Opinion analysis: A “nexus” requirement for the tax code’s obstruction felony

The Supreme Court ruled yesterday in a 7-2 decision that the federal government must prove a “nexus” between a particular administrative proceeding and a taxpayer’s conduct in order to secure a conviction under the “omnibus clause” in Section 7212(a) of the Internal Revenue Code, which makes it a felony “corruptly or by force” to “endeavo[r] to obstruc[t] or imped[e] the due administration of this title.” The proceeding, such as an investigation or audit, must be pending when the taxpayer’s alleged obstruction occurs “or, at the least,” must have been “then reasonably foreseeable by the defendant.”

Carl Marinello, who ran a cash courier freight business, did not pay taxes and, for years before hearing from the government that he was under audit, systematically destroyed records. An ongoing investigation was open during some of the years at issue. At trial, a jury convicted Marinello under the omnibus clause. The district judge did not include a pending proceeding instruction. The U.S. Court of Appeals for the 2nd Circuit affirmed Marinello’s conviction, holding that the obstruction charge did not require an action directed at an ongoing IRS audit or proceeding. Before the Supreme Court, Marinello continued to argue that a conviction under the omnibus clause required proof of attempted interference with a pending proceeding, while the government pushed for a broader reading of the clause that featured “subjective specific intent” and covered actions that have a “natural tendency to obstruct or impede the IRS in an unlawful manner to obtain an unlawful benefit.”

In an opinion by Justice Stephen Breyer, the Supreme Court leaned strongly toward Marinello’s view of the case, although it stopped short of requiring proof that a defendant knew of a pending proceeding. Instead, the majority looked to the interpretation of “a similarly worded criminal statute” in a 1995 obstruction-of-justice case, United States v. Aguilar. In Aguilar, the court adopted a “‘nexus requirement’: that the defendant’s ‘act must have a relationship in time, causation, or logic with the judicial proceedings.’” The majority explained that the reasons underpinning the adoption of the nexus requirement in Aguilar “apply here with similar strength.”

First, the court noted that judicial restraint in interpreting the reach of criminal statutes reflects deference to Congress and a concern for fair notice about the content of the law. The majority cited the text of the statute, its context, and, for “those who find [it] helpful,” the relevant legislative history, as well as “the broader statutory context of the full Internal Revenue Code,” all of which, it said, “counsel[] against adopting the Government’s broad reading.” It observed that “the verbs ‘obstruct’ and ‘impede’ suggest an object – the taxpayer must hinder a particular person or thing,” or in this situation a specific administrative proceeding.

The majority opinion took seriously a line of hypotheticals that had been developed at oral argument. A broader interpretation of “due administration of this title,” Breyer wrote, could apply to a person who pays a babysitter in cash, or leaves a large cash tip, or claims charitable deductions even if she has not kept all the receipts. “Such an individual may sometimes believe that, in doing so, he is running the risk of having violated an IRS rule, but we sincerely doubt he would believe he is facing a potential felony prosecution for tax obstruction.” Breyer also declined to “rely upon prosecutorial discretion to narrow the statute’s scope.”

Justice Clarence Thomas authored a dissent joined by Justice Samuel Alito. Thomas applied the textualist approach earlier adopted by Justice Antonin Scalia when he dissented in Aguilar from the court’s adoption of the nexus requirement. Nothing in the text limits the sweeping meaning of “the due administration of this title,” argued Thomas. It includes “the entire process of taxation, from gathering information and assessing tax liabilities to collecting and levying taxes.” Thomas dismissed the contention that a broad interpretation of Section 7212(a), which refers to corrupt behavior, would create a redundancy problem by overlapping with other misdemeanor tax provisions in the code, which often refer to willful behavior. He would have left it to prosecutorial discretion to identify appropriate cases (like Carl Marinello’s) for felony prosecution or to Congress to revise the statute.

Today’s decision was a qualified victory for taxpayer defendants and the criminal defense bar, especially its tax practitioners. At oral argument, the government argued that before this decision, perhaps four percent of criminal tax cases have included felony obstruction charges under Section 7212(a). The Supreme Court did not quite require the government to prove taxpayer knowledge of a pending administrative proceeding. Indeed, since some proceedings were pending at the time of some of Marinello’s alleged evidence destruction, the court’s decision may not foreclose the finding of a nexus and the possibility of a conviction on these facts. Nevertheless, the Marinello nexus requirement will be an important obstacle for the federal government to overcome before it can prevail on such a charge in future cases.