Supreme Court Holds that Omnibus Clause of the Tax Obstruction Crime (§ 7212(a)) Requires Awareness of Pending Tax-Related Proceeding (3/21/18; 3/22/18)

Today, the Supreme Court held in Marinello v. United States, ___ U.S. ___, ___ S.Ct. ___ 2018 U.S. LEXIS 1914  (2018), here, that "To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence."  There is a lot to unpack there, and I haven't had time to study the opinion.  I therefore offer for now only the Court's syllabus of the opinion (not the opinion itself, but probably as good a discussion other than the opinion as available right now).

Between 2004 and 2009, the Internal Revenue Service (IRS) intermittently investigated petitioner Marinello’s tax activities. In 2012, the Government indicted Marinello for violating, among other criminal tax statutes, a provision in 26 U. S. C. §7212(a) known as the Omnibus Clause, which forbids “corruptly or by force or threats of force . . .obstruct[ing] or imped[ing], or endeavor[ing] to obstruct or impede,the due administration of [the Internal Revenue Code].” The judge instructed the jury that, to convict Marinello of an Omnibus Clause violation, it must find that he “corruptly” engaged in at least one of eight specified activities, but the jury was not told that it needed to find that Marinello knew he was under investigation and intended corruptly to interfere with that investigation. Marinello was convicted. The Second Circuit affirmed, rejecting his claim that an Omnibus Clause violation requires the Government to show the defendant tried to interfere with a pending IRS proceeding, such as a particular investigation.

Held: To convict a defendant under the Omnibus Clause, the Government must prove the defendant was aware of a pending tax-related proceeding, such as a particular investigation or audit, or could reasonably foresee that such a proceeding would commence. Pp. 3–11. 

(a) In United States v. Aguilar, 515 U. S. 593, this Court interpreted a similarly worded criminal statute—which made it a felony “corruptly or by threats or force . . . [to] influenc[e], obstruc[t], or imped[e], or endeavo[r] to influence, obstruct, or impede, the due administration of justice,” 18 U. S. C. §1503(a). There, the Court required the Government to show there was a “nexus” between the defendant’s obstructive conduct and a particular judicial proceeding. The Court said that the defendant’s “act must have a relationship in time, causation, or logic with the judicial proceedings.” 515 U. S., at 599. In reaching this conclusion, the Court emphasized that it has“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.’ ” Id., at 600. That reasoning applies here with similar strength. The verbs “obstruct” and “impede” require an object. The taxpayer must hinder a particular person or thing. The object in §7212(a) is the “due administration of [the Tax Code].” That phrase is best viewed, like the “due administration of justice” in Aguilar, as referring to discrete targeted administrative acts rather than every conceivable task involved in the Tax Code’s administration. Statutory context confirms this reading. The Omnibus Clause appears in the middle of a sentence that refers to efforts to “intimidate or impede any officer or employee of the United States acting in an official capacity.” §7212(a). The first part of the sentence also refers to “force or threats of force,” which the statute elsewhere defines as “threats of bodily harm to the officer or employee of the United States or to a member of his family.” Ibid. And §7212(b)refers to the “forcibl[e] rescu[e]” of “any property after it shall have been seized under” the Internal Revenue Code. Subsections (a) and (b) thus refer to corrupt or forceful actions taken against individual identifiable persons or property. In context, the Omnibus Clause logically serves as a “catchall” for the obstructive conduct the subsection sets forth, not for every violation that interferes with routine administrative procedures such as the processing of tax returns, receipt of tax payments, or issuance of tax refunds. The statute’s legislative history does not suggest otherwise. The broader context of the full Internal Revenue Code also counsels against a broad reading. Interpreting the Omnibus Clause to apply to all Code administration could transform the Code’s numerous misdemeanor provisions into felonies, making them redundant or perhaps the subject matter of plea bargaining. It could also result in a similar lack of fair warning and related kinds of unfairness that led this Court to “exercise” interpretive“restraint” in Aguilar. See 515 U. S., at 600. The Government claims that the “corrupt state of mind” requirement will cure any over-breadth problem, but it is difficult to imagine a scenario when that requirement will make a practical difference in the context of federal tax prosecutions. And to rely on prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute’s general language places too much power in the prosecutor’s hands. Pp. 3–9.

(b) Following the same approach taken in similar cases, the Government here must show that there is a “nexus” between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. See Aguilar, supra, at 599. The term “particular administrative proceeding” does not mean every act carried out by IRS employees in the course of their administration of the Tax Code. Just because a taxpayer knows that the IRS will review her tax return annually does not transform every Tax Code violation into an obstruction charge. In addition to  satisfying the nexus requirement, the Government must show that the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant. See Arthur Andersen LLP v. United States, 544 U. S. 696, 703, 707–708. Pp. 9–11.

JAT Comments (revised through 3/22/18):

1.  Obstructive Conduct and Other Tax Felony Crimes.  Marinello was charged with engaging in "eight practices" of obstruction, "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." (Slip Op. 5, internal quotation marks and ellipses omitted).  Even if such conduct were not criminalized under § 7212(a) absent a nexus to a pending IRS investigation, many of them could, in context, be affirmative acts of evasion for tax evasion, § 7201, or conduct that would add flavor to charges of tax perjury, § 7206(1), or aiding and assisting, § 7206(2).  Tax Evasion is a 5 year felony, whereas the other two are three year felonies.  This is merely to say that, for the same conduct, the Government can use other charges.

Of course, for tax evasion, the Government will have to prove some material amount of tax due and owing (evaded tax), but in most of these cases I suspect that is not that big a deal, because, in order to get incarceration, the Government will be required to prove by a preponderance of the evidence a tax loss (same as the tax evaded element except as to burden of proof).  Note that the Government generally will not prosecute without some indication of incarceration which requires it to prove a tax loss for sentencing purposes.

2.  Relationship of Willfully and Corruptly.  The majority seems to equate the willfully element of most tax crimes with the corruptly element of § 7212(a).  The Court says (Slip Op. 11):

we find unconvincing the dissent’s argument that the distinction between “willfully” and “corruptly”—at least as defined by the Government—reflects any meaningful difference in culpability.

In this regard, the dissent says:

The Omnibus Clause requires that an act be done “corruptly,” but the misdemeanor provisions [JAT note: and the key felony provisions] require that an act be done “willfully.” The difference between these mens rea requirements is significant. While “willfully” requires proof only “that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty,” Cheek v. United States, 498 U. S. 192, 201 (1991), “corruptly” requires proof that the defendant “act[ed] with an intent to procure an unlawful benefit either for [himself] or for some other person,” United States v. Floyd, 740 F. 3d 22, 31 (CA12014) (collecting cases); see also Black’s Law Dictionary 414 (rev. 4th ed. 1951) (“corruptly” “generally imports a wrongful design to acquire some pecuniary or other advantage”). In other words, “corruptly” requires proof that the defendant not only knew he was obtaining an “unlawful benefit” but that his “objective” or “purpose” was to obtain that unlawful benefit. See 21 Am. Jur. 2d, Criminal Law §114 (2016) (explaining that specific intent requires both knowledge and purpose)

So, the majority seems to reject the notion that corruptly adds anything different than willfully for the other Title 26 tax crimes.

This has been an issue I have dealt with in the past where the fear was that corruptly might be broader and more amorphous than willfully.  But, as I have noted, the trend (including e.g., United States v. Kelly, 147 F.3d 172 (2d. Cir. 1998)) seems to equate the two concepts, as did the majority in Marinello.  See e.g., Marinello Tax Obstruction 7212(a) Oral Argument is Wednesday (12/3/17), here; Tenth Circuit Opinion on Mens Rea for Tax Obstruction - What Does Unlawful Mean? (7212(a)) (3/30/14), here; and Mens Rea Element of False Claims Crime, 18 USC § 287 (11/19/16), here.  I think the import of the quote from the majority opinion means that the two elements -- willfully and corruptly, are basically the same.

3.  Fair Warning.  The majority also was concerned about a broad reading of § 7212(a) which would not give persons fair warning.  (Slip Op. 10.)

A broad interpretation would also risk the lack of fair warning and related kinds of unfairness that led this Court in Aguilar to “exercise” interpretive “restraint.” See 515 U. S., at 600; see also Yates, supra, at ___–___ (slip op., at 18–19); Arthur Andersen LLP v. United States, 544 U. S. 696, 703–704 (2005). 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). 

I have been previously been concerned about this genre of issue.  See John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here; and Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.

Addendum 3/22/18 6:00 pm:

4.  For Marinello Personally, A Meaningless Victory:  The question arises whether Marinello, the defendant, will be satisfied with having established a valuable and important legal precedent and will richly deserve the thanks of those who dodge the bullet on his coattails.  Marinallo has to ask the question, how do I personally benefit from this decision.  I think the answer to that question is that he will likely not benefit very much from it.  Marinello was charged with one count of tax obstruction, § 7212(a), and eight counts of willfully failing to file individual and corporate tax returns for 4 years each.  He was convicted of all counts.  The Supreme Court's opinion only reverses the tax obstruction count.  The other eight counts of conviction stand, regardless of what happens to the tax obstruction count.  The other counts were misdemeanor counts (meaning that, for each count of conviction, the maximum sentence is 1 year, so that with "stacking" the maximum sentence he could get is 8 years).  Of course, the Sentencing Guidelines will kick in to produce an advisory sentencing range of less than 8 years.  But, and  this is key, the Sentencing Guidelines will produce the same sentence with or without the conviction on the tax obstruction count.  And, to the extent that the sentencing court in recalibrating the sentence is inclined to exercise its Booker discretion to impose a sentence of less than the Guidelines indicate range, since the overall pattern of conduct can be considered, it is hard to imagine that a Booker sentence would really be different even without the tax obstruction count.

Just as Justice Scalia said that administrative law is not for sissies, so to the Sentencing Guidelines is not for sissies. I delve into it, but caution that readers not familiar with the Guidelines might skip this discussion.  For background on the sentencing, here is what the Second Circuit said in his original appeal about the sentencing (I boldface certain items readers might want to focus on).  The important thing to remember is that sentencing is based upon the intended tax loss (the tax evaded) which can include tax loss for the convicted counts and even unconvicted or acquitted counts under the concept of relevant conduct:

In the defendant's Presentence Investigation Report (the "PSR"), the Probation Office calculated the total tax loss from Marinello's activities as approximately $598,215.53 by applying a percentage-based formula to his gross income from 2005 through 2008. See U.S. Sentencing Guidelines Manual (hereinafter, "U.S.S.G.") § 2T1.1(c)(2)(A) (U.S. Sentencing Comm'n 2014) (indicating that this formula should be used "unless a more accurate determination of the tax loss can be made"). The total tax loss resulted in a base offense level of twenty. See U.S.S.G. §§ 2T1.1(a)(1), 2T4.1(H)-(I) (specifying, for offenses involving willful failure to file returns, a base offense level of 20 where the tax loss is "[m]ore than $400,000" but not more than $1,000,000). A two-level enhancement to the base offense level was applied because Marinello's conviction under Count One implicated an adjustment for obstructing or impeding the administration of justice. See U.S.S.G. § 3C1.1. Marinello was also deemed ineligible for the two-level reduction for acceptance of responsibility. See U.S.S.G. § 3E1.1(a). In the view of the Probation Office, Marinello had not clearly demonstrated an acceptance of responsibility for his offense conduct in part because he continued to decline to accept responsibility for the obstruction charge and insisted there was a legal basis to contest this issue. Thus, with a criminal history category of one and a total offense level of twenty-two, Marinello's advisory Guidelines range for sentencing was forty-one to fifty-one months. The Probation Office also determined that Marinello owed the IRS $331,348.08 in corporate income taxes and $20,415 in personal income taxes from 2005 to 2008, and recommended that those amounts be imposed by the court's restitution order. 

Marinello filed objections to the findings in the PSR, two of which are relevant to this appeal. First, he argued that the tax loss and restitution amounts were incorrectly calculated. According to Marinello, "a more accurate determination of tax loss c[ould] be made" based on the actual corporate and personal tax returns he ultimately filed, years after the fact, for tax years 2005 through 2008. Objections to the [PSR] and Statement With Respect to Sentencing Factors, dated January 14, 2015, at 2-3 (App'x 514-15) (quoting U.S.S.G. § 2T1.1(c)(2)(A) (emphasis removed)). These returns reflected a tax loss of only $48,890, which would have yielded a base offense level of fourteen instead of twenty. See U.S.S.G. § 2T4.1(E). Marinello further asserted that any restitution was also capped at the $48,890 amount. 

Second, Marinello urged that the two-level reduction for acceptance of responsibility was applicable. n5 He argued that his conduct merited the reduction because he admitted to keeping poor business records and not paying his taxes; was previously willing to plead to the misdemeanor Counts Two through Nine; and proceeded to trial only to preserve a dispute concerning whether he could be held criminally liable under the section 7212(a) obstruction charge.
   n5 Marinello did not argue that he was eligible for an additional one-level reduction under U.S.S.G. § 3E1.1(b), nor does he make any argument with respect to this provision on appeal. 

In response, the government asserted that there were a variety of inaccuracies in Marinello's proffered tax returns (such as using an incorrect filing status and improperly claiming his mother as a dependent), which rendered them unreliable for purposes of calculating either an alternative tax loss or restitution amount. The government further contended that the two-level reduction for acceptance of responsibility was inapplicable because Marinello was evasive during his discussions with Agent Klimczak at the June 1, 2009, interview, disputed that he acted with the requisite mens rea to be convicted under Count One, and stated at the time the PSR was prepared that he did not accept responsibility for the obstruction charge. 

In his reply brief, Marinello did not address any of the alleged inaccuracies the government highlighted in his tax returns. He continued to argue, however, that he deserved the reduction for acceptance of responsibility. 

During Marinello's sentencing proceedings, the district court concluded that Marinello's alternative calculation of the tax loss and restitution at issue could not be used in light of the discrepancies the government identified in his proffered tax returns. The court therefore adopted the Probation Office's calculations of those figures and denied Marinello's first objection. His second objection concerning the acceptance of responsibility reduction was also denied based on the court's view that his case was not one of the "rare" situations specified in the Guidelines where the reduction is appropriate even though the defendant exercised his constitutional right to proceed to trial. Transcript of Sentencing ("Sentencing Tr."), July 1, 2015, at 12 (App'x 566) (applying U.S.S.G. § 3E1.1 cmt. 2). 

Marinello addressed the court prior to sentencing. He stated that he realized he had made a mistake, but that he did not accept the over half million dollar tax loss calculation by "a probation officer who probably without using an adding machine can't add a column of numbers together." Id. at 19 (App'x 573). After the district court observed that Marinello "expressed no remorse whatsoever," Marinello responded: 

I have complete remorse. I have absolutely complete remorse. I was overwhelmed by the job. I was overwhelmed by everything. Business went—turned south. And I tried to keep the company afloat. 

I'm 69 years of age. I should be retired, and I'm working every day of the week. Every month the [IRS] gets a check. 

Id. at 20 (App'x 574). The government underscored that the defendant's comments demonstrated that he clearly did not accept responsibility for his actions. 

Adopting the criminal history category, total offense level, and Guidelines range recommended by the Probation Office, the district court imposed a below-Guidelines sentence of thirty-six months' imprisonment and one year of supervised release. The district court also imposed restitution in the amount of $351,763.08, as recommended by the Probation Office. Following the entry of an amended judgment, this timely appeal followed.

There is a lot to unpack in that description, but since I cautioned readers not to read it unless they were familiar with the Guidelines, I won't attempt the unpacking here.  Suffice it to say, that although I have not attempted new Guidelines calculations, I would be surprised if virtually the same Guidelines range were not produced and, given the same pattern of facts, even without the tax obstruction count, the Booker discretion would produce the same sentence -- unless the sentencing court were to give Marinello some credit for having fought the good fight.

5.  The Gravemen of the Holding:  I offer here a summary of the holding that I prepared for another publication:

An issue that lingered for many years is whether conviction for tax obstruction under the Omnibus Clause of § 7212(a) required a nexus between the alleged obstructive acts and a pending IRS investigation of which the defendant was aware and which he intended to obstruct.  The wording of the the Omnibus Clause of § 7212(a) is based on language similarly worded to the general obstruction of justice statute, 18 U. S. C. § 1503(a).  In United States v. Aguilar, 515 U.S. 593 (1995), the Supreme Court interpreted that general obstruction of justice statute to require a nexus between the obstructive conduct and a particular judicial proceeding.  A split developed among the circuits as to whether, given the similarity in language, §7212(a) required the same nexus to a pending IRS proceeding; the Supreme Court accepted certiorari in Marinello v. United States, ___ U.S. ___, ___ S.Ct. ___, 2018 U.S. LEXIS 1914  (March 21, 2018) to resolve the split. 186 n___.   

In Marinello v. United States, ___ U.S. ___, ___ S.Ct. ___, 2018 U.S. LEXIS 1914 (March 21, 2018), the Supreme resolved the split, consistent with the interpretation of 18 U. S. C. §1503(a) in Aguilar and other cases, holding that in order to secure a conviction under the Omnibus Clause of 7212(a), the Government must show:

1. A nexus to an administrative proceeding:  "a 'nexus' between the defendant’s conduct and a particular administrative proceeding, such as an investigation, an audit, or other targeted administrative action. That nexus requires a 'relationship in time, causation, or logic with the [administrative] proceeding.'"  Aguilar, 515 U. S., at 599 * * * *.
2. A pending or in the offing proceeding.  "the [administrative] proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant.  See Arthur Andersen, 544 U. S., at 703, 707–708 (requiring the Government to prove a proceeding was foreseeable in order to convict a defendant for persuading others to shred documents to prevent their 'use in an official proceeding').

Of course, those "black letter" law holdings do not explain the meandering path of the issue in the lower courts and the reasoning in getting to the holdings.  That is adequately discussed in the Supreme Court's opinion and in the opinions in the Second Circuit, including the panel opinion and the opinion dissenting from denial of rehearing en banc.

6.  Other good discussions:

• Steve Johnson, Marinello – Curbing Abusive Exercise Of Prosecutorial Discretion In Tax Crimes Cases (TaxProf Blog 3/22/18), here.  Steve is a very good lawyer, thinker and writer; I recommend his discussion.
• Susan C. Morse, Opinion analysis: A “nexus” requirement for the tax code’s obstruction felony (SCOTUSblog 3/22/18), here.
• Nina Totenberg, Is Hiding Income And Destroying Records Obstruction? Maybe Not (NPR 3/21/18), here.  Totenberg is a very good writer on legal topics and distills judicial opinions for popular consumption.