Tax Law Update | March.30.2018
Last week, the Supreme Court in Marinello v. United States[i] significantly limited the government's ability to prosecute taxpayers for allegedly obstructive conduct related to potential tax violations. Prior to Marinello, the government routinely prosecuted taxpayers under the so-called "Omnibus Clause" of 26 U.S.C. § 7212(a) for conduct the government deemed as interfering with its "due administration" of the Internal Revenue Code, even when the taxpayer was not aware of the existence of a particular audit, investigation or other tax proceeding. Now, however, the Supreme Court has put an end to that overly-broad interpretation of the Omnibus Clause. Instead, the government must now establish that the taxpayer was aware of a pending tax-related proceeding (or could reasonably foresee such a proceeding), and that there is a nexus between the taxpayer's conduct and that proceeding.
The Omnibus Clause of 26 U.S.C. § 7212(a), makes it a felony to "corruptly or by force or threats of force . . . obstruct or impede, or endeavor to obstruct or impede, the due administration of this title," (i.e., the entire Internal Revenue Code) (emphasis added). Because the statute's language could potentially apply to anything related to the administration of the Internal Revenue Code, it has had the effect of criminalizing obstruction of even routine IRS procedures such as the ordinary processing of income tax returns, as well as daily activities of taxpayers that might affect the functioning of the IRS, such as communications with tax preparers and lapses in maintaining corporate books and records. Indeed, the Court in Marinello cited hypothetical examples of a person who pays a babysitter $41 per week in cash without withholding taxes; a person who gives a waiter a large cash tip; and someone who fails to keep receipts for every charitable donation. See Slip Op. at 7. This concern was crystallized by several amici curiae, including the American College of Tax Counsel. The broader reading of the Omnibus Clause might convert conduct meriting civil penalties or misdemeanor charges at best—such as failing to keep receipts for every charitable donation—into a felony. E.g., Brief of The American College of Tax Counsel as Amicus Curiae in Support of Petition for Writ of Certiorari 6-8, 12-13 (Apr. 21, 2017).
In Marinello, the IRS had opened, closed, and re-opened investigations of Mr. Marinello's tax activities over the course of five years. The government then indicted Marinello for several tax crimes, one of which was violating the Omnibus Clause. With regard to that violation, the government claimed that Marinello had engaged in at least one of eight different offending activities, including failing to maintain corporate books and records, failing to provide his accountant with complete and accurate tax information, destroying business records, hiding income, and paying employees with cash. The trial court instructed the jury on the requisite elements for a violation of the Omnibus Clause, but did not instruct the jury that there was any requirement that Marinello knew he was under investigation or that he intended to corruptly interfere with that investigation. Marinello was found guilty on all counts and appealed his conviction to the Second Circuit. Marinello argued that the Omnibus Clause requires the government to show that the defendant attempted to interfere with a pending IRS proceeding, such as a particular investigation. The Second Circuit disagreed and ruled that a defendant need not be aware of a particular IRS action or investigation to be found guilty of violating the Omnibus Clause.
The Supreme Court reversed, putting an end to this all-encompassing interpretation of the Omnibus Clause. The Court held that "to secure a conviction under the Omnibus Clause, the Government must show (among other things) that there is a 'nexus' between the defendant's conduct and a particular administrative proceeding, such as an investigation, audit, or other targeted administrative action." Slip Op. at 10. Moreover, the "nexus requires a 'relationship in time, causation, or logic with the [administrative] proceeding.'" Id. Importantly, the IRS's administrative conduct that falls within the scope of the statute does not include "routine, day-to-day work carried out in the ordinary course by the IRS, such as the review of tax returns." Id. at 11. The Court implicitly recognized amici curiae's concern that without limiting the Omnibus Clause, obstructing routine acts could be transformed into a felony obstruction charge. Finally, the Court stated that in addition to 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." Id. at 11. Thus, for a taxpayer to be criminally liable under the Omnibus Clause, there must be a particular administrative investigation or proceeding pending or reasonably foreseeable, and there must be a nexus between the defendant's conduct and that proceeding.
Marinello substantially limits the government's ability to charge taxpayers with criminal obstruction for interfering with the routine functioning of the IRS. The decision leaves open, however, several issues that are likely to be the subject of future litigation: (1) the precise meaning of "administrative proceedings" that remain subject to the Omnibus Clause; (2) the circumstances that make a proceeding "reasonably foreseeable"; and (3) the parameters of Marinello's new nexus requirement. All in all, it is an extremely favorable result for taxpayers.