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Justices Restrict ‘Ungodly Broad’ Obstruction Charge in Tax Cases

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Justice Stephen Breyer on Capitol Hill in 2011. Credit: Diego M. Radzinschi/ National Law Journal

The U.S. Supreme Court on Wednesday reined in federal prosecutors’ use of a broad tool in federal tax prosecutions.

In the case Marinello v. United States, a 7-2 majority, led by the Justice Stephen Breyer, rejected the government’s interpretation of an omnibus obstruction clause in the federal tax code because it risked depriving individuals of fair warning and risked “all kinds of related unfairness.”

To win a conviction under the obstruction clause, Breyer wrote, “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, an audit, or other targeted administrative action.”

That proceeding, Breyer said, must be “pending at the time the defendant engaged in the obstructive conduct or, at the least, was then reasonably foreseeable by the defendant.”

“Just because a taxpayer knows that the IRS will review her tax return every year does not transform every violation of the Tax Code into an obstruction charge,” Breyer wrote.

The omnibus clause, in 26 U. S. C. §7212(a) of the Internal Revenue Code makes it a felony to “corruptly … endeavo[r] to obstruct or imped[e] the due administration of this title.”

Justice Clarence Thomas, joined by Justice Samuel Alito Jr., dissented. “I would hold that the Omnibus Clause does what it says: forbid corrupt efforts to impede the IRS from performing any of these activities,” Thomas wrote. “The court, however, reads ‘this title’ to mean ‘a particular [IRS] proceeding.’ The court may well prefer a statute written that way, but that is not what Congress enacted.”

The Supreme Court case stemmed from the conviction of Carlo Marinello on nine counts of tax fraud, including  failing to file individual and corporate tax returns—serious misdemeanors—and the felony of obstruction. He was sentenced to three years in prison, primarily because of the felony charge. The U.S. Court of Appeals for the Second Circuit affirmed, with two judges dissenting and writing that the majority had cleared “a garden path for prosecutorial abuse.”

During Supreme Court arguments in December, most justices were critical of the government’s arguments. Justice Elena Kagan called the tax clause an “ungodly broad” provision. Breyer, in particular, raised concerns about the “many, many” provisions in the tax code that could ensnare the “unwary taxpayer.”

In his majority opinion, Breyer elaborated on those concerns, writing: “Interpreted broadly, the provision could apply to a person who pays a babysitter $41 per week in cash without withholding taxes, 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.”

Although that person may believe he or she is violating an IRS rule, Breyer added, “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).”

Jenner & Block partner Matthew Hellman represented Marinello in the Supreme Court. Hellman called the omnibus clause an “uber” felony provision during oral arguments.

“We’re pleased that the Court has rejected the government’s broad view of the obstruction statute,” said Hellman, co-chair of the firm’s Appellate and Supreme Court Practice, who argued the case. “As the court recognized, the government’s interpretation of felony tax obstruction was boundless and created an uber-felony for any civil or criminal tax violation.”

The Marinello decision is the latest of several recent rulings in which the justices have limited prosecutors’ use of broadly worded federal criminal statutes. In his majority opinion, Breyer noted the court’s rulings in McDonnell v. United States, Yates v. United States, United States v. Stevens, Arthur Andersen LLP v. United States, and United States v. Aguilar.

— Check out 4 Tax Planning Opportunities Under New Itemized Deduction Rules: Friedman on ThinkAdvisor.