Will Supreme Court Narrow The Broadest Tax Crime?

McGuireWoods LLP
Contact

In the October 2017 term, the Supreme Court will take up its first criminal tax case in almost a decade, Marinello v. United States.  At issue is a longstanding circuit split about a mainstay of the federal government’s arsenal in financial crime cases, the tax obstruction statute, which makes a felon of anyone who “corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration” of the Internal Revenue Code.  26 U.S.C. § 7212(a).  Marinello will decide whether this law only prohibits efforts to obstruct a pending IRS audit or collection proceeding, or instead whether (as the DOJ argues and most circuits agree) it also reaches any other conduct affecting federal taxes.

Often described as a “one-man conspiracy” statute, § 7212(a)’s reach at present is limited mainly by DOJ’s self-restraint.  Every other tax crime of consequence – tax evasion, filing false returns, failure to file, failure to pay, conspiracy to defraud – can also be charged as § 7212(a) on the government’s reading of the statute, which has been endorsed by most circuit courts.  It is undoubtedly the broadest tax crime.

But the government does not need the broad reading of § 7212(a) to fully and fairly enforce the tax laws.  The IRS already has more-specific criminal charges it commonly relies on to combat false tax returns and underpaid taxes – like tax evasion, filing false returns, or aiding and abetting.  DOJ usually relies on section § 7212(a) as a stopgap, precisely to cover conduct that can’t be readily prosecuted under more-specific laws.

The statute’s use as a stopgap also clarifies its potential for misuse.  Like conspiracy, § 7212(a) permits prosecutors to allege that otherwise-lawful acts become criminal because they are performed with wrongful intent.  But unlike the conspiracy charge for which it sometimes serves as a substitute, the DOJ’s broad reading of § 7212(a) cannot be justified by the law’s longstanding assumption that criminally-minded schemers become more dangerous when working together than when operating separately.

Some courts have suggested that tax enforcement needs a capacious charge like § 7212(a) to respond to criminal ingenuity.  Yet DOJ already has such a flexible charge: tax evasion, which similarly can be predicated on otherwise-lawful acts, like using corporate shells or stashing money abroad, if done with the requisite criminal intent.  Unlike the tax obstruction statute, though, tax evasion has a measure of built-in protection against government overreach: it requires proof beyond a reasonable doubt that the IRS suffered a financial loss, and proof of willfulness, that the defendant knew his conduct was illegal.  The prospect of subjecting the government’s theories of intent and taxation to adversarial testing deters charges in dubious cases.  An overbroad view of tax obstruction lessens the deterrent.

In that regard, Marinello touches on an important theme of the Supreme Court’s recent white collar crimes jurisprudence: the Court’s increasing distrust of prosecutorial discretion as a trustworthy safeguard against the abuse of broadly-worded federal criminal statutes.  Yates, construing the Sarbanes-Oxley Act, and McDonnell, addressing corruption offenses, both chose narrower interpretations of the respective crimes in part out of concern that an expansive interpretation of a broadly-worded crime left open too many possibilities for overreach.

In DOJ’s view, tax obstruction is a crime broad enough to penalize acts that are otherwise-lawful, result in no false document, and produce no financial loss to the government.  That much discretion may well be more than the Court is prepared to allow.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© McGuireWoods LLP | Attorney Advertising

Written by:

McGuireWoods LLP
Contact
more
less

PUBLISH YOUR CONTENT ON JD SUPRA NOW

  • Increased visibility
  • Actionable analytics
  • Ongoing guidance

McGuireWoods LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide