Narrowing the Scope of Obstruction in a Criminal Tax Case – Marinello v. United States

In March of 2018, the Supreme Court of the United States reigned in the obstruction statute as it relates to tax investigations. Marinello v. United States, 138 S. Ct. 1101 (2018).  Prior to Marinello, the government was free to charge any deceptive act which would benefit the tax payer as obstruction.  This allowed minor acts of deception, usually classified as misdemeanors, to be charged as felonies in federal court.  Under the sentencing guidelines, this is often the difference between probation and a lengthy term in a federal prison.

There are multiple obstruction statutes in the federal criminal system.  These statutes are fine tuned to handle specific proceedings.  18 U.S.C. § 1503 deals with obstructive actions during a criminal investigation, 18 U.S.C. § 1512 handles tampering with a government witness, 18 U.S.C. § 1513 involves intimidation of federal witnesses, and 26 U.S.C. § 7212 handles obstruction during a proceeding under the Internal Revenue Code (IRC).  The first three statutes have been finely tailored to ensure only obstructive actions conducted during a proceeding fall under the statute.  The obstruction statute for tax investigations, however, encompassed all acts which impeded the administration of the Internal Revenue Code (IRC).

In Marinello, the Supreme Court finally tailored § 7212 to align with the other obstruction statutes under federal law.

The New Look at Criminal Tax Obstruction

18 U.S.C. § 7212 involves two separate clauses.  The first involves the obstruction of justice by physical injury or threats to officers of the Internal Revenue Service or their families.  The second is the omnibus clause.  The omnibus clause makes it a criminal act to corruptly, or by force, endeavor to obstruct or impede the due administration of the IRC.  A person acts corruptly if they have the intent to gain an unlawful advantage.  This latter clause was at issue in Marinello.

Prior to the 1990’s, the omnibus clause of § 7212 was rarely used by federal prosecutors.  Starting in the 1990’s, it became a tool to obtain felony convictions on tax payers who did not neatly fit within the felony tax fraud framework.  Tax payers with clear misdemeanor offenses were now subject to felony prosecution.  In other cases, such as Marinello’s, the felony obstruction charge was added as an additional count to an existing felony indictment.

In Marinello, the defendant owned a New York based corporation which provided freight services between the United States and Canada.  The IRS received an anonymous tip in 2004 and opened an investigation through the criminal investigations division (CID).  The IRS never notified Marinello of the investigation and it was closed that year.  In 2009, the CID reopened the investigation.  During the investigation, Marinello admitted to not keeping business records and not remembering the last time he filed personal or corporate taxes.

In 2012, the government indicted Marinello with multiple counts of tax evasion and one count of obstruction under § 7212.  The indictment charged the defendant with committing eight separate obstructive acts.  Notably, 1) failing to provide his accountant with accurate and complete information, 2) destroying business records, and 3) hiding income by paying employees in cash.  Marinello argued at trial, and on appeal, he could not obstruct the administration of the IRC when he was unaware of the investigation.

After the close of evidence, the trial court instructed the jury that “to convict Marinello of the omnibus clause violation, it must find he corruptly engaged in at least one of the eight specified activities, and Marinello acted corruptly if had the intent to gain an unlawful advantage.” The court did not instruct the jury to consider Marinello’s knowledge of the investigation prior to returning their verdict.  This knowledge component became Marinello’s main issue on appeal.

The Supreme Court viewed § 7212 next to the other obstruction statutes and concluded the trial court’s reading of § 7212 was overbroad.  The Court noted the broad interpretation would allow the government to pursue felony cases for every advantageous action taken by a tax payer.  The use of cash would become an issue as most tax payers know using cash allows the recipient to dodge tax liability.  A tax payer who does not keep good receipts could fall under § 7212 as it impedes the administration of the IRC and could be to the tax payer’s advantage.   Any evasive act related to tax matters could impede the due administration of the IRC.  Most actions taken by a tax payer will be to the tax payer’s advantage.

After noting the absurdity of the trial court’s analysis under § 7212, the Court constructed a new rule for § 7212 prosecutions.  For the government to prove an obstruction case under § 7212 under Marinello, they must prove: 1) a targeted proceeding was pending, 2) the tax payer knew of the targeted proceeding, or could have reasonably foreseen its inception, and 3) a nexus between the action taken and the proceeding at issue.

The Court pulls the innocuous acts out of the statute by requiring a targeted proceeding. A targeted proceeding includes an open audit from the IRS or an open investigation by the CID.  The day to day operations of the IRS are no longer a basis for prosecution under § 7212.  A tax payer knows his tax returns are subject to inspection by the IRS, but these day to day inspections are not a targeted proceeding under the Court’s interpretation.  If a person pays his employees cash to circumvent the IRC, he may be guilty of tax evasion.  But, unless a more targeted proceeding is underway, he cannot be prosecuted under § 7212.

The tax payer must know the targeted proceeding is pending, or it must be reasonably foreseeable an investigation is on the tax payer’s doorstep.  The obvious case occurs when a tax payer is notified by the CID an investigation has been opened.  Or a tax payer receives a letter stating the IRS is conducting an audit of their business.  However, there are situations where the CID has opened an investigation, but has yet to notify the tax payer.  If the tax payer has no reason to foresee a criminal investigation, prosecution under § 7212 will not be appropriate in that case.

The third factor is a nexus between the obstructive action taken and the proceeding at issue.  This factor looks at the timing and causation of the tax payer’s actions.  If the tax payer receives notification of an open investigation, and immediately starts burning his records, the nexus will be clear.  However, most cases are not that cut and dry.  It will be interesting to see how this factor evolves as more cases are appealed under the Marinello standard.

Criminal Tax Obstruction Still Evolving

Since the 1990’s, the courts of appeals have left the proper administration of § 7212 to prosecutorial discretion.  In Marinello, the Supreme Court greatly narrowed the use of § 7212 for federal prosecutors.  The statute is now reserved for its intended purpose – prosecuting tax payers who take obstructive actions in response to an open tax proceeding.  The statute was never meant to criminalize every evasive act related to taxes.  Those actions were rightfully criminalized in the substantive sections of the IRC.  Many of those sections are misdemeanors with no possibility of jail time.

As with all new case law, the standard in Marinello will undergo modifications.  Criminal tax lawyers will challenge the outer boundaries of the Court’s ruling to fine tune the interpretation of § 7212.  It will be interesting to see the evolution in years to come.

 

 

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