Criminal Tax Obstruction Case Argued Before the Supreme Court

Posted on by Moskowitz LLP Posted in Tax Planning & Compliance, Tax: Audits, Litigation & Collection

This past December, the Supreme Court heard the first criminal tax case to be argued before it in a decade. The Court agreed to hear the case following a petition by Carlo J. Marinello, II, a freight service businesses owner from Buffalo, New York, who had been convicted on charges of federal income tax evasion for failing to maintain business records and failing to file income tax returns for many years.

The Marinello Case

The IRS investigated Marinello twice – in 2004 (an investigation that was closed before Marinello learned of it) and again in 2009 (during which Marinello admitted his wrongdoing to IRS agents). Marinello was charged in 2012 for failure to file personal and corporate income tax returns from 2005 through 2008 and failure to pay over $2.3 million in taxes.

All of the counts against Marinello were misdemeanors for willfully failing to file tax returns in
violation of 26 U.S.C. §7203, except one – a felony violation under the Internal Revenue Code’s 26 U.S.C. § 7212(a) “omnibus clause.” Section 7212(a) prohibits any act that corruptly obstructs or impedes (or attempts to obstruct or impede) the administration of the U.S. Tax Code.

The basis for the Section 7212(a) allegations against Marinello were as follows:

  1. He failed to maintain corporate books and records,
  2. He failed to provide his accountant with complete and accurate information about his personal and business income,
  3. He destroyed business records,
  4. He cashed business checks,
  5. He hid business income in personal and other bank accountants,
  6. He transferred business assets to others (namely, his wife),
  7. He paid business employee with cash, and
  8. He used business funds to pay for personal expenses.

In court, Marinello’s lawyers argued for the first time that a conviction under the omnibus clause of Section 7212(a) requires proof that “he knew he was under investigation by the IRS and intended to corruptly interfere with that investigation.” They stated that the government’s evidence showed only that Marinello endeavored to obstruct the ability of the IRS to calculate his taxes, not that he tried to interfere with the IRS criminal investigation once he learned about it.

The district court denied the motion, ruling that the Section 7212(a) omnibus clause applies to corrupt endeavors that obstruct or impede the administration of U.S. tax laws,and is not limited to known IRS investigations. Marinello was convicted on all counts and was sentenced to 36 months in prison followed by one year of supervised release.

Marinell’s Appeals

Marinello appealed. The Second Circuit Court of Appeals affirmed the lower court’s decision, finding that the Section 7212(a) omnibus clause may be applied to any corrupt act or omission that obstructs or impedes any IRS activity – including lying to the government and willful destruction of business records even before an IRS investigation has commenced.

Martinello then petitioned the Supreme Court, arguing that under the overly broad reasoning of the Second Circuit, any act of tax evasion or fraud could also be charged as obstruction of a criminal tax investigation. The Supreme Court granted a Writ of Certiorari and arguments were heard on December 5th. Amicus briefs (briefs submitted by outside groups with an interest in the outcome of the case) in support of Marinello were filed by the American College of Tax Counsel, the New York Council of Defense Lawyers, and the U.S. Chamber of Commerce.

The Court’s opinion may be handed down anytime through the last day of the term (late June or early July).