Marinello v. United States: The Supreme Court Limits the Scope of I.R.C. § 7212(a)

In Marinello v. United States, decided this week, the U.S. Supreme Court handed down a taxpayer victory by limiting the scope of the omnibus clause in Section 7212(a) of the Internal Revenue Code, which prohibits persons from corruptly attempting to obstruct or impede the due administration of the tax code.

The taxpayer in this case, Carlos J. Marinello, II, owned and managed a corporation in New York that maintained a freight service between the United States and Canada. Mr. Marinello kept little documentation of the corporation’s earnings and expenses, shredded or discarded most of the corporation’s records, paid his employees in cash, didn’t issue tax statements to himself or to his employees, and often used the corporation’s money to pay for personal expenses.

As a result of an anonymous letter received in December 2004, the IRS began an investigation into Mr. Marinello. The IRS found that Mr. Marinello had failed to file any personal or corporate income tax returns since at least 1992. However, the investigation was soon closed because the IRS was unable to determine whether Mr. Marinello’s unreported income was significant.

At the time, Mr. Marinello didn’t know of this investigation. Nevertheless, Mr. Marinello sought the advice of an attorney and accountant in 2005. Mr. Marinello was informed that he needed to begin keeping books and records and needed to start filing personal and corporate tax returns. Mr. Marinello continued to do neither.

The IRS reopened its investigation into Mr. Marinello in 2009. As a result of this renewed investigation, the government charged Mr. Marinello with eight counts of willful failure to file a tax return under Section 7203 of the Internal Revenue Code and one count of corruptly attempting to obstruct or impede the due administration of the Internal Revenue Code under the omnibus clause of Section 7212(a). These charges apparently related to Mr. Marinello’s conduct prior to the reopened investigation in 2009. In relevant part, Section 7212(a) provides:

Whoever . . . corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of [the Internal Revenue Code], shall, upon conviction thereof, be fined not more than $ 5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only by threats of force, the person convicted thereof shall be fined not more than $ 3,000, or imprisoned not more than 1 year, or both.

A jury convicted Mr. Marinello on all nine counts. The trial court sentenced Mr. Marinello to three years imprisonment and ordered him to pay $351,733.08 to the IRS in restitution.

Mr. Marinello appealed to the U.S. Court of Appeals for the Second Circuit. On appeal, Mr. Marinello argued in part that the government had to prove that Mr. Marinello knew of some pending IRS investigation or proceeding in order to secure a conviction under the omnibus clause in Section 7212(a). The Second Circuit disagreed, holding that the omnibus clause criminalizes corrupt interference with the official administration of the tax code even without an investigation or proceeding of which the defendant has knowledge. After holding for the government on the remaining issues, the Second Circuit affirmed the judgment of the trial court.

However, the U.S. Supreme Court rejected the Second Circuit’s interpretation of the omnibus clause in Section 7212(a) and held for Mr. Marinello. The Court, in an opinion written by Justice Breyer, held that the omnibus clause does not apply to possible interference with “routine administrative procedures that are near universally applied to all taxpayers, as the ordinary processing of tax returns” but rather “to specific interference with targeted governmental tax-related proceedings, such as a particular investigation or audit.”

In support of its holding, the Court argued that omnibus clause needed to be read with the rest of Section 7212, which referred to efforts to “intimidate or impede any officer or employee of the United States acting in an official capacity” as well as efforts to “forcibly rescue[ ] . . . any property after it shall have been seized under [the Internal Revenue Code] . . . .” The Court took this to mean that the omnibus clause must apply to activity similarly directed against “individual identifiable persons or property” and not just against the general administration of the Internal Revenue Code. In addition, the Court argued that the Second Circuit’s interpretation of the omnibus clause in Section 7212(a) could fail to provide fair warning as it could criminalize the conduct of “a person who pays a babysitter $41 per hour 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.”

Thus, the Court held that the Government must show a “nexus” between the defendant’s actions and some particular proceeding, such as an investigation, audit, or other targeted administrative action, that was pending or reasonably foreseeable at the time of the defendant’s actions. Because the jury didn’t find that the government proved such a nexus in Mr. Marinello’s case, the Court reversed and remanded the Second Circuit’s decision.

Note, however, that Mr. Marinello remains convicted of the remaining eight counts of willful failure to file a tax return. In addition, other criminal provisions of the Internal Revenue Code could potentially apply to conduct similar to Mr. Marinello’s – for instance, Section 7201, which criminalizes a willful attempt to evade or defeat tax.

Nevertheless, the Supreme Court’s decision sets a limit on the scope of a section that was being applied too expansively by the government.