When it comes to criminal tax cases, most taxpayers immediately think of Al Capone. Capone's case was pretty straightforward: Capone never filed an income tax return and was subsequently convicted on federal income tax evasion charges. Case closed. But tax law - and criminal law - can be complicated. Enter Marinello v. United States. Marinello is the first criminal tax case to be argued at the Supreme Court in nearly a decade. Here's what's at stake.
Marinello was convicted under 26 U.S.C. 7212(a), a criminal tax statute. Under section 7212(a), it's a felony to obstruct the administration of tax laws. The question raised in Marinello is whether the statute requires that the defendant know that there is a pending Internal Revenue Service (IRS) action or proceeding when engaging in the allegedly obstructive conduct.
Marinello's Supreme Court petition was initiated by writ of certiorari filed on March 22, 2017. That means that Marinello asked to be heard. The Supreme Court has what is called "original jurisdiction" over certain kinds of cases. Those cases, which are defined by statute (28 U.S.C. §1251) go straight to the Supreme Court; the typical case associated with original jurisdiction would be a dispute between the states.
However, most cases don't have original jurisdiction. To be heard at the Supreme Court level without having original jurisdiction, the losing party (in this case, Marinello) must file a petition seeking a review of the case. If the Supreme Court grants the petition and decides to hear the matter, it’s called a writ of certiorari. That's what happened in this case.
Here are the facts which are not in dispute: The Petitioner, Carlo J. Marinello, II, owned and operated a freight service business in western New York. He didn't keep business records or file income tax returns (business or personal) from approximately 1992 through 2010.
The IRS got wind of Marinello's business practices based an anonymous tip and in 2004, the IRS began an investigation. The IRS eventually closed the investigation because it couldn't determine whether the unreported income was significant. At the time, Marinello didn't know about the investigation.
In 2009, the IRS decided to take another look at Marinello and his business. This time, IRS agents interviewed Marinello at his home. Marinello admitted to the agents that he failed to file tax returns, used business income to pay for personal expenses, and destroyed bank statements and business records.
In 2012, Marinello was charged with nine counts of tax-related offenses. Eight of those counts were misdemeanors for willfully failing to file personal income and corporate tax returns for the years 2005 through 2008 (the unreported gross business income for those years totaled over $2.3 million). The remaining count was a felony: violating 26 U.S.C. § 7212(a).
26 U.S.C. 7212(a) says:
Whoever corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title, or in any other way corruptly or by force or threats of force (including any threatening letter or communication) obstructs or impedes, or endeavors to obstruct or impede, the due administration of this title, shall, upon conviction thereof, be fined not more than $5,000, or imprisoned not more than 3 years, or both, except that if the offense is committed only be threats of force, the person convicted thereof shall be fined not more than $3,000, or imprisoned not more than 1 year, or both.
The jury convicted Marinello on all counts and he was sentenced to prison.
Marinello appealed. He argued that to be convicted under 26 U.S.C. 7212(a), he would have had to have been aware of an IRS investigation. The Second Circuit disagreed, finding that the statute covers any corrupt act or omission that obstructs or impedes any activity under the Tax Code. In this case, lying and destroying records - both willful - fit the bill. Marinello's subsequent request for a rehearing en banc (meaning before all the judges of the court) was denied.
Marinello petitioned the Supreme Court, arguing that the Second Circuit’s interpretation meant that any action which made the IRS' ability to assess and collect taxes more difficult could be the basis of a felony obstruction charge if alleged by a prosecutor to be "corrupt." In his petition, his lawyers wrote:
It is difficult, for example, to conceive of any act of tax evasion or tax fraud that could not also be charged as tax obstruction on the Second Circuit’s reading.
Subsequently, a number of amicus curiae briefs were filed in support of Marinello, including those by The American College of Tax Counsel, New York Council of Defense Lawyers, and the Chamber of Commerce of the United States of America. Amicus curiae is a Latin phrase meaning "friend of the court." For legal purposes, an amicus curiae is a party who is not formally involved in the case - meaning neither a plaintiff nor a defendant - but someone (or some organization) which has a vested interest in the outcome.
The government argued that the Second Circuit's interpretation was proper. Marinello, the government charged, engaged in patterns of behavior which were intended to hide his illegal actions from the IRS. He paid his employees in cash and did not issue tax records to them; he "systematically destroyed" most of his business records, including bank account statements, employee work statements, receipts, bills, and other documents. And, he "routinely diverted corporate funds for his personal use" including paying his mortgage from business accounts and taking cash out of the company on a weekly basis. In other words, he was accused of cheating and then covering his tracks.
But maybe all of that was incidental? Maybe Marinello didn't know better? The government alleges that Marinello sought advice from a certified public accountant (CPA) who specifically told Marinello not to destroy his records. Prosecutors claim that he did it anyway. And after that consultation with the CPA, the government alleges that Marinello continued to avoid filing tax returns all while paying himself and his employees in cash. When he was asked about destroying the records, Marinello allegedly told an IRS agent that it was "the easy way out."
The government pointed to that behavior as support for the felony conviction. The IRS powers alluded to in the statute, the government claims, include gathering information to ascertain income, as well as calculating, assessing, and collecting any taxes that may be due. Audits and investigations, the government claims, may be examples of “due administration” but they are not the only functions that apply. The government argues that making it impossible for the IRS to do its job - including, the government claims, willfully destroying records so that IRS cannot determine any tax liability - is obstruction. "Shredding documents or deleting computer files is not inherently wrongful conduct," the government wrote in its brief, "but it becomes wrongful if done with the requisite criminal intent."
As for whether Marinello knew that he was making it impossible for the IRS to do its job? The trial court believed that he did know: At sentencing, the court found that Marinello knew "that he had the obligation" to preserve records, report income, and pay taxes. His failure to do so, the court said, was part of a "defiant stand" in an attempt "to thwart the efforts of the government to collect taxes."
Marinello's attorneys argue that the government's interpretation is an overreach. Such a broad read of the statute, they argue, means that it could be tacked on to any number of tax charges - and that, they claim, is not the intent of the law.
Oral arguments in the matter will be heard in front of the Supreme Court today. The case is Carl J. Marinello, II, Petitioner v. United States (No. 16-1144). You can follow the Supreme Court docket here.
