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03/28/2018

Obstruction of the Tax Code: Supreme Court Limits Gov’t Power to Criminalize Sloppy Tax Filers

Did you commit a felony when you made those cash payments to your babysitter?  Last week, the United States Supreme Court issued an opinion answering the question as decisively, no. “Please,” you are probably thinking, “that could never have been the case.” But according to the federal government’s arguments in a recent criminal tax case at our nation’s highest court, such conduct could have constituted felony obstruction of the tax code if you knew your babysitter was likely not going to report the income to the IRS.

Under the government’s requested interpretation of 26 U.S.C. § 7212(a), which punishes anyone who corruptly obstructs or impedes the due administration of the tax code, such a payment to the babysitter would be “corrupt” because it would help another obtain an unlawful benefit (not paying taxes) and impede the IRS’s ability to collect those taxes.  In Marinello v. United States, however, Justice Breyer delivered a 7-2 decision that decisively narrowed the scope of conduct that constitutes felony obstruction of the tax code.  The decision should leave every taxpayer relieved that they cannot unwittingly become subject to criminal prosecution.

Cause of Action Institute filed one of only two “friend of the court” briefs at the certiorari stage, in partnership with the National Association of Criminal Defense Lawyers.  The two organizations partnered again at the merits stage to file a second “friend of the court” brief in support of Mr. Marinello’s position.

Carlo Marinello, II owned a small courier service in New York.  In 2012, the United States obtained an indictment against him for failure to file tax returns and for obstruction 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 obstructed the administration of the tax code when he failed to maintain books and records for his small business, failed to provide his accountant with complete information, and discarded business records and receipts.  The government argued that these otherwise innocuous (and perfectly legal) acts were criminal because they impeded the IRS’s administration of the tax code and were done “corruptly” because they helped him obtain an unlawful benefit—evading taxes.  However, the tax code separately criminalizes tax evasion and failure to file tax returns and requires that the government prove that the defendant acted “willfully,” a heighted criminal intent, in committing these crimes.

Disagreeing with the government, the Supreme Court held that the “due administration of the tax code” as referenced in section 7212(a) did not cover any and all governmental efforts to collect taxes.  Rather, the clause refers to the specific interference with targeted governmental tax-related proceedings, such as a particular investigation or audit.  Specifically, the Supreme Court held that 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.  The government must also prove that the investigation or audit was pending at the time the defendant engaged in in the obstructive conduct or was at least reasonably foreseeable by the defendant.  Marinello v. United States, 584 U.S. __, __ (2018) (slip op., at 11).   In other words, the defendant’s actions must obstruct a currently pending proceeding or specific IRS audit.  This reasoning was based on a similarly worded criminal statute pertaining to the obstruction of “justice” as interpreted by the Supreme Court.  See United States v. Aguilar, 515 U.S. 593 (1993) (requiring proof that the defendant obstructed a specific pending proceeding, not just the government’s broad administration of justice).

With regard to a taxpayer’s payment to a babysitter, and citing an IRS regulation, Justice Breyer remarked the government’s interpretation of the statute could result in felony prosecution for a person who pays a babysitter $41 per week in cash without withholding taxes, leaves a large cash tip in a restaurant, fails to keep charity donation receipts, or fails to provide every record to an accountant.  As Justice Breyer stated, “[a] taxpayer may know with a fair degree of certainty that her babysitter will not declare a cash payment as income—and, if so, a jury could readily find that the taxpayer acted to obtain an unlawful benefit for another.”  The Supreme Court stated that if Congress had intended this result, it would have spoken with more clarity.

Justice Breyer further emphasized that criminal statutes must be narrowly interpreted and that courts cannot rely on promises of prosecutorial discretion to narrow the scope of a statute.  The Supreme Court has “traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress and out of concern that a fair warning should be given to the world in language that the common world will understand of what the law intends to do if a certain line is passed.”  Marinello, 584 U.S. at __ (slip op., at 4).  Moreover, the Court’s review of the broader statutory context of the entire Internal Revenue Code further counseled against adopting the government’s broad reading.  The Court noted that the tax code “creates numerous misdemeanors, ranging from willful failure to furnish a required statement to employees, section 7204, to failure to keep required records, 7203, to misrepresenting the number of exemptions, 7205, to failure to pay any tax owed, however small the amount, 7203.”  The Court stated that to interpret the statute as applying to any administration of the tax code would potentially transform many, if not all, of these misdemeanor provisions into felony obstruction, making the specific provisions redundant, or perhaps the subject matter of plea bargaining.  Id.  According to Justice Breyer, the government’s preferred interpretation would render superfluous many of the provisions of the same enactment, something that Congress could not have intended when it codified section 7212(a).

The Court further noted that it could not trust that prosecutorial discretion would limit the government’s use of the clause.  At oral argument, the government attorney conceded that under the Attorney General’s Charging and Sentencing Policy, where a more-punitive and less-punitive criminal statute may apply to a case, the prosecutor must charge a violation of the most punitive statutory provision that it can readily prove at trial.  Office of the Attorney General, Department Charging and Sentencing Policy (May 10, 2017).  To rely upon prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute’s highly abstract general statutory language places great power in the hands of the prosecutor. Marinello, 584 U.S. at __ (slip op., at 9).  The Court refused to construe the criminal statute on the assumption that the government will use it responsibly. According to Justice Breyer, doing so risks allowing “policemen, prosecutors, and juries to pursue their personal predilections,” id. (citing Smith v. Goguen, 415 U.S. 566, 575 (1974), which could result in the nonuniform execution of that power across time and geographic location.” Marinello, 584 U.S. at __ (slip op., at 9).

The Supreme Court’s holding is an important one for the rule of law, limiting the scope of overly broad criminal statutes, and protecting average taxpayers.

Erica Marshall is counsel at Cause of Action Institute

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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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05/2/2017

The Rule of Lenity: A five-minute guide to navigating the intersection of administrative and criminal law

It is not often that you think of the terms “criminal defense” and “Chevron deference” in the same sentence. But this is starting to change given the ever-expanding number of quasi-civil and criminal statutes passed by Congress.

Indeed, much of the conduct that we would typically consider to be a violation of a regulation, subject to civil penalties in federal court or in an administrative tribunal, is criminalized in the same statute. And it is usually the government’s decision as to whether the case proceeds civilly or with handcuffs.

Read the full post by Cause of Action Institute Counsel Erica Marshall, published on The Federalist Society’s blog

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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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02/17/2017

Doing the Time Without Doing the Crime

Imagine that you are the CEO of large food producer, and you are notified out of the blue that your company is responsible for a salmonella outbreak possibly affecting thousands of people around the country.  If I were that CEO, I would be worried for those who were affected and disappointed that my leadership hadn’t prevented such an outbreak.  Most importantly, I would immediately act to remedy the situation.

In August, 2010, this hypothetical became a reality for Austin (“Jack”) DeCoster and his son, Peter DeCoster, the CEO and COO, respectively, of a large Iowa egg producer, Quality Egg, LLC.  Around this time, the Food and Drug Administration traced a salmonella outbreak back to the company’s eggs after it received reports of roughly 1,900 illnesses.  Jack and Peter DeCoster were unaware of the contamination in their facilities and had no knowledge that their company was sending out such eggs, but they immediately took steps to remedy the outbreak.  They voluntarily recalled millions of dozens of eggs and complied with all of the Food and Drug Administration’s investigations into their facilities.

When the United States prosecuted Quality Egg under the Food, Drug, and Cosmetic Act (“FDCA”), which prohibits the introduction of any adulterated food into interstate commerce, the company plead guilty and agreed to pay a $6.8 million dollar fine.  Jack and Peter DeCoster also plead guilty to being “responsible corporate officers” of Quality Egg under a doctrine created by the Supreme Court in United States v. Park, 421 U.S. 658 (1975).

Under the Park doctrine, a corporate officer can be found guilty of committing a misdemeanor when his or her corporate position affords them “the power to prevent” violations of the FDCA, even absent “knowledge of, or personal participation in” the violation.  Park, 421 U.S. at 6670, 676.  Because of this low burden for proving criminal culpability, and the lack of any “guilty mind” requirement, no corporate officer had ever received a jail sentence under the Park doctrine.  In the plea agreement, both the government and the DeCosters agreed that the DeCosters had no knowledge that the eggs contained salmonella and that the DeCosters had taken no action to contribute to the release of the adulterated eggs into the marketplace.  In other words, the DeCosters had neither a “guilty mind” nor had they taken any “guilty act” to commit this crime, as is required to receive a prison sentence under the Fifth Amendment Due Process Clause of the United States Constitution.

Nonetheless, at sentencing, the Judge found the DeCosters had run the company in a negligent manner, and sentenced them each to pay a $100,000 fine and serve three months in prison.

After a split panel of the United States Court of Appeals for the Eighth Circuit affirmed, the DeCosters filed a petition for a writ of certiorari, asking the Supreme Court to review the legality of their prison sentence.  The DeCosters’ petition highlights Due Process concerns that could affect anyone being charged criminally for the conduct of others.  On February 10, 2017, Cause of Action joined a “friend of the court” brief in support of the DeCosters’ petition, along with the National Association of Manufacturers and the National Association of Criminal Defense Lawyers, arguing that liability for “responsible corporate officers” has never and should never result in prison time, due to a lack of any mens rea requirement for conviction.

In our system, the government must prove in a criminal prosecution that the defendant committed a criminal act and did so with criminal intent.  As the Supreme Court has stated, “we must construe [an imprisonment] statute in light of the background rules of the common law in which the requirement of some mens rea for a crime is firmly embedded.”  Staples v. United States, 511 U.S. 600, 605 (1994).

The DOJ wants to make an example of the DeCosters.  The U.S. Attorney who filed the case stated: “Corporate officials are on notice….[c]laims of ignorance or ‘I delegated the responsibility to someone else’ will not shield them from criminal responsibility.”  But to do so at the expense of a hallmark principle of our justice system is a mistake, and marks a dangerous departure from the safeguards of American criminal jurisprudence.

The brief can be found here.

Erica Marshall is counsel at Cause of Action Institute.

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