United States: Supreme Court Limits Tax Obstruction Charge

Today, the Supreme Court delivered a welcome decision narrowing the obstruction "Omnibus Clause" within the Internal Revenue Code, 26 U.S.C. § 7212(a). The Court held in Marinello v. United States that in order to sustain a tax obstruction conviction, there must be a nexus between the defendant's conduct and a particular administrative proceeding. The Court rejected the Second Circuit's interpretation below, which would have permitted a conviction for obstructing "routine administrative procedures that are near-universally applied to all taxpayers, such as the ordinary processing of income tax returns." Majority Op. at 1.

The defendant's conduct is more colorfully described in Justice Thomas's dissent than in Justice Breyer's majority opinion. As Justice Thomas recounts, Marinello, the owner of a courier services company, prepared virtually no documents regarding company earnings and expenditures, shredded most business records, paid employees in cash, took money of out of the business for personal expenses, ignored the advice of advisers, changed his story regarding why he never filed tax returns, and said that he "never got around" to paying taxes. Dissenting Op. at 1-2. For that, the government charged him with violating a number of criminal tax statutes, including the Omnibus Clause.

With respect to the Omnibus Clause, the government asserted that Marinello engaged in at least eight different acts, including "failing to maintain corporate books and records, failing to provide his tax accountant with complete and accurate tax information, destroying business records, hiding income, and paying employees with cash." Majority Op. at 2 (cleaned up). Marinello was convicted of all counts – misdemeanor failure to file charges as well as the felony obstruction charge.

The Omnibus Clause forbids:

  • Corruptly or by force or threats of force (including any threatening letter or communication) obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede, the due administration of [the Internal Revenue Code].

26 U.S.C. § 7212(a).

In interpreting the Clause's scope, the Court looked to its prior decision in United States v. Aguilar, 515 U.S. 593 (1995), which addressed the obstruction statute (18 U.S.C. § 1503(a)) that applies to conduct affecting "the due administration of justice." In Aguilar, the Court limited the statute by interpreting it as requiring a nexus to a judicial proceeding.

The Court then applied that same nexus requirement to the Omnibus Clause with an analysis based upon the statute's text, statutory context, and legislative history, each affirming that the Omnibus clause is not intended to serve as a "catchall applicable to the entire Code including routine processing of tax returns, receipt of tax payments, and issuance of tax refunds." Id. at 6.

The Court also invoked not only Aguilar but also a number of its recent decisions that counseled against a broad reading of criminal statutes, citing, among others, McDonnell v. United States, 579 U.S. ___ (2016), Yates v. United States, 547 U.S. ___ (2015), and Arthur Andersen LLP v. United States, 544 U.S. 696 (2005). The Court noted that broad interpretation would risk a "lack of fair warning and related kinds of unfairness." Then, raising concerns for parents, big tippers, and individuals with sloppy record-keeping habits alike, the Court observed that a taxpayer who pays a weekly babysitter in cash, or leaves an excessive tip at a restaurant, or fails to provide every record to an accountant may know that he is running a risk of violating an IRS rule, but "we sincerely doubt he would believe he is facing a potential felony prosecution for tax obstruction." Majority Op. at 7.

Finally, the Court refused to "rely upon prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute's highly abstract general statutory language," stating that it "places great power in the hands of the prosecutor." Majority Op. at 9. The Court noted that such discretion may lead to the fear of arbitrary prosecution, which risks undermining the criminal justice system. Quoting McDonnell, the Court confirmed that we "cannot construe a criminal statute on the assumption that the Government will use it responsibly." Id.

Meanwhile, Justice Thomas, joined by Justice Alito, criticized the majority for reading the word "this title" to mean "a particular [IRS] proceeding," noting that the text of the clause is far from ambiguous and the cases cited by the majority are inapplicable. Dissenting Op. at 1.

This decision rightly limits what could be read as a broad catch-all charge, converting conduct that would otherwise constitute at most a misdemeanor, into a felony. It follows naturally in the significant line of recent cases above, in which the Court has limited the scope of broadly written criminal provisions.

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