High Court Curbs Tax Code Whose Abuse Potential Caused Alarm

WASHINGTON (CN) – Wary of the potential for prosecutorial abuse, the Supreme Court reined in a provision of the tax code Wednesday that helped put one septuagenarian away for 18 months.

Known as the “omnibus clause” of the criminal tax code, the statute punishes anyone who “corruptly … obstructs or impedes, or endeavors to obstruct or impede the due administration of” all 27 volumes of the Internal Revenue Code.

The government’s reading of the clause failed Wednesday to sway the Supreme Court. Writing for a 7-2 majority, Justice Stephen Breyer noted that unchecked enforcement could make a felon of anyone who commits one of the various misdemeanors laid out in the tax code — from the failure to keep required records “to failure to pay any tax owed, however small the amount.”

“Interpreted broadly, the provision could apply to a person who pays a babysitter $41 per week in cash without withholding taxes, leaves a large cash tip in a restaurant, fails to keep donation receipts from every charity to which he or she contributes, or fails to provide every record to an accountant,” Breyer added.

“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,” the 11-page ruling continues. “Had Congress intended that outcome, it would have spoken with more clarity than it did in §7212(a).”

Justice Clarence Thomas countered in his dissent meanwhile that the tax fraudster who brought the underlying challenge, Carlo Marinello, has little in common with the babysitters of Breyer’s hypotheticals.

Marinello spent years “shredd[ing] documents and hid[ing] evidence about his company’s earnings to avoid paying taxes even after warnings from his lawyer and accountant,” wrote Thomas, who was joined by Justice Samuel Alito.

“It is not hard to find similar cases prosecuted under the Omnibus Clause,” the dissent continues.

Harry Sandick, an attorney at Patterson Belknap who has been watching the case, noted that the Supreme Court historically has “read these types of statutes narrowly — particularly in white-collar cases.”

With Wednesday’s ruling, Sandick added, “the court is continuing its role in policing the enforcement obstruction-related statutes to make sure that they do not become a trap for the unwary.”

Marinello brought his challenge to the omnibus clause after he was convicted of violating it by virtue of the fact that a jury found he had engaged in at least one of eight other criminal activities.

To be sure, Marinello was convicted of all eight other counts against him, but the jury was instructed that it need not agree upon which count Marinello violated to hold him culpable under the omnibus clause as well.

After the Second Circuit endorsed this broad reading of the statute in a 2016 ruling that affirmed Marinello’s conviction, U.S. Circuit Judge Dennis Jacobs balked at his colleagues last year for not rehearing the case en banc.

Jacobs groused that Marinello’s conviction had relied “on the most vague of residual clauses,” and that the Second Circuit, in affirming, “cleared a garden path for prosecutorial abuse.”

“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,” the dissent continued.

The Supreme Court took up the case in June and reversed 7-2 Wednesday, saying the clause should be read more narrowly as referring to “specific interference with targeted governmental tax-related proceedings.”

Breyer also noted that a rise in omnibus clause prosecutions in the last 20 years undermines the government’s claim that it can be counted on to narrow the statute’s scope through prosecutorial discretion.

“Regardless, to rely upon prosecutorial discretion to narrow the otherwise wide-ranging scope of a criminal statute’s highly abstract general statutory language places great power in the hands of the prosecutor,” Breyer wrote. “Doing so risks allowing ‘policemen, prosecutors, and juries to pursue their personal predilections,’ which could result in the nonuniform execution of that power across time and geographic location. And insofar as the public fears arbitrary prosecution, it risks undermining necessary confidence in the criminal justice system. That is one reason why we have said that we ‘cannot construe a criminal statute on the assumption that the government will “use it responsibly.”’”

Thomas warned in response, however, that “even the worst offenders can escape liability” in the majority’s narrowing of the Omnibus Clause.

Sandick at Patterson Belknap highlighted this line as well.

“Going back many years,” the attorney said in a statement, “the court seems to believe that Congress enacts overly broad statutes that will have the unintended consequence of punishing innocent conduct if the statute is given a strictly literal reading.”

Sandick also took note of how the court mentioned a memorandum by the Jeff Sessions Department of Justice, which calls for the prosecution of defendants for the most punitive count available for specific conduct.

“So it might be the case that the court is beginning to react to how it fears the department will operate under the Trump administration,” Sandick added.

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