Monday, August 25, 2008
Ninth Circuit Holds Inability to Pay No Defense in Tax Evasion Case
By SHERRI M. OKAMOTO, Staff Writer
The government does not need to prove that a taxpayer had sufficient funds to pay his taxes to prosecute the taxpayer for failing to pay, the Ninth U.S. Circuit Court of Appeal held on Friday.
A majority of the appellate panel concluded circuit precedent requiring the government prove a taxpayer’s ability to pay was no longer controlling even though it was never expressly overruled, and upheld Jack Easterday’s conviction for willful failure to pay employee payroll taxes.
Easterday operated a chain of nursing homes in Northern California which struggled financially between 1996 and 2005. Even though Easterday accurately stated the corporation’s tax liabilities in its tax filings, he repeatedly failed to pay the full amount of payroll taxes due to the Internal Revenue Service.
The government eventually charged Easterday with 109 counts of failing to pay taxes.
At trial, Easterday did not dispute that he failed to pay the taxes when they came due but claimed his failure to pay was due to the fact that he had used what money the corporation had to pay other company bills in order to keep the nursing homes operational.
He asked the court to instruct the jury that the government had to prove he had the financial ability to satisfy his tax obligations at the time the taxes were due, to prove he ‘willfully” failed to pay, in violation of 26 U.S.C. § 7202.
His requested instruction was drawn from a portion of the Ninth Circuit’s opinion in United States v. Poll, (1975) 521 F.2d 329, which held that a taxpayer’s offer of proof that the corporation “lacked the liquid resources to pay the full amounts due and that he intended to make up the deficiencies later” was relevant to the determination of whether the taxpayer’s failure to pay over taxes was willful.
U.S. District Court Judge Charles R. Breyer of the Northern District of California found that Poll was no longer good law and rejected the instruction. Easterday subsequently was convicted of 107 counts and sentenced to 30 months in prison.
On appeal, Easterday contended that Poll is binding law because the Ninth Circuit had never expressly overruled it.
Writing for the appellate court, Judge Mary M. Schroeder explained that en banc review is not required to overturn a case where intervening Supreme Court authority is clearly irreconcilable with prior circuit authority.
She reasoned that the holding in Poll which formed the basis for Easterday’s proposed instruction was “effectively eradicated” by the Supreme Court one year later in United States v. Pomponio, (1976) 429 U.S. 10, which held that “willfulness” means a voluntary, intentional violation of a known legal duty, and does not require proof of any other motive.
Although she acknowledged that Poll “is not completely dead,” because it has been used “as a shorthand term” describing the standard for a willful failure to pay in the context of child support, Schroeder wrote, in the tax field “it now exists only as a nearly completely buried obstacle to traffic that generally has run over it or passed it by for more than thirty years.”
This case “illustrates the enduring truth of Ben Franklin’s sage observation that ‘nothing is certain but death and taxes,’” Schroeder concluded.
U.S. District Judge Valerie Baker Fairbank of the Central District of California, sitting by designation, joined Schroeder in her opinion, but Judge N. Randy Smith dissented.
Despite agreeing with the majority that Poll is bad law, Smith reasoned it was still the controlling law of the circuit, which left him “between ‘the proverbial rock and a hard place.’”
He argued that Poll was not clearly irreconcilable with Pompino because Poll’s definition of willfulness was not premised on a belief that willfulness requires an evil motive or bad purpose, but only that the ability to pay is relevant to demonstrate willfulness, and Pomponio did not state otherwise.
Thus, he concluded, “we are required to either follow Poll or make a sua sponte en banc call.”
The case is United States v. Easterday, 07-10347.
Copyright 2008, Metropolitan News Company