We do not get tax cases out of the Supreme Court very often, and the decision in Marinello v. United States will be an important one in determining how likely it is that clients who have not complied with the federal tax laws will be subject to a felony prosecution for obstruction of justice. This has become especially important in light of recent Department of Justice guidelines directing prosecutors to charge the most punitive crimes that can be proven in court.


Background

Mr. Marinello operated a freight service in New York. He maintained little documentation of his business, not retaining bank statements, employee records, vehicle expense records or bills. He paid his employees in cash and did not issue W-2s. He used company funds for personal purposes. He did not file personal or business tax returns.

The IRS Criminal Investigation Division investigated his activities in secret for a number of years, and were frustrated in their investigation by the lack of documentation. Finally, in 2012, he was charged with a felony violation of Code Sec. 7212, corruptly endeavoring to obstruct and impede the due administration of the internal revenue laws, and eight misdemeanor charges relating to failure to file individual and corporate tax returns.

Key to the Supreme Court’s decision was that, during the many years that Mr. Marinello was failing to maintain business records, paying employees with cash, failing to issue W-2s, and paying personal expenses with business revenue, Mr. Marinello was unaware of the ongoing IRS investigation into his practices.

Code Sec. 7212(a) reads as follows:

"CORRUPT OR FORCIBLE INTERFERENCE. Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) 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, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both. The term “threats of force,” as used in this subsection, means threats of bodily harm to the officer or employee of the United States or to a member of his family."

Mr. Marinello was sentenced to three years in prison under the statute in addition to other penalties.

Federal agencies have until May 10 for a final appeal with the U.S. Supreme Court, but CLO industry observers do not expect the Fed or the SEC to follow through.
The U.S. Supreme Court


The decision

Mr. Marinello argued that the government must prove that he was aware of the IRS investigation of him when he committed the acts alleged to constitute obstruction of the IRS. His position was supported by a Sixth Circuit decision in United States v. Kassouf. The IRS argued that a taxpayer can violate the statute by taking corrupt action that is intended and likely to obstruct anticipated IRS administration action.

The Second Circuit rejected Mr. Marinello’s argument, siding with similar rulings by the First, Ninth and Tenth Circuits that the statutory language did not require the taxpayer’s actual knowledge of a current investigation or proceeding. The dissenting Supreme Court opinion by Justice Clarence Thomas joined by Justice Samuel Alito also found no such requirement in the statutory language.

The majority of the Supreme Court, in an opinion by Justice Stephen Breyer, found for Mr. Marinello, concluding that the Department of Justice must prove that the taxpayer knew that a particular action was obstructing a pending tax-related proceeding or could reasonably foresee that such a proceeding would commence. The opinion stated that, for the statute to apply, the taxpayer must obstruct or impede a particular person or thing, and that the reference in the statute to due administration of the Tax Code must refer to discrete targeted administrative acts, rather than every conceivable task involved in the Tax Code’s administration. The majority cites to a similar position taken by the court with respect to a similar federal statute, wherein the court stated that it traditionally exercises restraint in assessing the reach of federal criminal statutes.

The majority opinion also stated that it must be a targeted administrative action. Just because the taxpayer knows that the IRS will review tax returns annually does not transform every Tax Code violation into an obstruction of justice charge. There must be a nexus between the taxpayer’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative proceeding.


The takeaway

The takeaway here is not that it is better to be consistently destroying records and taking cash out of the business for personal expenses rather than just when you start worrying that the IRS might be starting to snoop around. Remember, Mr. Marinello may have escaped the obstruction of justice charge but he remained guilty of failure to file tax returns and pay taxes due.

Instead, the takeaway is that a failure to retain all documentation that might be helpful to the IRS or to follow all procedures required by the Tax Code does not necessarily subject a client to a felony obstruction of justice charge. But for this decision, under the new guidelines for filing charges from the Department of Justice, many delinquent taxpayers may have been charged with a felony count of obstruction of justice for even a relatively innocent tossing of tax records or paying an expense with cash.

There is still some uncertainty under the Supreme Court language with the inclusion of the language that the obstruction of justice statute could apply where the taxpayer could reasonably foresee that such a proceeding would commence.

That language leaves it open to future litigation as to what might have been reasonably foreseeable in a particular case. Still, taxpayers should be able to take some comfort from this decision.

Mark Luscombe

Mark Luscombe

Mark Luscombe, JD, LLM, a CPA and attorney, is the principal federal tax analyst for Wolters Kluwer Tax & Accounting.