Fault Lines
21 June 2017

IRS Dogpiles Carlo Marinello for His Poor Recordkeeping

February 28, 2017 (Fault Lines) –  Good legislative drafting is hard to do. And bad legislative drafting is easy to do. In the criminal sphere, bad drafting leads to open-ended statutes with broad terms defining an offense against the government limited only by  prosecutorial discretion. When the legislature crafts a straightforward statute, by contrast, it’s easy to hold the prosecutor accountable for charging decisions.

In more complex crimes, a prosecutor is vested with more charging discretion. While there is still a victim, harm, and a wrongdoer, reasonable people can still disagree about whether criminal liability should attach.

So a CEO may embarrass his company, in turn causing harm to investors, but that is not usually criminal. In other cases, such as insider trading, a corporate insider benefits by breaching a duty of nondisclosure to the company, hurting those outside of the loop. When an honest services case is charged, the public is thought to be harmed by the officeholder depriving of them of honest services—irrespective of whether the action was detrimental.

In the case of the latter two, the legislators determined that at least some conduct definable by the statute is a crime. And they leave it to prosecutors to decide if the case at hand rises to criminal wrongdoing. Unfortunately, sometimes the legislators punt on defining the crime in the first place, which leads to unenforceable statutes.

Another area where the legislature tends to draft vague statutes is when the crime is against the state. One such example is the IRS omnibus clause—lovely name:

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, [will be fined or imprisoned.]

If you read this and think you know what it means, you’ve never been to law school. A couple things jump off the page. Beats me what corruptly means here. The use of ‘in any other way’ tells you that sneezing could be a problem. And ‘due administration of this title’ means the entire IRS code. Re-written in more layman friendly terms, it says: “You ‘corruptly’ do anything to make things even a little difficult for the IRS to collect taxes, you’re looking at three years in prison.”

Now your attention is fixed on what corruptly could possibly mean. Because not filing your taxes on time would impede the IRS in collecting taxes. The Second Circuit has helpfully provided that definition:

The term ʺcorruptlyʺ within the meaning of this section encompasses conduct that has ʺthe intent to secure an unlawful advantage or benefit either for one’s self or for another.ʺ

That’s not terribly helpful either because now we wonder, what is an unlawful advantage or benefit? Crickets from the Second Circuit.

In the context of the statute, it sounds circular. It’s unlawful to do anything that would impede the IRS. So, unlawful here doesn’t really narrow the statute in any meaningful way. So, corruptly seems to mean simply you benefit in some way from your action, which impedes the IRS. As it turns out, it is remarkably easy to give yourself such a benefit.

Carlo Marinello operated a courier and freight service. But for lawyers and accountants, he was a nightmare client. He was focused on making money and delivering stuff for customers. He shredded and threw away most of the paperwork he got. And it was his business, so he commingled personal and business expenses. Paperwork and documentation were things a guy like him just didn’t have time to do. Nor did he have the time to file his taxes.

After a decade and a half of running the business, he finally contacted an attorney and an accountant. The CPA refused to take Marinello on but warned Marinello to start keeping documents. When the IRS finally caught up to him, he had done just about everything a business course would tell you not to do.

When he went to trial, he was convicted of violating the omnibus clause, among other things. The Government did not allege that he did anything new or different to impede its investigation into his finances; it just alleged that all of the things he did wrong for years were enough. And the jury obviously agreed.

On appeal, he argued that to act corruptly, he had to have impeded the investigation, once he became aware of it. No dice, said the Second Circuit:

Second, the Department of Justiceʹs internal tax division policy states that the omnibus clause may be used ʺto prosecute a person who, prior to any audit or investigation, engaged in large‐scale obstructive conduct involving the tax liability of third parties.ʺ

Because we conclude that, under section 7212(a), ʺthe due administration of this titleʺ is not limited to a pending IRS investigation or proceeding of which the defendant had knowledge, we reject Marinelloʹs first argument as without merit.

Yes, you read that right. You commit a federal crime by keeping terrible books. Sure, that can make sense for a large, publicly traded company. But it’s a little hard to fathom why the IRS can send a business owner to jail simply for unintentionally making an audit difficult.

Recently, the Supreme Court has expressed doubts about these sorts of open-ended statutes. The Court reversed a conviction for the corrupt destruction of documents in an official proceeding. It reversed a conviction for the destruction of evidence, which was a fish. And it reversed a conviction due to the vagueness of the residual clause in the Armed Career Criminal Act.

Marinello sought a rehearing by the entire Second Circuit, which rejected his petition. But two judges dissented. Before too long, they really get going:

The panel opinion in Marinello affords the sort of capacious, unbounded, and oppressive opportunity for prosecutorial abuse that the Supreme Court has repeatedly curtailed.

If keeping sloppy business records alone is a crime, then most small businesses are probably at risk.

The actus reus for this crime is the failure to keep sufficient books and records. * * * First, the risk of wrongful conviction, even with a mens rea requirement, is real: the line between aggressive tax avoidance and “corrupt” obstruction can be hard to discern, especially when no IRS investigation is active.

Yes. And the judicial interpretation of key terms is entirely unhelpful.

Second, alleging a corrupt motive is no burden at all. Prosecutorial power is not just the power to convict those we are sure have guilty minds; it is also the power to destroy people. How easy it is under the panel’s opinion for an overzealous or partisan prosecutor to investigate, to threaten, to force into pleading, or perhaps (with luck) to convict anybody.

There really is no statutory or judicial check here. And the statute is broad enough to conceal any improperly motivated charges, such as against political enemies, competitors of friends and families, or any disfavored person. All it would take is for a person to shred documents that the IRS says that they should have kept, before the IRS told them to keep them.

A standard of ‘keep anything the IRS later might want to examine’ is a vague standard. Too vague to administer. Not even the tort of spoliation of evidence reaches that broadly.

This is about people with guns coming to collect taxes under the express threat of prison. More specifically, it is about making it unintentionally difficult for those armed people to collect the proper amount of taxes. Besides being vague, the harm Marinello caused by his record keeping is attenuated from the harm of not paying taxes, for which he was also convicted. Here, the prosecution dogpiled Marinello. But there is nothing to stop the IRS from bringing that as a standalone charge. And that’s something we should be concerned about.

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