tax Professor at Georgetown, worried that any code violation could be charged as being done corruptly and thus subject to the extra three-year penalty and felony conviction.  Justices Gorsuch posited that the statutory language seemed to point to having to “corruptly” impede something other than just make the IRS’s job harder somewhere someday.  Justice Breyer insisted the Government agree with his definition of the mens rea requirement, which Mr. Parker eventually gamely did.

Upon rebuttal Petitioner made clear his position that any cabining of the statute the Court arrived at that recognized Mr. Marinello’s actions did not fall within the statute would be acceptable to Petitioner.  He and Justice Gorsuch agreed that “a win’s a win.”  Having picked up the signal from the Chief and Justice Kagan, Mr. Hellman finished noting that whether not giving everything to your accountant, using cash or keeping meticulous records would be criminalized rested on prosecutorial discretion that was obviated by the Justice Department’s “charge the highest crime” mandate.

At least from oral argument it appears the Government’s overbroad interpretation of the statute and its play for unrestrained prosecutorial power regarding it, is likely to doom its case despite a well-argued defense of that policy.  It also appears that the bright line rule that Marinello sought (and that we also pressed in our amicus) does not have the full support of the Court.  Nonetheless, today in this case it was a good day to be the Petitioner.

To learn more about this case, watch the short SCOTUSbrief video below, via The Federalist Society

John J. Vecchione is president and CEO at Cause of Action Institute, amicus

 

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06/28/2017

Supreme Court to Hear Case on Obstruction of the Tax Code

The Supreme Court this week announced that it will hear the case of Carlo Marinello, II v. United States next fall.  The Supreme Court granted Mr. Marinello’s petition for a writ of certiorari after considering it in conference on June 26, 2017, the Court’s last day of the summer session.  Cause of Action Institute filed an amicus curiae brief in support of Mr. Marinello’s petition, urging the Supreme Court to hear the case to address the Second Circuit’s expansive reading of a tax statute that could be interpreted to criminalize routine conduct of everyday American taxpayers and business owners.

Mr. Marinello owned a small courier service in New York. In 2012, the United States obtained an indictment against him under 26 U.S.C. 7212(a)’s “omnibus clause” of the criminal tax code, which makes it a felony to “in any other way corruptly…obstruct [] or impede [] or endeavor to obstruct or impede, the due administration” of the tax code.  The government argued that Mr. Marinello could be guilty of corruptly obstructing or impeding the administration of the tax code by performing acts as common as failing to maintain books and records for his small business, failing to provide his accountant with complete information, and discarding business records, all because he did these acts with the goal of not paying taxes.  However, the tax code already outlaws tax evasion, and it requires that the government prove a heightened criminal intent—that the defendant acted “willfully.”  The Sixth Circuit, in order to cabin its expansive language, has held that an individual must have knowledge that his or her conduct is obstructing an ongoing IRS investigation in order to be found guilty under the omnibus provision.  The Second Circuit and other courts of appeals have interpreted the language much more broadly, however, causing a circuit split.

Cause of Action’s amicus curiae brief highlighted the importance of preserving mens rea, or “guilty mind” requirements and the need for our criminal code to clearly inform people about what is, or is not, illegal.  As Judge Jacobs wrote in his dissent from the rest of the judges on the Second Circuit, “if this is the law, nobody is safe.”  Cause of Action hopes that the Supreme Court will cabin the omnibus clause as the Sixth Circuit has done and intends to file a new amicus curiae brief at the merits stage.  You can check out our prior blog post on this case here.

Erica Marshall is counsel at Cause of Action Institute.

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04/26/2017

Criminal Prosecutions on Tax Day: “If this is the law, nobody is safe”

Tax Day is just behind us, marking the ceremonial American tradition of waiting to the last minute to electronically file a Form 1040 in the hopes of receiving a tax refund (or maybe that is just me). This year alone, the IRS expects to process approximately 150 million tax returns.  But few Americans stop to think before clicking “submit,” about the sheer breadth of information they are supplying.  A tax return is an intimate financial portrait that details your income, marital status, number of dependents, the property and assets you’ve acquired, and gifts you’ve received, all based on documents and receipts collected throughout the previous year.

Remember on tax day that while Title 26 of the United States Tax Code gives the IRS the power to levy taxes, it also creates criminal sanctions to make sure people pay what they owe. Tax evasion is a felony, as is failure to pay any tax due, filing a false return, and not filing a return at all in some cases.  But what if otherwise legal acts or omissions—like not keeping financial records, throwing away receipts, not giving all of your documents to your accountant, cashing checks, or even using cash—were also a felony under the tax code?  Tax cheats should be prosecuted, but the law needs to be applied in a way so that the millions of Americans who file tax returns every year, but might not keep receipts or documents, cannot be caught up in an overreaching prosecution.

This was the issue that faced the Second Circuit in United States v. Marinello.  Carlo Marinello ran a courier company in New York and didn’t file tax returns for a number of years.  He was indicted with eight counts for failure to file a tax return.  However, the government also charged him with a felony for “corruptly obstruct[ing] or imped[ing]…the due administration of the [tax code]” under 26 U.S.C. § 7212(a).

This statute states:

Whoever corruptly or by force or threats of force … endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under [Title 26], or in any other way corruptly or by force or threats of force … obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both.

According to the indictment, Mr. Marinello could be guilty of the felony of corruptly obstructing or impeding the administration of the tax code by performing acts as common as “failing to maintain corporate books and records,” “failing to provide [his] accountant with complete . . . information related to [his] personal income,” “discarding business records,” “cashing business checks,” and “paying employees in cash” because he performed these acts and omissions with the intent to obtain an unlawful benefit—not paying taxes. The jury convicted Mr. Marinello on this basis, and the Second Circuit affirmed the conviction.

The other felony provisions in Title 26, including the felony for not paying taxes under section 7202, impose a “willfull” mens rea requirement, which requires the government to prove that the person had a “guilty mind” and acted with the knowledge that his conduct was unlawful, and made a voluntary, intentional violation of a known legal duty.  However, the obstruction statute punishes anyone who “corruptly” endeavors to obstruct or impede the administration of Title 26, a much lower standard.  To act “corruptly” is to act “with intent to gain an unlawful advantage or benefit for oneself or for another.”

As this otherwise statutorily-undefined term has been applied across the land, and by the Second Circuit in Mr. Marinello’s case, any act or omission that obstructs the administration of the tax code is a felony so long as the defendant committed that act or omission to gain an “unlawful benefit”—whether or not the defendant knew that benefit was unlawful, whether or not the act or omission itself is a legal act, and whether or not the unlawful benefit sought by the defendant was even related to the tax code.  Troublingly, this “obstruction” statute has become a catchall felony provision with a reduced mens rea requirement that has swallowed the other criminal provisions in the tax code.  For example, it is hard to imagine how failing to file a tax return would not also impede the administration of the tax code.

Disagreeing with the Second Circuit, and concerned about the overbreadth and vagueness of the statute, the Sixth Circuit has cabined the obstruction statute to require that the government prove that the defendant took action to impede or obstruct a pending IRS investigation or action, such that a particular IRS employee was obstructed by the defendant’s conduct. United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998).

Mr. Marinello filed a petition for a writ of certiorari with the Supreme Court, asking it to hear his case and resolve the split between the Sixth Circuit and the Second Circuit. Cause of Action Institute and the National Association of Criminal Defense Lawyers filed a “friend of the court” brief, urging the Supreme Court to take the case to clarify the type of conduct that is criminalized under the tax code.  As Judge Jacobs of the Second Circuit warned in his dissent from the rest of the court, “if this is the law nobody is safe.”

The full amicus brief can be found here

Erica Marshall is counsel at Cause of Action Institute

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