Supreme Court goes thumbs up and thumbs down on tax cases

When you withhold taxes from employees’ pay, you’re administering the tax code. The U.S. Supreme Court has now given you some breathing room. It ruled that you can’t be criminally liable for obstructing the due administration of the tax code unless you’re aware of, or can reasonably foresee, a pending proceeding, such as an audit. (Marinello v. U.S., No. 16-1144, 2018)

Narrow scope of criminal provision. Marinello was convicted of committing corrupt acts before he became aware of any IRS investigation. He failed to file tax returns, didn’t keep corporate books and shredded what books he did keep. He used business income to pay his personal expenses and destroyed bank statements. He also paid employees in cash—which normally isn’t a crime—and didn’t file W-2s or 1099s—which is bad enough, but also generally not considered a crime.

He appealed, arguing that he couldn’t be guilty if he had no idea that he was in the IRS’ cross hairs. A federal appeals court upheld his conviction, but the Supreme Court reversed it.

Supreme Court: There must be a connection between a defendant’s conduct and a particular administrative proceeding (e.g., an investigation, audit or other targeted action). That connection, the court further said, must require a relationship in time, causation or logic with the proceeding.

YES, THEY NOTICED: Justice Breyer, who wrote the majority opinion, demonstrated an understanding of how Payroll fits into this scheme. A broad reading of the tax code section at issue (Section 7212(a)), he said, could result in criminal felony convictions for failing to provide employees with W-2s, failing to keep records or claiming too many allowances on a W-4.

FLSA Compliance D

100% penalty stands. It’s not all good news, however. The court turned down the petition of a business owner who was assessed the 100% responsible person penalty under tax code Section 6672 for failing to remit taxes withheld from his employees’ pay.

Owner: He wasn’t responsible because he didn’t control the company’s finances; instead, his lender had lock-box control over the finances. Appellate court: Even if the lender had complete control over the finances, the owner voluntarily entered into the loan agreement. (Karban v. U.S., No. 17-630, 2018)