Great Second Circuit Dissent on Potential Overreach in Tax Obstruction (2/28/17)

I previously reported on the decision in United States v. Marinello, ___ F.3d ___,  United States v. Marinello, 839 F.3d 209, 218 (2d Cir. 2016), here.  See Second Circuit Rejects Aberrational Sixth Circuit Opinion in Kassouf on Requirements for § 7212(a) Tax Obstruction (Federal Tax Crimes Blog 10/15/16), here.  On February 15, 2017, the Court denied en banc review after an active judge requested that the judges be polled on the issue.  See United States v. Marinello (2d Cir. 2017), here.  I write because of the strong dissent to denial of en banc review authored by Judge Dennis Jacobs and joined by Judge Jose Cabranes.

Judge Jacobs starts:

I respectfully dissent from the denial of rehearing in banc. The panel weighed in on the wrong side of a circuit split, affirmed a criminal conviction based on the most vague of residual clauses, and in so doing has cleared a garden path for prosecutorial abuse.

Just a reminder for the background.  Many of the crimes that are deployed for tax violations have very specific elements for conviction.  Think tax evasion, tax perjury and failure to file which require specific elements, including willfulness which is the voluntary intentional violation of a known legal duty.  Some of the crimes deployed in the fight against tax misbehavior, however, are much loosier-goosier.  Section 7212(a), here, was charged as one count.  Section 7212(a) is the problem (although, as I note below, the same problem inheres in the Klein conspiracy).  Judge Jacobs nails it in the next paragraphs:

Marinello was convicted at trial on nine counts. Eight of them (for willful failure to file tax returns) raise no issue. The single problematic count is for violating the "omnibus clause" of the criminal portion of the Internal Revenue Code, which makes it a felony to "in any other way corruptly . . . obstruct[] or impede[], or endeavor[] to obstruct or impede, the due administration of this title." 26 U.S.C. § 7212(a). Yes: "this title" is the entire corpus of the Internal Revenue Code -- a slow read in 27 volumes of the United States Code Annotated.  

The government charged that Marinello violated the omnibus clause in eight different ways. And the district court instructed the jury that it was enough for conviction that Marinello violated the statute in any single one of those several ways -- and that the jurors did not need to agree among themselves as to which. 

Among the acts listed in the jury charge as violating the omnibus clause are: 

• “failing to maintain corporate books and records for Express Courier [his small business]”;
• “failing to provide [his] accountant with complete and accurate information related to [his] personal income and the income of Express Courier”;
• “destroying, shredding and discarding business records of Express Courier”;
• “cashing business checks received by Express Courier for services rendered”; and
• “paying employees of Express Courier with cash.” 

839 F.3d at 213 (internal brackets omitted). If this is the law, nobody is safe: the jury charge allowed individual jurors to convict on the grounds, variously, that Marinello did not keep adequate records; that, having kept them, he destroyed them; or that, having kept them and preserved them from destruction, he failed to give them to his accountant. 

After conviction on all counts, Marinello moved for a new trial on the ground, inter alia, that the omnibus clause applied only to knowing obstruction of an ongoing IRS investigation, not to every possible impediment to the administration of any of the uncountable provisions of the Internal Revenue Code; and that he therefore should have been acquitted because there was no evidence that he was aware of an IRS investigation. 

The district court rejected the argument and the panel affirmed, holding: "under section 7212(a), 'the due administration of this title' is not limited to a pending IRS investigation or proceeding of which the defendant had knowledge." 839 F.3d at 223. Accordingly, the law in the Second Circuit today is that it is a felony to "corruptly" take (or try to take) any of the actions listed above -- or to take or try to take any other action that impedes the "due administration" of the Internal Revenue Code. 

The Sixth Circuit, alert to the sweep of criminalizable conduct, held that the omnibus clause was limited to cases in which the defendant knew of a pending IRS action. United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Miner, 774 F.3d 336, 342-45 (6th Cir. 2014). The Sixth Circuit's view is now distinctly in the minority, and the panel's opinion here signs on to the emerging consensus of error in the circuit courts.

Judge Jacobs then skillfully analyzes the legal background and concludes that the concerns recognized by the Sixth Circuit in Kassouf and Miner were spot on.  I encourage readers to review the opinion carefully for that analysis.  I do point out the following which may appear like sound bites, but have serious concerns behind them:

The saving requirement that the Sixth Circuit added is that there must have been a pending IRS action of which the defendant was aware. That measure goes a good way toward setting some bounds. It construes the statute as a specialized tool for active IRS investigations, rather than a prosecutor's hammer that can be brought down upon any citizen. 

And what is lost in confining this statute to interference with ongoing proceedings? Failure to pay taxes is already a crime, as is tax evasion. See 26 U.S.C. § 7201-7207; 18 U.S.C. § 371. Marinello himself, who is certainly culpable for his tax evasion, was in fact convicted of eight such felonies aside from the single count of violating the omnibus clause. Indiscriminate application of this omnibus clause serves only to snag citizens who cannot be caught in the fine-drawn net of specified offenses, or to pile on offenses when a real tax cheat is convicted. 

The panel opinion does not consider the risk of prosecutorial abuse at all, and dismisses overbreadth and vagueness in a single paragraph -- and that paragraph merely cites other decisions. 839 F.3d at 221-22. Instead, the panel opinion spends pages positing differences between the phrases "due administration of justice" and "due administration of this title," and looking to statutory context and legislative history in an attempt to distinguish the Supreme Court's interpretation of a nearly identical statute in Aguilar. 

The attempt fails. Aguilar looked to the conduct specified in the rest of the statute in construing the omnibus clause of 18 U.S.C. § 1503(a), and the panel opinion seeks to distinguish the omnibus clause here (§ 7212(a)) on that basis. But reading § 7212(a) in context subverts rather than supports the panel's broad interpretation: a contextual reading demonstrates that § 7212(a) is about impediments to the work of particular officers and employees of the IRS, rather than to the work of the IRS in the abstract or in whole.

(Note:  careful readers likely picked up an error in the foregoing that is not related to the point Judge Jacobs makes; he says that Marinello was convicted on eight specific tax felonies; according to the introduction, the convictions were for failure to file, which is a misdemeanor offense in § 7203, here.)

Finally, it is not only tax obstruction, § 7212(a), that suffers from this overbreadth but also tax defraud conspiracy (commonly referred to as the Klein conspiracy).  I have previously written about these concerns:  John A. Townsend, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough, 9 Hous. Bus. & Tax. L.J. 255 (2009), here, and in an online appendix with examples, Tax Obstruction Crimes: Is Making the IRS's Job Harder Enough? Online Appendix, 9 Hous. Bus. & Tax L.J. A-1 (2009), here.  In the Appendix, I discuss a number of examples which might be charged under the Klein conspiracy or its tax obstruction counterpart in § 7212(a).

Readers interested in this subject might want to review the following blog postings:

• More on the Need for a Pending Proceeding for Tax Obstruction, Section 7212(a) (Federal Tax Crimes Blog 12/19/14), here.
• Sixth Circuit Holds that § 7212(a)'s Omnibus Clause Requires Knowledge of a Pending Proceeding / Action and Intent to Obstruct (Federal Tax Crimes Blog 12/13/14), here (discussing United States v. Miner, 774 F.3d 336 (6th Cir. 2014), here.