On March 5, 2018, the United States Tax Court published a fascinating decision in Mazzei v. Commissioner1, siding with the assertion by the Commissioner of Internal Revenue ("Commissioner") that the taxpayers' structure lacked economic substance. The opinion again demonstrates why the Tax Court is not a taxpayer-favorable forum to litigate tax-advantaged transactions, even those that are arguably sanctioned under the Internal Revenue Code. 2
Mazzei is particularly unusual in that Tax Court opinions rarely include dissenting opinions, much less concurring opinions. What is even more unusual about the case is the almost unprecedented vigorous dissent issued by Judge Holmes ( joined by three other Judges) and the equally vitriolic attack on Judge Holmes' dissenting opinion by the majority.
1 150 T.C. No. 7 (2018). 2 Unless otherwise stated, all Section references herein are to the applicable
Sections of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury Regulations promulgated thereunder.
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VOLUME 2, ISSUE 2
Overview - Transaction Structure
In Mazzei, a family-owned agriculture company's tax-favorable foreign service corporation ("FSC") commissions which were contributed to Roth IRAs were recast as excessive distributions to the Roth IRAs by the shareholders of the company. The opinion rests on the conclusion that the contributions were in substance directed by the shareholders rather than the FSC.
The Mazzei family invested in a pre-packaged plan intended to avoid taxes by shifting commissions from its family business to a Bermuda FSC and into personal Roth IRAs. The Mazzeis' S corporation, the Mazzei Injector Corp. ("Injector"), which revolved around a unique chemical injection process, was formed in 1978 by Angelo Mazzei and his wife, Mary Mazzei. The Mazzeis' daughter, Celia, later became involved with the business as well.
In 1998, Injector entered into a program provided by the Western Growers Association ("WGA"), in which WGA provided a Bermuda FSC for a participant's business, which distributed its commissions into participants' Roth IRAs. As part of the program, each of the Mazzeis formed his or her own self-directed Roth IRA, contributing the maximum $2,000 for the year.3 Generally, although yearly contributions are limited, income that accrues in a Roth IRA (including dividend income from the Roth IRA's investments) can be distributed tax-free.4 Contributions in excess of the yearly limit are subject to an excise tax.5
Each of the Mazzeis' Roth IRAs purchased 33 1/3 shares of the FSC, and the combined 100 shares were attributed to a separate account in the FSC. Under the FSC rules in existence, a separate FSC account is treated as a separate corporation.6 FSCs were tax-advantaged in that they
3 The Commissioner did not contest that $2,000 was the proper limit, although the Tax Court notes that this was potentially in excess of each family member's limit due to salary constraints.
4 Sections 408 and 408A. 5 Section 4973. 6 Former Section 927(g).
allowed a domestic exporting business to attribute a set percentage of eligible sales commissions to the FSC (the business's "exempt foreign trade income"), a percentage of which was excluded from U.S. taxable income.7
During the period from 1998 to 2002, Injector provided the FSC management company with its foreign sales numbers for the period, and management computed the maximum commission payment allowed. During this period, $533,057 was paid to the FSC as commissions after-tax, and the total sum was then dividended to the Roth IRAs tax-free.
Prior to entering these transactions, the Mazzeis presented the plan to their accountant for confirmation. Additionally, in each year at issue, the Mazzeis fully disclosed the arrangement on their individual tax returns.
Tax Court Opinion
The Tax Court rejected the Mazzeis' transactions, stating that the substance was that the dividends from the FSC were actually dividends to the Mazzeis, rather than dividends to their Roth IRAs, followed by contributions by the individuals in excess of their annual limits. In making its determination, the Court looked to "cases where a right to receive income is allegedly transferred before the income arises" for the principle that the taxpayer with "dominion over the income at the moment of receipt" is determinative of the true owner of an "income-generating asset."8
To make this determination, the Court noted its belief that the $500 purchase price for the stock of the FSC did not provide a significant risk of loss by the Roth IRAs.9 Additionally, applying heightened scrutiny to the related-party transactions at hand, the Court found that an independent holder of the FSC's stock could not have "realistically have expected to receive any benefits (before or after tax) due to its formal ownership of the FSC stock" because the distributions were at the discretion of the Mazzei family, which would seemingly not make distributions unless such distributions were to its own benefit.10 Thus, because the parties with economic
downside risk and upside gain were the Mazzeis, the Court found the Mazzeis were the substantive owners of the FSC.
In finding for the Commissioner, the Court acknowledged the Sixth Circuit's seemingly contrary holding of Summa Holdings, Inc. v. Commissioner, in which a similar Tax Court opinion was overturned.11 However, because the issue at hand is appealable to the Ninth Circuit and Summa Holdings was a Sixth Circuit decision, the Tax Court was not bound by Summa Holdings.12 Additionally, the Tax Court tried to distinguish Summa Holdings because that case involved a domestic international sales corporation ("DISC") rather than a FSC, and the case involved the treatment of the corporation making the commission payments rather than the treatment of the Roth IRAs and individual taxpayers, whose appeals are still pending in the First and Second Circuits. Based on the vigorous dissent and contentious nature of this opinion in general, it looks likely now that the Ninth Circuit will address the Summa Holdings analysis in an appeal of Mazzei.
The dissent relies on several well-argued points to discredit the majority opinion. First, in referencing the similarities to Summa Holdings, the dissent notes:
[T]he Sixth Circuit--in the course of reversing our decision in a case nearly identical to this one--warned that a court that construes the Tax Code against its language and in favor of judge-made doctrine acts like Caligula, who famously posted tax laws in fine print and so high that Romans could not read them. It is our custom to reconsider an issue when a circuit court reverses us. And today we have to choose either a well-reasoned opinion by a highly respected judge in America's heartland, or Caligula. We pick Caligula.13
In Summa Holdings, a family-owned S Corporation shifted commission income to a DISC, which was held by Roth IRAs for the benefit of the family members. The dissent goes so far as to mention that the parties to the instant matter both agreed that the only difference
7 See former Sections 921 through 927. 8 150 T.C. No. 7 at 13 (citing Comm'r v. Banks, 543 U.S. 426 (2005) and Helvering v.
Horst, 311 U.S. 112 (1940)). 9 Id. at 15. 10 Id. at 16-17. 2018 Winston & Strawn LLP
11 848 F.3d 779 (6th Cir. 2017), rev'g T.C. Memo. 2015-119. 12 See Golsen v. Comm'r, 54 T.C. 742 (1970). 13 150 T.C. No. 7 at 27.
between the Mazzeis and the family in Summa Holdings is the distinction between DISCs and FSCs.14 As such, unsurprisingly the dissent believes the end result should be the same.
"the dissenting opinion points out that a substance over form inquiry is inappropriate"
The dissent goes on to chastise the Commissioner for attempting to overturn the Mazzeis' structure simply because the structure is taxpayer-favorable. As was discussed in Summa Holdings, the dissenting opinion notes that certain entities are by their nature solely intended to be taxpayer-favorable, such as DISCs, FSCs, and Roth IRAs. Entities such as DISCs and FSCs by their nature do not have economic substance; rather, they are simply shells set up for tax advantages provided by the Code. As such, the dissenting opinion points out that a substance over form inquiry is inappropriate, as such an analysis risks overriding "statutory provisions whose only function is to enable tax savings."15
The dissent points out other flaws in the majority's analysis as well. First, the majority relies on case law assigning the income from income-generating assets due to dominion and control. However, here the income-generating asset is Injector, rather than the FSC, so it does not make sense to recharacterize the FSC's ownership. Second, the majority claims that the Roth IRAs could not own the FSC because they have no downside or upside related to the FSC, but Injector likewise had no downside or upside risk in its ownership of the FSC. Finally, while the majority claims Summa Holdings only analyzed the transaction from the corporation's perspective, the Sixth Circuit actually analyzed the positions of all of the parties involved.
Judge Thornton, former Chief Judge of the Tax Court, who authored the majority opinion ( joined by 11 judges and two concurring opinions), harshly criticizes the dissent, devoting more than four pages to its response. At one point, the majority remarks, "[t]he dissent does not explain why our analysis is incorrect. Its entire argument relates to why we should not sham the entities, which in fact, we do not do." The majority further attacks Judge Holmes' dissent under a number of broad headings, such as "Our Approach Appropriately Considers Value," "The Dissent's Hypothetical Misconceives our Analysis," and "The Dissent's Approach Lacks Support in the Code."
It should be noted that Judge Holmes, the author of the dissenting opinion, also recently penned the majority opinion of Avrahami v. Commissioner in which the Tax Court found that a taxpayer-favorable captive insurance arrangement did not qualify as insurance, although the taxpayer in that case asserted it followed the guidelines provided by Section 831(b).16 Judge Holmes did not mention Summa Holdings in the opinion, presumably because the briefings in Avrahami were fully submitted prior to the Summa Holdings opinion's release.
Avrahami, Mazzei, and the Tax Court's opinion in Summa Holdings impose significant hurdles for taxpayers litigating structured tax transactions in the Tax Court even when they are tax-favored under the Code. Although arguably inconsistent with his opinion in Avrahami, Judge Holmes' vocal dissent in Mazzei will make his anticipated decision in Caylor Land & Development v. Commissioner17 an interesting case to watch, as it involves a post-Summa Holdings micro-captive that is a tax-favored structure under IRC section 831(b). Will Judge Holmes distinguish his analysis in Caylor from his Mazzei lament or if he sticks to his Mazzei analysis, will he be overruled by the full Court? In either event, we anticipate the Circuit Courts of Appeals will have the final say as to the outcomes of these cases.
Lawrence M. Hill and Kevin Platt
14 Id. at 30. 15 Id. 2018 Winston & Strawn LLP
16 149 T.C. No. 7 (2017). 17 See 2016 WL 9736161.
IRS Acknowledges that Cryptocurrency is a Threat
IRS Criminal Investigation division Chief Donald Fort stated recently at the Federal Bar Association meeting on Taxation in Washington, D.C., that virtual currencies are an immediate concern to the IRS and a focus of the Criminal Investigation group. Fort outlined three areas of tax enforcement focus involving the use of virtual currency:
i. The absence of taxpayers to report gains on the disposition of virtual currencies;
ii.Use of cryptocurrency accounts as alternatives for other financial accounts, such as bank accounts;
iii.Use of cryptocurrency in business transactions that are unreported, including payment of wages and goods and services.
In 2014 the IRS issued Notice 2014-21 (2014-16 I.R.B. 938), which describes how the IRS applies U.S. tax principles to transactions involving virtual currency. According to the IRS, virtual currencies that can be converted into traditional currency are considered "property" for tax purposes, and a taxpayer can have a gain or loss on the sale or exchange or a virtual currency, depending on the taxpayer's cost to purchase the virtual currency (i.e., tax basis). Thus, under general tax principles applicable to property transactions, the sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally have tax consequences that could result in tax liability. The notice applies to individuals and businesses that use virtual currencies.
According to the IRS, taxpayers who have engaged in any of these virtual currency transactions and have not properly reported the virtual currency transactions have failed to comply with internal revenue laws, and, when appropriate, can be liable for penalties and interest. In addition, the IRS recently announced that those dealing in large amounts of cryptocurrency may also be subject to criminal prosecution, should they fail to correctly report the income tax consequences of digital currency transactions. Criminal charges could include tax evasion and filing a false tax return. Taxpayers convicted of tax evasion may be subject to a prison term of up to five years and a fine
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"According to the IRS, virtual currencies that can be converted into traditional currency are considered "property" for tax purposes"
of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000. The following virtual currency transactions must be reported to the IRS:
Wage, salary, or other income paid to an employee with virtual currency is reportable by the employee as ordinary income, subject to employment taxes.
Virtual currency received by a self-employed individual in exchange for services is ordinary income subject to self-employment tax.
Virtual currency received in exchange for goods or services by a business is reportable as ordinary income.
Gain on the sale of property held as a capital asset in exchange for virtual currency is reportable as a capital gain.
Gain on the exchange of virtual currency for other property is generally reported as a capital gain if held as a capital asset and as ordinary income if it is property held for sale to customers in a trade or business.
Payments made in virtual currency are subject to information reporting requirements to the same extent as payments made in real currency or instruments denominated in real currency.
New York Cryptocurrency Investigation
On April 17, New York Attorney General Eric T. Schneiderman launched the Virtual Markets Integrity Initiative, a fact-finding inquiry into the policies and
practices of platforms used by consumers to trade virtual or "crypto" currencies like bitcoin and ether. As part of a broader effort to protect cryptocurrency investors and consumers, the Attorney General's office sent letters to 13 major virtual currency trading platforms requesting key information on their operations, internal controls, and safeguards to protect customer assets. As the letters explain, the initiative seeks to increase transparency and accountability as it relates to the platforms retail investors rely on to trade virtual currency, and better inform enforcement agencies, investors, and consumers.
Richard A. Nessler
IRS Announces New Compliance Initiatives and "Dirty Dozen" List
The Internal Revenue Service has recently released two publications that reveal how it plans to combat tax evasion. On March 13, 2018, the Large Business and International ("LB&I") division announced five new compliance areas that it will focus on during audits and on March 21, 2018, the Internal Revenue Service released its annual "Dirty Dozen" list of tax scams.
"These scams range from simple to more elaborate, and may put taxpayers at risk for identity theft, penalties, and even criminal liability."
Large Business Audits
The IRS Large Business and International (LB&I) division, which audits companies with assets of more than $10 million, announced five additional areas that it will focus on during audits. These five campaigns are the third set that have launched since the LB&I division was reorganized in
2015. This new set of campaigns includes three that are focused on partnership issues. One of these campaigns is designed to target partners that are subject to selfemployment tax under the Self-Employment Contributions Act on their share of partnership income, but do not pay the tax. Another focuses on partners that do not correctly report the gain or loss on a sale of partnership interest. The third addresses partnerships that stop filing tax returns.
Outside of partnerships, a fourth campaign is concerned with companies that engage in spinoffs, split-offs, or splitups that are improperly deducting the costs that facilitate these transactions, which should be capitalized. Finally, the fifth campaign deals with recognizing a gain or loss on the disposition of modified accelerated cost recovery system property.
These five campaigns supplement the first set of 13 campaigns that was announced in January 2017 and the second set of campaigns that was added in November of that year.
The "Dirty Dozen"
The Internal Revenue Service also released its annual "Dirty Dozen" list of tax scams as a caution to taxpayers. These scams range from simple to more elaborate, and may put taxpayers at risk for identity theft, penalties, and even criminal liability. This year's "Dirty Dozen" includes the following:
Phishing: Taxpayers should be aware of fake e-mails and websites, claiming to be the IRS, asking for personal information. The IRS will never initiate contact through e-mail about a tax liability or a refund.
Phone Scams: Similar to phishing, scammers are impersonating IRS agents over the phone to threaten taxpayers or steal personal information.
Identity Theft: Taxpayers should be vigilant about tactics used all year round to steal their identities.
Return Preparer Fraud: Taxpayers are advised to be aware of dishonest return preparers who may scam clients, perpetuate fraud, or steal client identities.
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Fake Charities: Fake charities with names similar to familiar or nationally recognized charities are soliciting contributions from unsuspecting individuals.
Inflated Refund Claims: Taxpayers should be wary of preparers promising inflated tax refunds. These preparers often ask taxpayers to sign blank returns and charge fees based on a percentage of the refund.
Excessive Claims for Business Credits: Taxpayers should be careful not to improperly claim credits, such as the fuel tax credit or research credit, that are generally not available to most taxpayers.
Falsely Padding Deductions on Returns: Taxpayers should avoid overstating the value of deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit.
Falsifying Income to Claim Credits: Con artists may convince taxpayers to inflate income to claim credits. This could lead to back taxes, interest, and penalties.
Frivolous Tax Arguments: Promoters may encourage taxpayers to make unreasonable or outlandish legal arguments against paying taxes; taxpayers are warned that the penalty for filing a frivolous tax return is $5,000.
Abusive Tax Shelters: These are structures that are used to shelter income to avoid paying taxes. The IRS is targeting the promoters and sellers of these structures in particular, and urges taxpayers to seek an independent opinion if offered one of these complex structures.
Offshore Tax Avoidance: Taxpayers who are hiding money or income offshore are urged to come forward voluntarily to satisfy their tax-filing obligations.
The last two scams on this list, abusive tax shelters and offshore tax avoidance, are discussed in detail herein.
Micro-Captive Tax Shelters
Regarding abusive tax shelters, the IRS has highlighted micro-captive insurance tax shelters. A captive insurance company, which is permissible under tax law, is one that is owned by the insured or parties related to the
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"Taxpayers are warned that, while there are legitimate reasons to maintain foreign financial accounts, there are reporting obligations relating to these accounts, and failure to comply with these requirements can lead to fines or even criminal prosecution."
insured, resulting in certain tax benefits. Under section 831(b) of the Code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of premiums from income so that the captive is only taxed on investment income. In micro-captive tax shelters, promoters convince taxpayers, often closely held corporations, to set up micro-captives that lack the attributes of genuine insurance.
In 2016, the IRS issued Notice 2016-66 noting that microcaptive arrangements had potential for tax evasion. The notice established a reporting requirement for those entering into such transactions, or transactions that are substantially similar, on or after November 2, 2006. Congress has also established strict diversification and reporting requirements for new and existing captives in the Protecting Americans from Tax Hikes ("PATH") Act, effective January 1, 2017. Taxpayers entering into microcaptive arrangements should be aware that the IRS is scrutinizing these schemes for tax evasion.
Offshore Tax Evasion
The IRS has also intensified its efforts in preventing offshore tax evasion, including the launch of the Offshore
Voluntary Disclosure Program ("OVDP") in 2009. Since then, there have been more than 56,400 voluntary disclosures under the program, resulting in more than $11.1 billion in revenue. However, applications have dwindled to just a few hundred per year, and the IRS has announced that the program will end on September 28, 2018. In recent years, the IRS has conducted thousands of offshore civil audits and also pursued criminal charges, leading to billions of dollars of tax revenue, criminal fines, and restitution.
Over the years, the IRS has collected information on individuals identified as engaging in offshore tax evasion. The IRS continues to use information learned through its investigations to target individuals, bankers, and other service providers suspected of helping clients in offshore tax evasion. Taxpayers are warned that, while there are legitimate reasons to maintain foreign financial accounts, there are reporting obligations relating to these accounts, and failure to comply with these requirements can lead to fines or even criminal prosecution.
The Foreign Account Tax Compliance Act ("FATCA") has helped the IRS curb offshore tax evasion by creating a network of intergovernmental agreements which mandate third-party reporting of foreign financial accounts. FATCA is currently in its third year of operation. With the OVDP ending soon, taxpayers who are not in compliance with reporting have limited time to take advantage of voluntary disclosure. Taxpayers can be sure that the IRS is committed to stopping offshore tax evasion.
House Passes Bill That Would Strengthen Independence of IRS Appeals Office
On April 18, 2018, the House passed the Taxpayer First Act (H.R. 5444), which includes provisions that would establish an Internal Revenue Service Independent Office of Appeals ("Independent Appeals"). In an effort to strengthen the independence of the existing IRS Office of Appeals, the bill generally would (i) require the IRS to provide notice and an explanation to a taxpayer whose request for consideration is denied, (ii) require the IRS
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"The bill would require the IRS to prescribe notice and protest procedures for taxpayers who are denied Independent Appeals consideration."
Office of Chief Counsel ("Chief Counsel") to ensure any staff that provides advice to Independent Appeals with respect to a matter was not previously involved in such matter, and (iii) entitle certain taxpayers to access to the non-privileged portions of materials developed by the IRS case files on their matters.
The IRS has an Office of Appeals that reviews administrative determinations arising from the IRS's collection and examination activities and attempts to resolve disputes between the IRS and taxpayers without litigation. Currently, the IRS has broad discretion to determine which taxpayers have access to the Office of Appeals. Although taxpayers generally receive consideration by the Office of Appeals, there are exceptions under which consideration can be denied, such as cases in which inadequate time remains under the statute of limitations. In addition, the Office of Appeals has been criticized for its lack of independence from the other divisions within the IRS.
The Taxpayer First Act includes measures intended to ensure taxpayers' access to, and strengthen the independence of, the IRS Office of Appeals.
Independent Office of Appeals
Although the IRS historically has had an Office of Appeals, the Taxpayer First Act would for the first time codify it in law, establishing an office to be known as the Internal Revenue Service Independent Office of Appeals. Independent Appeals would be headed by a Chief of Appeals.
"The Taxpayer First Act also includes measures to ensure that Independent Appeals receives independent advice from Chief Counsel."
Notice Procedures; Congressional Oversight
The bill would require the IRS to prescribe notice and protest procedures for taxpayers who are denied Independent Appeals consideration. The bill would require the procedures to include a requirement that the IRS provide the taxpayer with a written notice that sets forth the facts underlying the basis for the IRS's denial and a detailed explanation of the reasons for denying the request. The notice also must advise the taxpayer of its right to protest the denial of Independent Appeals consideration.
The bill would also would require the IRS to provide an annual report to Congress detailing the number of cases in which a taxpayer was denied access to Independent Appeals and the reasons for such denials.
There is an exception in the bill under which denied cases that involve only frivolous positions are not subject to these notice procedures.
Advice from Office of Chief Counsel
The Taxpayer First Act also includes measures to ensure that Independent Appeals receives independent advice from Chief Counsel. Under the bill, Chief Counsel would be responsible for ensuring that any advice provided with respect to a matter under consideration by Independent Appeals be provided only by staff who were not involved in (i) advising the IRS employees working on the case prior to its referral to Independent Appeals or (ii) preparing the case for litigation.
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Access to Case Files
Currently, to gain access to the case file developed by the IRS, a taxpayer would be required to file a Freedom of Information Act ("FOIA") request, which can be a complicated filing. The Taxpayer First Act would make it easier for certain taxpayers to gain access to this information.
Under the bill, "specified taxpayers" that have an Independent Appeals conference scheduled would be entitled to receive the IRS case file no later than ten days prior to the conference. For this purpose, a "specified taxpayer" is (i) an individual taxpayer with adjusted gross income below $400,000 or (ii) an entity taxpayer with gross receipts below $5 million.
Scott A. Malone
Supreme Court Reversed Marinello's Obstruction Conviction
On March 21, 2018, the United States Supreme Court reversed a decision by the Second Circuit Court of Appeals18 which had upheld Marinello's conviction of obstruction under the Omnibus Clause contained in IRC 7212(a). In reversing the conviction, the Supreme Court held that the government must demonstrate that the taxpayer interfered with a targeted governmental taxrelated proceeding, such as an audit or investigation, to convict an individual of obstruction or impeding the due administration of the tax code under the omnibus clause. The Supreme Court's opinion "is a victory for fairness and fair warning when it comes to the application and interpretation of broadly worded provisions of federal criminal statutes," states Lawrence Hill at Winston & Strawn LLP. 19
In 2012, defendant Marinello was charged in a superseding indictment with corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws, in violation of 26 U.S.C. 7212(a) (count one), and
18 United States v. Marinello, __ U.S. __, 138 S. Ct. 1101 (March 21, 2018), rev'd, 839 F.3d 209 (2nd Cir. 2016).
19 Supreme Court: IRS Went Too Far With Taxpayer Obstruction Charge, Bloomberg Law, March 22, 2018.
willfully failing to file individual and corporate tax returns for calendar years 2005 through 2008, in violation of 26 U.S.C. 7203 (Counts Two through Nine). At trial, defense counsel conceded that Marinello did not file his tax returns, but argued that Marinello could not be convicted on count one the Omnibus Clause because he lacked the requisite criminal intent under section 7212(a), in as much as he did not "corruptly" obstruct or impede the administration of the Internal Revenue Code. The jury convicted Marinello on all counts. Marinello moved for a judgment of acquittal or a new trial and argued, in part, that the phrase "the due administration of this title" in section 7212(a) refers exclusively to pending IRS investigations, and that a defendant may be convicted under the Omnibus Clause statute only if he knowingly interferes with such an investigation.
Marinello argued that he should be acquitted because there was no evidence that he had become aware of the IRS's investigation until his June 2009 interview with an IRS agent, which occurred after the conduct alleged in the superseding indictment had already taken place. The district court rejected Marinello's argument, concluding that knowledge of a pending IRS investigation was not an essential element of the crime under the Omnibus Clause in section 7212(a). On appeal, the Second Circuit Court of Appeals affirmed. Because of a split within the circuits, the Supreme Court granted certiorari.20
Section 7212(a) criminalizes certain "[a]ttempts to interfere with [the] administration of internal revenue laws." The statute provides:
[w]hoever  corruptly or by force or threat 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 tile, 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 or imprisoned, or both].
20 137 S. Ct. 2327 (June 27, 2017).
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The second clause of section 7212(a), the "Omnibus Clause," is a catch-all provision that criminalizes "any other way" of corruptly obstructing or impeding the due administration of the Internal Revenue Code. At the Supreme Court, Marinello argued that the statutory phrase, "the due administration of this title" under the Omnibus Clause refers exclusively to pending IRS investigations or proceedings, of which the defendant must have knowledge in order to corruptly obstruct or impede.
In interpreting the meaning of the omnibus clause, Justice Breyer, who delivered the majority opinion, concluded that the "due administration of [the Tax code]" under the statute does not cover routine administrative procedures "that are near-universally applied to all taxpayers." According to the Court, the omnibus clause requires specific interference with a tax investigation or audit that a taxpayer's actions must have a relationship in time, causation, or logic with a tax investigation or audit.21 The Court found support in both the language of the statute as well as its legislative history.
First focusing on the language of the statute, the Court acknowledged that the Omnibus Clause contains the verbs "obstruct" and "impede," which the Court said suggests an object here, the object is the "due administration of this title." While this could mean every act performed by the IRS, the Court concluded it was best limited to only some acts because the Omnibus Clause appears in the middle of a statutory sentence that refers specifically to efforts to corrupt or forceful actions taken against identifiable persons or property. The Court found further support in the legislative history. The House Reports stated that the Omnibus Clause provided for "the punishment of treats or threatening acts against agents of the Internal Revenue Service" and "will also punish the corrupt solicitation of an internal revenue employee." Likewise, the Senate Report stated that section 7212 "covers all cases where the officer is intimidated or injured; that is, where corruptly, by force or threat of force, directly or by communication, an attempt is made to impede the administration of the internal-revenue laws."
21 The Supreme Court referenced United States v. Aquilar, 515 U.S. 593 (1998) and United States v. Walasek, 527 F.2d 676 (3d Cir. 1975), which imposed a similar nexus requirement.
The Court also referenced policy concerns for limiting the scope of the Omnibus Clause. The Court stated that it "traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress and out of concern that a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed." The Court rejected the Government's broad interpretation of the Omnibus Clause because the code creates numerous misdemeanors, which would "potentially transfer many, if not all, of those misdemeanor provisions into felonies, making the specific provisions redundant." The Court was further troubled by a broad interpretation that would also risk the lack of fair warning and related kinds of unfairness that led the
Supreme Court in Aquilar to exercise interpretive restraint. Thus, under Marinello, to secure a conviction under the Omnibus Clause, the government must show the following:
1. That there is a nexus between the defendant's conduct and a particular administrative proceeding, such as an investigation or audit, and
2.That the proceeding was pending at the time the defendant engaged in the obstructive conduct or, at the lease, was then reasonably foreseeable by the defendant.
Richard A. Nessler
2018 Winston & Strawn LLP
Winston & Strawn's Tax Controversy and Litigation Practice
Our tax controversy practice is one of the cornerstones of Winston & Strawn's tax practice. Many of our tax attorneys devote a substantial portion of their practice to tax controversy matters, with several attorneys concentrating their entire practice on these matters.
Winston & Strawn's tax controversy practice represents our clients' interests at all administrative and judicial levels. Our nationally recognized team of tax litigators, some of whom are former government trial attorneys, has litigated some of the most significant civil and criminal tax cases in U.S. history. Our tax controversy attorneys have presented, negotiated, and resolved hundreds of cases with IRS appeals offices around the country, and the scope of our appeals practice covers virtually every taxpayer-contested issue. Our team of trial attorneys also regularly represents
clients in mediations, arbitrations, tax litigation, and trials before the U.S. Tax Court, the U.S. Court of Federal Claims, federal district courts, and state courts. When necessary, we handle cases for clients in the federal circuit courts of appeal and the U.S. Supreme Court. We have also represented clients in grand jury investigations; Senate PSI investigations; Independent Counsel investigations; before the Director of Practice of the Treasury Department; and other administrative tribunals. In addition, one of our attorneys recently served as an Independent Examiner for a Swiss Bank under the Department of Justice's Swiss Bank Program.
Our tax controversy attorneys represent major financial institutions, multinational corporations, other public corporations, and significant privately held corporations, exempt organizations, high net worth individuals, and large estates in administrative and judicial proceedings against the IRS and the Department of Justice.
Chair, Federal Tax Controversy Practice Partner, New York email@example.com
Of Counsel, New York firstname.lastname@example.org
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