Argument analysis: Is “cash only” enough for a tax law obstruction charge?

Marinello v. United States is a criminal tax case that presents a limiting-principle puzzle. It turns on the meaning of I.R.C. § 7212(a), which makes “corrup[t]” “obstruction” of “the due administration of this Title” a felony. The language is “ungodly broad,” as Justice Elena Kagan described it, because of, as Justice Neil Gorsuch suggested, the “pervasive, continuous, brooding” nature of tax administration. Throughout the argument, the justices pressed counsel for a limiting principle, in an animated discussion that saw participation from every justice save Justice Clarence Thomas. The taxpayer argued that the government is required to prove that the taxpayer had knowledge of a “pending proceeding” by the IRS, while the government maintained that proof of a “specific intent to obtain an unlawful benefit” is the appropriate prerequisite for an obstruction charge under this section. The justices appeared to favor an interpretation that falls somewhere in between.

Carlo Marinello ran a cash courier freight business, did not pay taxes and, before he heard from the government that he was under audit, destroyed records. Matthew Hellman, representing Marinello, began by taking aim at the government’s proposed limiting principle. But the justices quickly redirected Hellman to an examination of his own client’s “pending proceeding” proposal.

Hellman compared Section 7212 to another obstruction statute, 18 U.S.C. § 1503,  which was limited with a pending-proceeding requirement in United States v. Aguilar. Both statutes, he said, have a two-part structure. The first part – what Hellman called the “officers clause” — covers interference with individuals involved in administering the tax code and participating in a court case, respectively. The second part – the “administration clause” — more broadly refers to “due administration of this Title” and “due administration of justice.” The structural parallel is clear, argued Hellman, so the obstruction statute in tax law should have a pending-proceeding requirement, just like the statute in Aguilar. Hellman argued, pointing to 18 U.S.C. § 1512(f), that Congress knows how to specify that a proceeding need not be pending.

But Gorsuch and Justice Sonia Sotomayor suggested that it is not as clear in the context of tax administration that “pending proceeding” is the right line. Perhaps the line should be drawn when the agency is, as Gorsuch put it, “doing something other than merely passively receiving taxes.” Perhaps an affirmative act on the part of the tax administrator should be required. One hypothetical involved a phone call placed by an IRS agent to a taxpayer before an audit was opened. But Hellman, perhaps unintentionally speaking in the government’s interest, said “that the line between when the IRS is doing something and not doing something at times can be a little bit blurry.”

Assistant to the Solicitor General Robert Parker argued the case for the federal government. The justices were ready with two hypotheticals. The first was a reporting-position hypothetical, posed by Sotomayor. If a taxpayer takes an aggressive tax position that turns out to be illegal, she asked, could the taxpayer be charged under Section 7212(a)? No, Parker responded, because the taxpayer has to know that the advantage is unlawful to have a corrupt intent.

The second hypothetical involved paying people in cash. Say one taxpayer hires another taxpayer to babysit, or mow a lawn, or clean gutters. The service provider prefers to be paid in cash. As the taxpayer who needs the services probably knows, the reason why the service provider prefers cash has to do with tax evasion. Parker conceded that under the government’s limiting principle, both the payor of cash and the recipient “may come within the scope” of Section 7212(a). Parker argued that an additional requirement is that the act have a “natural tendency to obstruct or impede the IRS in an unlawful manner to obtain an unlawful benefit.” Would a payment of cash have that natural tendency if a service provider charged $125 if paid by check, $100 if paid by cash? asked Justice Samuel Alito. Not necessarily, claimed Parker, when pressed by Alito, Sotomayor, Kagan, and Justice Stephen Breyer — “subjective specific intent” is required.

Failing to file an information return reporting payments to an individual independent contractor, unlike obstruction under Section 7212(a), is not a felony. This hypothetical thus nicely illustrates the “upcharge” problem that the taxpayer and his amici emphasized in their briefs and about which several justices, including Justices Ruth Bader Ginsburg and Anthony Kennedy and Chief Justice John Roberts, expressed concern. In response to questions about the government’s policy of charging “to the maximum extent reasonably possible,” Parker represented that about four percent of criminal tax cases include an obstruction charge. Kennedy was interested in whether the government’s view would change if 80 percent of cases could include such a charge under its theory of the meaning of Section 7212(a).

In rebuttal, Hellman once more took aim at the government’s position, including by arguing that a “substantial number of … misdemeanors would qualify as obstruction” and pointing out the increased leverage that the possibility of a felony charge could have in a plea-bargain negotiation. He referred back to his exchange with Gorsuch and Sotomayor, and said that “there are other ways of reading the officers clause in conjunction with the administration clause to come up with a more limited standard.” “So, what is it? … [W]hat is the limit?” asked Ginsburg, insisting on more precision. In response, Hellman attempted to characterize what Gorsuch and Sotomayor had suggested earlier. He described a requirement of an “obstructive act or omission … in the context [of] some interaction with the IRS.” Breyer had the final substantive word from the bench, a point about the text of the statute. “So I think you’re suggesting work with the word in the statute, ‘administration.’ That’s the word?” “Yes,” said Hellman.

Stay tuned. A decision is expected before the end of June.

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