Charges of Conspiracy: A Potential Consequence of the Supreme Court’s Recent Decision in Marinello

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Charges of Conspiracy: A Potential Consequence of the Supreme Court’s Recent Decision in Marinello

On March 21, 2018, the Supreme Court issued its decision in Marinello v. United States.[1]The holding of the Court focused on restricting the scope of the Omnibus Clause of section 7212(a) of the Internal Revenue Code. In particular, the Court held that the Government must prove that a defendant was aware of a pending tax-related proceeding (or could reasonably foresee that a proceeding would commence) before he can be convicted of obstruction under the Omnibus Clause.[2]Given this interpretation by the Court, is there a potential consequence for another related criminal statute?

The Klein Conspiracy

Section 371 of the federal criminal code describes the crime of conspiracy to defraud the United States.[3]In part, the statute provides as follows:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.[4]

This statute was of particular concern in United States v. Klein.[5]In Klein, the defendants had been involved in an elaborate scheme—setting up at least 17 foreign corporations—to operate their businesses and minimize their taxes.[6]Ultimately, the defendants (Klein chief among them) were convicted of conspiracy “to defraud the United States by impeding, impairing, obstructing and defeating the lawful functions of the Department of the Treasury in the collection of the revenue . . .”[7]However, the defendants challenged their conviction under this statute, arguing that it was “too vague and general to afford a proper basis for a felony and trial conviction.”[8]The Court disagreed. It held, in part, that the specific details of the tax avoidance schemes could support the general conspiracy charge.

The 7212(a)/371 Relationship</strong

The relationship between the Omnibus Clause of section 7212(a) and section 371 may not be readily apparent. However, it does not take long to find cases where both statutes are addressed.[9]Further, previous Supreme Court cases have defined section 371 with language similar to section 7212(a). For example, the majority opinion in Hammerschmidt v. United Statesdefined section 371 with particularity: “To conspire to defraud the United States means primarily to cheat the Government out of property or money, but it also means to interfere with or obstruct one of its lawful governmental functionsby deceit, craft or trickery, or at least by means that are dishonest.”[10]Additionally, the Court in Tanner v. United States stated that the language of section 371 includes “any conspiracy for the purpose of impairing, obstructing or defeating the lawful function of any department of Government.”[11]

Moreover, the language of Tax Division Directive No. 77 underscored the statutory relationship between section 7212(a) and section 371. That directive stated, in part: “In general, the use of the ‘omnibus’ provision of Section 7212(a) should be reserved for conduct occurring after a tax return has been filed — typically conduct designed to impede or obstruct an audit or criminal tax investigation, when 18 U.S.C. 371 charges are unavailable due to insufficient evidence of conspiracy.”[12]Consequently, both statutes are seen as related options that the Government may use to charge defendants in tax cases.

An Evolving Relationship?

After the decision in Marinello, the scope of section 7212(a) was greatly restricted. Despite the broad language of the statute (“the due administration of [the Internal Revenue Code]”),[13]the Court limited the scope to a pending (or reasonably foreseeable) tax-related proceeding, such as a particular investigation or audit.[14]Assuming the Government continues to charge defendants under section 7212(a) and section 371, the scope of a Klein conspiracy charge could be similarly restricted.

Interestingly, one of the defendants in Klein attempted to argue a disparity between his indictment and the proof offered by differentiating between the different functions of the Treasury Department. However, the Second Circuit was not amused, stating: “His highly technical argument and citations do not really impugn the over-all responsibility of the Treasury for the entire task of securing the revenue.”[15]Further, the defendant’s argument that the conspiracy indictment should be based on a conspiracy to violate the revenue laws, rather than one to defraud the United States, was found to be without merit.[16]

In 2004 the Department of Justice issued Tax Division Directive No. 129, which supersedes Directive No. 77. Regarding section 7212(a)’s relationship to charges of conspiracy, the directive states, in part: “The fact that conduct that violated §7212(a) was in furtherance of a preexisting criminal scheme – for example, an ongoing conspiracy or a continuing attempt to evade taxes – does not preclude prosecution under §7212(a).”[17]Although the language does not specifically state section 371, the DOJ has not foreclosed the possibility of continuing to charge defendants under both section 371 and section 7212(a).

Conclusion

It remains to be seen what the full impact of the Marinello decision will be. While the Marinello decision restricted the language of an otherwise broad statute, it is possible that the Klein conspiracy charge could be similarly impacted. On the other hand, the conspiracy charge under section 371 involves the defrauding of the United States in general and not just the administration of the Internal Revenue Code. This may suggest that the courts will defer to the generality of the statute rather than restrict it like the Court did in Marinello. Ultimately, while the Kleinconspiracy charge may or may not be affected, it is certain that the Government will continue to pursue conspirators of tax-avoidance schemes with under section 7212(a) and section 371.

[1]Marinello v. United States, No. 16-1144, 2018 U.S. LEXIS 1914, at *1 (Mar. 21, 2018).

[2]Id.

[3]18 U.S.C.S. § 371 (2018).

[4]Id.

[5]United States v. Klein, 247 F.2d 908 (1957).

[6]Id.at 910.

[7]Id. at 915.

[8]Id.at 910.

[9]See generally, United States v. Kassouf, 144 F.3d 952 (6th Cir. 1998); United States v. Marek, 548 F.3d 147 (1st Cir. 2008); United States v. Boos, No. 97-6329, 1999 U.S. App. LEXIS 454 (10th Cir. 1999); United States v. Coplan, 703 F.3d 46 (2d Cir. 2012).

[10]Hammerschmidt v. United States, 265 U.S. 182, 188 (1924) (emphasis added).

[11]Tanner v. United States, 483 U.S. 107, 128 (1987).

[12]Tax Division Directive No. 77 (1989).

[13]I.R.C. § 7212(a) (2018).

[14]Marinello v. United States, No. 16-1144, 2018 U.S. LEXIS 1914, at *1 (Mar. 21, 2018).

[15]United States v. Klein, 274 F.2d 908, at 920.

[16]Id.

[17]Tax Division Directive No. 129 (2004).

 

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