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

CoA Institute Urges Supreme Court to Restrict Agency Power

On January 10, 2017 Cause of Action Institute (CoA Institute) joined an amicus brief filed by the Cato Institute (Cato) in the Supreme Court case Gloucester County School Board v. G.G. to comment on an important aspect of administrative law: the scope of the Auer doctrine (taken from the Supreme Court case Auer v. Robbins (1997)), which holds that courts should generally defer to agency interpretations of their own regulations.  The case involves a challenge to a school board’s decision preventing GG, a transgender student, from using the school bathroom corresponding to his preferred gender identity.

After the board made its decision, the U.S. Department of Education weighed in, issuing an interpretive letter.  James Ferg-Cadima, the Acting Deputy Assistant Secretary for Policy for the Department of Education’s Office of Civil Rights, stated that “Title IX . . . prohibits recipients of Federal financial assistance from discriminating on the basis of sex, including gender identity, …When a school elects to separate or treat students differently on the basis of sex in those situations, a school generally must treat transgender students consistent with their gender identity.”  Thus, according to the letter, Title IX and its regulations would mandate that the school board allow GG to use his preferred bathroom.

GG sued in federal district court, alleging violations of Title IX and the Constitutions’ Equal Protection Clause.  The district court dismissed GG’s claims but on appeal the 4th Circuit overturned this decision and, applying the Auer doctrine, held that the district court should have deferred to the interpretation contained in the Ferg-Cadima letter, as the letter was not plainly erroneous or inconsistent with the statute or agency regulation.  The 4th Circuit so held even though the letter was not subject to any public consideration and was contrary to the prior understanding of Title IX’s requirements.  The case then proceeded to the Supreme Court.

CoA Institute joined with Cato and four law professors to file an amicus brief supporting the school board in order to address the issues related to Auer deference.  The brief calls the Auer doctrine into question and argues in favor of stricter limits on the latitude currently given to agencies interpreting their own regulations.  Among the problems noted by the brief are that this type of deference (1) provides incentives for agencies to issue vague regulations, which they can interpret at will without going through any public notice or comment procedures and (2) undermines the separation of powers by giving agencies the authority to both write regulations, a legislative function delegated by Congress, and to definitively determine their meaning, a judicial function.

You can read the brief here.

Josh Schopf is counsel at Cause of Action Institute

Florida Bankers Association: The Supreme Court Must Check IRS Abuse of Discretion

Today, Cause of Action Institute submitted an amicus brief to the U.S. Supreme Court urging it to grant a petition for certiorari to review the D.C. Circuit’s decision in Florida Bankers Association v. Department of the Treasury.  The Court should take the case to ensure that IRS rules are subject to the proper judicial review, a much-needed check on the agency’s rulemaking discretion.

In August 2015, the D.C. Circuit ruled that the Anti-Injunction Act shielded the IRS rule at issue from judicial review.  The Act requires taxpayers to pay taxes first and sue later for a refund if they believe a particular rule is infirm.  The rationale behind this rule is to protect government’s ability to generate a consistent stream of revenue without litigation slowing down that process.  However, the rule at issue in Florida Bankers was simply a reporting requirement and the penalty attached to it is designed to ensure compliance, not generate revenue.  Nonetheless, the IRS argued, and the majority of the divided D.C. Circuit panel agreed, that the Act applied to challenges to the reporting requirement as well.  This argument directly conflicts with a unanimous Supreme Court decision from last term, Direct Marketing Association v. Brohl.

Cause of Action Institute’s amicus brief brought a unique perspective to the question.  We revealed that although judicial review is an important part of constraining agency discretion, it comes at the end of a long rulemaking process and is especially important when an agency, such as the IRS, routinely defies established oversight procedures.  The IRS is notorious for skirting numerous rulemaking procedures that help ensure both accountable and higher-quality rulemaking.

The IRS, for example, evades Executive Order 12,866, which requires agencies to submit significant rules to the White House Office of Information and Regulatory Affairs for pre-publication review.  As Cause of Action Institute informed the Court in its brief, “Over the past ten years, the IRS has submitted only eight rules to OIRA for regulatory review and deemed only one of those rules significant.  Those eight rules are less than one percent of the final rules the IRS published in the Federal Register over the same period.”

In addition to evading pre-publication review, the IRS also flouts the Administrative Procedure Act’s rulemaking requirements.  Cause of Action Institute relied on University of Minnesota Law School Professor Kristin Hickman’s empirical research to show the Court that in “almost ninety-three percent of the cases she surveyed over a three-year period, ‘Treasury claimed explicitly that the rulemaking requirements of APA section 553(b) did not apply.’”

Effective and accountable agency rulemaking requires robust judicial review of agency authority, the process followed in promulgating rules, and the record upon which the rulemaking is based.  Overextension of the Anti-Injunction Act undermines these important principles, and the Supreme Court should grant certiorari and reverse the D.C. Circuit.

Click here to read the amicus brief in its entirely.


National Law Journal: Group Wants Justices to Lift Limits on Political Giving

Group Wants Justices to Lift Limits on Political Giving

By Marcia Coyle      July 17, 2013

For its first brief in the U.S. Supreme Court, the Cause of Action Institute picked a controversial cause: an end to certain limits on individual contributions to federal candidates, political action committees and political party committees.

McCutcheon and Republican National Committee v. Federal Election Commission offers the Supreme Court an another opportunity to deregulate money in elections following its much criticized ruling in Citizens United v. Federal Election Commission in 2010. The justices will hear arguments in the case this fall.

The Cause of Action Institute, which describes itself as a nonprofit, nonpartisan government-accountability organization “that fights to protect economic opportunity when federal regulations, spending and cronyism threaten it,” has joined the legal fight with an amicus brief supporting challengers Shaun McCutcheon and the Republican National Committee (RNC).

“This is their first Supreme Court brief, but it’s right down their alley,” said Barnaby Zall of Weinberg, Jacobs & Tolani in Rockville, Md., counsel of record on the amicus brief. “They are an organization focused on government accountability and they work mainly with the [Freedom of Information Act]. They understand disclosure and rules. They looked at this issue as combining lots of issues that affected them.”

Under federal campaign finance laws, there are two types of limits on political contributions by individuals. Base limits restrict the amount an individual may contribute to a particular candidate committee ($2,600 per election); national party committee ($32,400 per calendar year); state, district and local party committee ($10,000 per calendar year (combined limit)); and political action committee (PAC) ($5,000 per calendar year). Aggregate limits restrict the total contributions that individuals may make in a biennial—two-year—election cycle.

McCutcheon and the RNC urge the justices to apply the most searching scrutiny—strict scrutiny—to those biennial limits and find that the limits violate the First Amendment. Under the aggregate limits, individuals may contribute $48,600 to candidate committees and $74,600 to non-candidate committees, of which no more than $48,600 may go to non-national party committees (state, district and local party committees (combined) and PACs).

The amicus brief by Cause of Action Institute walks the justices through the last 40 years of changes in the campaign spending and disclosure environment. Those changes, it argues, undercut the original rationale for the aggregate limits.

“In an era in which parties and campaigns compete not only with other like entities, but also with independent voices armed with the latest technology and an almost limitless ability to uncover, analyze and publish contributor information, does the rationale for the current aggregate limits survive?” the brief asks.

The rationale for the limits, according to Congress in 1974, was to prevent circumvention of the limits on individual contributions. As the Supreme Court said in its landmark campaign finance ruling, Buckley v. Valeo: “Congress was surely entitled to conclude that disclosure was only a partial measure, and that contribution ceilings were a necessary legislative concomitant to deal with the reality or appearance of corruption inherent in a system permitting unlimited financial contributions, even when the identities of the contributors and the amounts of their contributions are fully disclosed.”

But what was true of disclosure in 1974 is not true today, the institute posits in one of two key arguments.

“ ‘Fully disclosed,’ in 1974, meant buried in a mountain of paper filings” in a few offices, according to the institute, with little public access.

“Today, there are effective and efficient public and private alternatives, all designed to disclose and publicize any evasions of the contribution limit,” the brief argues. “The Justice Department, the media, and private organizations all use these technologies to monitor, in real-time, campaigns and donors, and release the results on the Internet free of charge, in formats expressly designed to be used by relatively unsophisticated analysts and observers.”

That difference between today and 40 years ago, the brief adds, demonstrates that the aggregate limits are no longer tailored to the problem that Congress was addressing.

And then there is Citizens United. That 5-4 decision lifting the ban on corporate and union independent spending, along with other court decisions, has created alternative methods for individuals to speak during campaigns, the institute says. That new freedom to speak has removed the major incentive to circumvent individual contribution limits.

“Those alternative means are readily available to cautious donors now,” the brief explains. “These lawful, compliant expenditures can be made by one speaker or in conjunction with others.”

The effect of the limits today is “to punish those few donors who want to support more candidates directly than the aggregate limits permit. Thus the aggregate limits are simply another attempt to prevent persons of wealth (or those who seek to promote challengers or innovative candidates) from associating in the manner they choose.”

Daniel Epstein, the institute’s executive director and former investigative counsel for the U.S. House Committee on Oversight and Government Reform, said the aggregate limits do not protect against the most serious type of political corruption today—so-called dark money contributions for which the identity of the donor does not have to be disclosed.

“We don’t usually write amicus briefs,” Epstein said. “Most of our litigation is directly representing clients. The reason we were motivated to work with Zall is he is obviously an election law expert and we tend to be free market. You want a marketplace of ideas not just in terms of economic transactions but in terms of speech as well. One of the things we basically argue is that the contribution limits are both over-inclusive and under-inclusive. It would have a potential limit on the kinds of discussions that we viewed as important. Minority groups, bloggers and others might be adversely affected by the limits.”

The ability of someone who wants to violate the law has diminished substantially, according to Zall. “That is recognized by the Department of Justice and others, but the interpretations of the law have not changed” he said, adding that the institute’s brief brings “a realization that the old interpretations don’t work in the new environment. What they end up doing is causing more problems than they would solve.”



Amicus Brief, McCutcheon v. FEC

McCutcheon v. FEC amicus brief



Shaun McCutcheon et al v. Federal Election Commission- AMICUS CURIAE SUPPORTING APPELLANTS

Cause of Action submitted an Amicus Curiae to the Supreme Court of the United States. The case is Shaun McCutcheon  et al v. Federal Election Commission.

Amicus Curiae