The ‘one-man conspiracy’ statute

Like many federal statutes that include a “catchall” residual clause designed to apply to conduct that might not be covered by the specific language in the rest of the statute, Tax Code Section 7212(a) imposes a criminal penalty on anyone who “corruptly … obstructs or impedes or endeavors to obstruct or impede, the due administration” of the Internal Revenue Code.

And on Dec. 6, 2017, the Supreme Court heard oral arguments to determine if the catchall phrase, also called an omnibus clause or “uber” clause, is justified in its broad use and interpretation by federal prosecutors.

“It’s been called the one-man conspiracy statute,” said Nathan Hochman, a partner in Morgan Lewis’ litigation practice group, and former head of the Tax Division of the Department of Justice.

“Normally you need two or more people for a conspiracy, but not with Section 7212,” he said. “And with a conspiracy, you don’t need to commit the underlying offense to be guilty of a crime.”

Code Section 7201 (attempt to evade tax) or 7206 (fraud and false statements) are generally used, Hochman explained.

“But what happens in a tax case where you can’t charge either because you don’t have all the elements to prove a false return or an evasion scheme? That’s where Section 7212 comes into play,” he said.

“You can go back into every act taken by someone, whether it’s an affirmative act of tax evasion or not,” he said. “And you can go back as far as you want, even beyond the statute of limitations, if necessary, and lead up to its eventual overall effect on the IRS.”

The statute has been used in a number of contexts, according to Hochman.

“It’s used in situations where people were taking a variety of steps, and the prosecutor wants to get all the steps before the jury,” Hochman explained. “It makes relevant all types of evidence that may be irrelevant if the charge was just tax evasion or a false statement on a return. It’s a very potent weapon for a prosecutor to have in his or her arsenal. The question for the Supreme Court is: What are the limits?”

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The U.S. Supreme Court building stands in Washington, D.C., U.S., on Friday, April 7, 2017. Judge Neil Gorsuch is poised to win an intensely political confirmation fight to join a Supreme Court already struggling to stay above politics. The Senate's expected confirmation of Gorsuch Friday will restore the generally conservative majority that existed before Justice Antonin Scalia's death last year. Photographer: Andrew Harrer/Bloomberg via Getty Images

The case at hand

For Carlo J. Marinello II, this clause had the effect of turning his failure to file tax returns over a period of several years from a misdemeanor into a felony.

Marinello owned and operated a freight service that couriered items between the United States and Canada. From 1992 to 2010, he did not keep business records or file personal or business tax returns. He shredded and discarded records, paid his workers in cash and issued no W-2s or 1099s. He ignored advice from his attorney and accountants to maintain records, and ignored a phone inquiry from an Internal Revenue Service agent. He was eventually turned in through an anonymous letter to the IRS.

Marinello was indicted by a grand jury on nine counts of tax-related offenses, and a jury found him guilty on all counts. Eight of the counts were misdemeanors under Code Section 7203 for willfully failing to file personal income and corporate tax returns for the years 2005 through 2008.

The remaining count charged him with violating Code Section 7212(a)’s residual clause. The district court instructed the jury that proof beyond a reasonable doubt of any one of the eight obstructive acts alleged in the indictment, including omissions, would be sufficient to find Marinello guilty under Section 7212(a).

Marinello appealed to the Second Circuit, arguing that guilt under the residual clause requires knowledge of a pending IRS action or investigation. He urged the court to adopt the Sixth Circuit’s interpretation of Code Section 7212(a), which held that the reference to “due administration of this title” requires some pending IRS action, such as a subpoena or audit, of which the defendant was aware.

The Second Circuit rejected the Sixth Circuit’s interpretation, holding that the statute covers any corrupt act or omission that obstructs or impedes any activity under the Tax Code.

In the petition for certiorari, Marinello noted that under the Second Circuit’s interpretation, “a defendant who does not maintain records at a time when the IRS does not have a pending action against him — let alone undertaking an action of which he is aware — can nonetheless be convicted of a felony of obstructing the administration of the Tax Code.”

“The Supreme Court was asked to resolve an apparent disagreement among the federal circuits,” said David De Jong, CPA, Esq., a partner at Stein Sperling. “The Sixth Circuit Court of Appeals agreed with the defendant that he can only be convicted if he knowingly interfered, which would require knowledge of an investigation. Three other courts of appeals had disagreed.”

“In oral argument, Justice Alito asked the government whether a 20 percent cash discount on cleaning gutters could be a violation of the statute,” De Jong observed. “Counsel responded in the negative but seemed to retreat from that answer if a corrupt purpose could be shown.”

“Justice Sotomayor and Justice Gorsuch offered a reading of the tax obstruction statute that is likely to carry the day,” said Jeffrey Green, a partner at Sidley Austin. “That is, that the IRS must be engaged in some type of active proceeding, even if that is not a full-blown audit or investigation. The assistant to the solicitor general ably withstood withering questioning from the bench, but his appeal to the DOJ’s charging discretion was undone by the DOJ’s new policy requiring that the most severe charge be made in all cases.”

“A lot of the discussion was focused on what ‘administration’ means,” said Green. “As Justice Kagan noted, that can mean anything and everything that the IRS does. She called the solicitor general’s interpretation ‘ungodly broad,’ in that if you read the statute the way the government does, then anything you do that might impede anything the IRS does, even throwing away records you’re not obligated to keep, could land you in jail with a felony charge of obstruction. And as Justice Breyer pointed out, people that offer to pay someone in cash may be guilty because they have reason to believe that the individuals to whom they’re paying cash might not report that income.”

“Not filing a tax return is a misdemeanor, not a felony,” Green noted. “But the government’s interpretation would make a felony obstruction charge automatic, because the IRS can’t do its job if they can’t look to see if you’ve reported all of your income.”

Green anticipates that the Court will reverse and remand to the Second Circuit to apply a new standard to the facts of Marinello’s case.

“It’s almost certain that they will reverse,” he said. “It will be interesting to see where they will land. It will probably be a bit short of what the petitioner is asking for — that there needs to be a pending proceeding. Justices Sotomayor and Gorsuch offered a reading a bit broader than that. On remand, it could potentially be a danger for Mr. Marinello depending on how the Supreme Court writes the case.”

“Quite likely it will be a 9-0 decision, and the opinion will be written by Justice Sotomayor,” he said.

“My sense is that it will be reversed,” agreed Don Falk, an appellate litigation partner at Mayer Brown. “But the court won’t adopt either the petitioner’s or the government’s position.”

“The court may decide based on the mens rea [knowledge of wrongdoing] component, or it may focus on the ‘administration of this title’ element. My best guess is that they would require some kind of affirmative action by the taxpayer that occurs after any contact by the IRS. A letter or phone call would be enough — it would not have to be a formal proceeding.”

“It’s rare to hear a justice described a statute in such terms as ‘ungodly broad’ and still find it constitutional,” observed Hochman. “The reason is that the due process clause requires a statute to alert someone as to when they’re crossing a line in order to find them criminally responsible for their action. What they seemed [at oral argument] to be suggesting is that the statute covers many actions that they don’t believe to be potentially criminal.”

“The indications seem to be that they will reverse,” he said. “It looks like Mr. Marinello found a right collection of justices to hear his case.”

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