Supreme Court Keeps Tax Code From Becoming a Dragnet

COMMENTARY Courts

Supreme Court Keeps Tax Code From Becoming a Dragnet

Mar 27th, 2018 7 min read
COMMENTARY BY
John-Michael Seibler

Legal Fellow

John-Michael Seibler directs The Heritage Foundation’s project to counter abuse of the criminal law, particularly at the federal level.
In a majority opinion authored by Justice Stephen Breyer, the Court ruled to limit the government's interpretation of the tax code's catch-all criminal provision. RomanBabakin/Getty Images

Here’s a win for limited government and the rule of law, tailor-made for tax season.

In Marinello v. United States, a 7-to-2 majority of the Supreme Court limited the government’s sweeping interpretation of the tax code’s criminal catch-all provision, which prohibits “corruptly … endeavor[ing] to obstruct or impede the due administration” of the tax code. That broad language leaves the majority of Americans who want to comply with the tax laws in the dark as to all the conduct that it proscribes.

The government argued that someone would not have to be aware of the existence of a pending tax-related proceeding, such as an investigation or an audit. The Supreme Court disagreed.

Justice Stephen Breyer wrote the court’s majority opinion, and Justice Clarence Thomas wrote a dissenting opinion, which was joined by Justice Samuel Alito.

Breyer noted that under the government’s broad interpretation of the law, a person who does any of the following might have been committing a federal crime: leaving a large cash tip or paying “a baby sitter $41 per week in cash without withholding taxes,” failing “to keep donation receipts from every charity to which [one] contributes,” or failing “to provide every record to an accountant.”

The justices doubted that such conduct would trigger a federal prosecution for tax obstruction, but nonetheless recognized that people would be legitimately concerned about violating IRS rules.

At oral argument, Alito said that “it’s lawful for taxpayers to avoid taxes, but not to evade taxes,” but “the line can be very … thin.”

Here, the government stretched the obstruction law to reach any act “that has the natural tendency to obstruct or impede the IRS in an unlawful manner to obtain an unlawful benefit.”

For example, the government argued that if you pay someone $100 in cash for a service—say, to clean the gutters—and “that is then not reported to the IRS or is falsely reported to the IRS,” that could be obstruction.

Breyer aptly noted that such a dragnet carries a “lack of fair warning and related kinds of unfairness” that have led the court in prior cases to “‘exercise’ interpretive ‘restraint.’” That line of cases is long indeed (including AguilarArthur AndersenBondMcDonnellMcNallyMcCormickSun-Diamond GrowersSkilling, and Yates).

According to the National Federation of Independent Business, if the court had bucked that trend and upheld the government’s position in Marinello, “that
would have greatly complicated tax compliance for small businesses, who already spend inordinate time, energy, and money on tax issues,” the federation argued. “And worse, it would have opened the doors for prosecutions against businesses for engaging in completely legitimate practices simply because the government alleges that business might have had some improper motive”—namely, cheating the tax man.

But the petitioner in this case was no Boy Scout. As the owner of a courier business, Carl Marinello failed to file corporate and personal tax returns for more than a decade; mishandled corporate funds; paid employees in cash without proper documentation; and “stored” many tax documents in the shredder.

In 2009, he told an IRS agent that he “could not recall the last time he had filed an income-tax return,” and that destroying files was “the easy way out.”

Marinello was tried and convicted of nine offenses, including eight counts of willfully not filing tax returns (under 26 U.S.C. § 7203), and one count—the only troublesome one, and the only one that he appealed—of violating the catch-all provision.

To limit its scope, Marinello had asked the trial court to instruct the jury that in order to convict him of violating that provision, the government had to prove that he knowingly obstructed a pending IRS investigation.

The 6th Court of Appeals had held that such an instruction was required in United States v. Kassouf (1998). But the trial court refused Marinello’s request, and the 2nd Circuit Court of Appeals affirmed his conviction.

When the 2nd Circuit declined to reconsider the original panel’s ruling, Judge Dennis Jacobs wrote a dissenting opinion, which was joined by Judge Jose Cabranes, warning that by rejecting the so-called “nexus” requirement between the alleged obstruction and an IRS proceeding, jurors could convict a defendant of obstruction for being disorganized (not keeping adequate records), sloppy (inadvertently destroying records), or absent-minded (not supplying every conceivably relevant scrap of paper to their tax advisor or accountant).

“If this is the law,” Jacobs wrote, “nobody is safe.”

Tax experts at the American College of Tax Counsel agreed, writing in a friend-of the-court brief that the lower court’s decisions subjected taxpayers to “a material risk of felony prosecution without fair warning.”

Of course, the tax code covers far more than personal and corporate income taxes. As the Cause of Action Institute and the National Association of Criminal Defense Lawyers explained in their friend-of-the-court brief, it covers “all individuals and entities, and governs transactions ranging from nonprofit creation … to financing presidential campaigns … and taxing the sale of firearms.”

Altogether, the IRS has nearly 80,000 personnel interpreting and administering the more than 10 million words in the Internal Revenue Code and implementing regulations.

Compare that to “War and Peace” at a mere 587,287 words. The average person can probably list with equal certainty all of the protagonists in that tome and all the conduct that might be charged as criminal endeavors to obstruct tax-code administration.

Thankfully, in United States v. Bishop (1973), the Supreme Court acknowledged that “our complex tax system” often causes uncertainty “even among taxpayers who earnestly wish to follow the law.” And “[i]t is not the purpose of the law to penalize … innocent errors made despite the exercise of reasonable care.”

The court’s Marinello decision echoes Bishop’s call for lenity.

Almost 20 years ago, The Heritage Foundation’s founder, Edwin J. Feulner, wrote that Americans already “waste an inordinate amount of time working on their taxes.”

“The IRS estimates it takes 653 minutes—almost 11 hours—to fill out the 1040 ‘E-Z’ form. Taxpayers annually spend about 5.4 billion hours filling out 569 different forms.”

At least now, when it comes to the offense of obstructing that Goliathan tax code, the court’s opinion in Marinello arms the Davids of the world with some much-needed clarity.

This piece originally appeared in The Daily Signal