Source: http://www.postschell.com/publications/1494-felony-tax-obstruction-statute-only-applies-ongoing-or-foreseeable-proceedings
Timestamp: 2019-04-20 12:39:12+00:00

Document:
On March 21, 2018, the U.S. Supreme Court in Marinello v. United States, No. 16-1144, 2018 U.S. LEXIS 1914, imposed a significant limitation on the government’s ability to charge and successfully convict taxpayers for obstructing administration of the Internal Revenue Code. Section 7212(a) of the IRC makes it a felony to “corruptly or by force” “endeavor to obstruct or impede the due administration of this title.” In a 7-2 decision, the Court announced a narrow interpretation of “due administration of [the IRC],” holding that due administration referred only to a particular proceeding and not general IRS administration.
Section 7212(a) criminalizes efforts “to intimidate or impede any officer or employee” of the IRS” “corruptly or by force or by threats of force.” 26 U.S.C. § 7212(a). It also contains a residual clause that prohibits “in any other way corruptly . . . obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration of [the IRS].” Id. (emphasis added). This is also known as the Omnibus Clause.
The Omnibus Clause’s broad language covers a wide swath of taxpayer conduct, as many actions can ultimately be deemed to have impeded the IRS, such as a taxpayer’s poor recordkeeping habits or cash payment practices. The Clause also requires a different mens rea than willfulness, which is standard for most tax crimes; a violation only requires that the defendant acted “corruptly,” which in this context means “performed with the intent to secure an unlawful benefit for oneself or another.” United States v. Massey, 419 F.3d 1008, 1010 (9th Cir. 2005) (internal quotation marks omitted). These unique features have made the Omnibus Clause a favorite weapon for prosecutors in financial crime cases. Before Marinello, most every tax crime of consequence – evasion, filing false tax returns, failing to file, failing to pay, and conspiracy to defraud the IRS – could also be charged – and more easily proven – as a section 7212(a) violation. Many defense practitioners felt that the Clause’s only limiting principle was, in practice, the government’s prosecutorial discretion.
The Sixth Circuit, relying on the Supreme Court’s decision in United States v. Aguilar, 515 U.S. 593 (1995), imposed an additional requirement on the Omnibus Clause, holding that it required the government to prove that the defendant obstructed a pending IRS action or proceeding, such as an investigation or audit, of which the defendant was aware. See United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998). Although this approach was rejected by the First, Second, Ninth, and Tenth Circuits, it was adopted by the U.S. Supreme Court.
Marinello was not a sympathetic defendant: He owned and operated a business transporting freight internationally. United States v. Marinello, 839 F.3d 209, 211 (2d Cir. 2016). From 1992 through 2010, he maintained no corporate books or records, instead shredding or discarding all of the business’s bank statements, employee work statements, receipts, and bills. He paid his employees in cash, never issued Form 1099s or W-2s, and routinely used business funds for personal expenses. Id. Marinello never filed any personal or corporate tax returns during this period, despite being instructed to do so by counsel. Id.
(8) using business receipts and money from business accounts to pay personal expenses, including the mortgage for the residence in which the defendant resided and expenses related to the defendant's mother's care at a senior living center.
Id. at 213. All of this conduct predated Marinello’s 2009 interview with the IRS.
The Supreme Court reversed, holding that the Omnibus Clause’s language “does not cover routine administrative procedures that are near-universally applied to all taxpayers, such as the ordinary processing of income tax returns.” 2018 U.S. LEXIS 1914 at *6. “Rather, the clause as a whole refers to specific interference with targeted government tax-related proceedings, such as a particular investigation or audit.” Id.
We set forth two important reasons for doing so [in Aguilar]. We wrote that we have 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. Both reasons apply here with similar strength.
Id. at *9-10 (internal quotation marks omitted) (citations omitted).
the Omnibus Clause logically serves as a “catchall” in respect to the obstructive conduct the subsection sets forth, not as a “catchall” for every violation that interferes with what the Government describes as the “continuous, ubiquitous, and universally known” administration of the Internal Revenue Code.
Viewing the Omnibus Clause in the broader statutory context of the full Internal Revenue Code also counsels against adopting the Government’s broad reading. That is because the Code creates numerous misdemeanors, ranging from willful failure to furnish a required statement to employees, §7204, to failure to keep required records, §7203, to misrepresenting the number of exemptions to which an employee is entitled on IRS Form W-4, §7205, to failure to pay any tax owed, however small the amount, §7203. To interpret the Omnibus Clause as applying to all Code administration would potentially transform many, if not all, of these misdemeanor provisions into felonies, making the specific provisions redundant, or perhaps the subject matter of plea bargaining.
Interpreted broadly, the provision could apply to a person who pays a babysitter $41 per week in cash without withholding taxes, see 26 CFR §31.3102-1(a)(2017); IRS, Publication 926, pp. 5-6 (2018), leaves a large cash tip in a restaurant, fails to keep donation receipts from every charity to which he or she contributes, or fails to provide every record to an accountant. Such an individual may sometimes believe that, in doing so, he is running the risk of having violated an IRS rule, but we sincerely doubt he would believe he is facing a potential felony prosecution for tax obstruction. Had Congress intended that outcome, it would have spoken with more clarity than it did in §7212(a).
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. Doing so risks allowing policemen, prosecutors, and juries to pursue their personal predilections, which could result in the nonuniform execution of that power across time and geographic location. And insofar as the public fears arbitrary prosecution, it risks undermining necessary confidence in the criminal justice system. That is one reason why we have said that we cannot construe a criminal statute on the assumption that the Government will use it responsibly.
Id. at *16-17 (citations omitted) (internal quotation marks omitted). The Court then reversed the Second Circuit’s decision and remanded for further proceedings. Importantly, the Court’s decision does not affect Marinello’s remaining, non-Omnibus Clause convictions.
Thus, in order to prove a violation of the Omnibus Clause going forward, prosecutors will need to establish that an investigation or audit of the defendant taxpayer was being conducted at the time of the alleged obstruction and that the defendant was aware of or should have reasonably foreseen it.
The Court’s decision in Marinello has potentially decreased the attractiveness of Omnibus Clause prosecutions by limiting the Clause’s broad sweep and requiring the government to prove two additional elements: the existence of an ongoing proceeding and the defendant’s knowledge of it.
Although Marinello may cause a decrease in the number of Omnibus Clause prosecutions, it may cause an increase in Klein conspiracy charges, given the expansive evidence permitted in conspiracies and the ease with which potential co-conspirators are often found in tax cases.
Timeline evidence will become increasingly important as both the prosecution and defense seek to place allegedly obstructive conduct in relation to the government’s investigation or audit.
Establishing the defendant’s awareness of the government’s investigation will become important. This will potentially create new issues to grapple with in the calculus of whether a defendant will testify in his own defense, especially if the conduct at issue occurred just before an official communication or interview.
Expect the concept of reasonably foreseeable to be litigated vigorously, especially in the case of businesses or individuals who have been under audit previously.
Evidence that the defendant engaged in allegedly obstructive conduct for a long period of time before the proceeding at issue may be useful in arguing that the conduct was not aimed at any particular investigation or audit – although such a strategy is not without risk, depending on the behavior and other charges.

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