U.S. v. Easterday

• Decision Date: 22 August 2008
• Docket Number: No. 07-10347.,07-10347.
• Citation: 564 F.3d 1004
• Parties: UNITED STATES of America, Plaintiff-Appellee, v. Jack E. EASTERDAY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

564 F.3d 1004

UNITED STATES of America, Plaintiff-Appellee, v. Jack E. EASTERDAY, Defendant-Appellant.

No. 07-10347.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 10, 2008.

Filed August 22, 2008.

Amended April 27, 2009.

Gregory V. Davis, Washington, D.C., for plaintiff-appellee United States of America.

Dennis P. Riordan, San Francisco, CA, for defendant-appellant Jack E. Easterday.

Appeal from the United States District Court for the Northern District of California, Charles R. Breyer, District Judge, Presiding. D.C. No. CR-05-00150-CRB.

Before MARY M. SCHROEDER and N. RANDY SMITH, Circuit Judges, and VALERIE BAKER FAIRBANK,^* District Judge.

Opinion by Judge SCHROEDER; Dissent by Judge N.R. SMITH.

ORDER

The opinion filed August 22, 2008, and appearing at 539 F.3d 1176 (9th Cir.2008), is hereby amended. The amended opinion is filed concurrently with this Order.

With this amendment, Judge Schroeder has voted to deny the petition for rehearing en banc, and Judge Fairbank has so recommended. Judge N.R. Smith has voted to grant the petition for rehearing en banc.

The full court has been advised of the petition for rehearing en banc and no judge has requested a vote on whether to rehear the matter en banc. Fed. R.App. P. 35.

The petition for rehearing en banc is DENIED. No further petitions for rehearing or rehearing en banc will be accepted.

OPINION

SCHROEDER, Circuit Judge:

This case illustrates the enduring truth of Ben Franklin's sage observation that "nothing is certain but death and taxes." It is an appeal from a conviction for willful failure to pay over employee payroll taxes, in violation of 26 U.S.C. § 7202. The defendant-appellant, Jack Easterday, sought an "ability to pay instruction" in order to contend to the jury that his failure to pay over the taxes he owed was not "willful," because he had spent the money on other business expenses and therefore could not pay it to the government when it was due. The district court refused to give the instruction, and Easterday subsequently was convicted and sentenced to thirty months in prison.

The requested instruction was drawn from a portion of a 1975 decision of this court, United States v. Poll, 521 F.2d 329 (9th Cir. 1975), that we have never subsequently cited favorably in the context of a prosecution for failure to pay taxes. Poll in turn relied upon an earlier Ninth Circuit decision, United States v. Andros, 484 F.2d 531 (9th Cir.1973), that two other circuits have expressly rejected. See United States v. Tucker, 686 F.2d 230, 233 (5th Cir.1982); United States v. Ausmus, 774 F.2d 722, 725 (6th Cir.1985). Most significantly, the holding of Poll that formed the basis for the proposed instruction was effectively eradicated by subsequent Supreme Court authority.

Easterday contends that Poll is binding on us because this court has never expressly overruled it. The district court held that Poll was no longer good law. We agree with the district court. Poll's requirement that the government prove that the taxpayer had sufficient funds to pay the tax was premised on a definition of willfulness that included some element of evil motive. The Supreme Court subsequently rejected any such definition of willfulness in the tax statutes. See United States v. Pomponio, 429 U.S. 10, 12, 97 S.Ct. 22, 50 L.Ed.2d 12 (1976) (per curiam); see also Cheek v. U.S., 498 U.S. 192, 201-02, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991). "Willful" in the tax context means a voluntary, intentional violation of a known legal duty. See Cheek, 498 U.S. at 201-02, 111 S.Ct. 604; United States v. Powell, 955 F.2d 1206, 1211 (9th Cir.1992). In other words, if you know that you owe taxes and you do not pay them, you have acted willfully. Poll has continued to be referred to occasionally in other contexts, principally in the child support area. See United States v. Ballek, 170 F.3d 871, 874 (9th Cir.1999); H.R.Rep. No. 102-771, at 6 (1992). It is not, however, good tax law. We therefore affirm.

Background

Easterday operated a chain of nursing homes in Northern California through a parent corporation, Employee Equity Administration ("EEA"), and its subsidiaries. Between 1998 and 2005, the total payroll tax liability for EEA and its subsidiaries for the period from the fourth quarter of 1998 through the fourth quarter of 2005 was $44,864,162, of which $26,018,869 was paid. Although the companies' tax filings accurately stated its tax liabilities, Easterday, through the corporation, repeatedly failed to pay over to the Internal Revenue Service ("IRS") the full amount of payroll taxes due.

The IRS sent Easterday's companies numerous notices requesting payment of the delinquent taxes. When those notices did not result in payment, the IRS sent notices informing Easterday's companies of an intent to levy against each company's assets. Although Easterday was cooperative with the IRS and took full responsibility for the tax delinquency, his pattern of nonpayment continued. The IRS assessed liens against corporate accounts, but when payment was still not forthcoming, it eventually filed criminal charges. In 2005, the government charged Easterday with 109 counts of failure to pay over taxes in violation of 26 U.S.C. § 7202, with each count representing a different quarter in which the taxes of EEA and its subsidiaries were deficient.

Easterday did not dispute that he failed to pay the taxes when due. His defense was simply that he lacked the financial ability to comply with his tax obligations. Although the district court ruled that ability to pay was not relevant, Easterday was able to put on testimony that the nursing homes were struggling financially and he had trouble paying the bills, with losses of more than $20,000,000 between 1996 and 2005.

Easterday's witnesses testified, in essence, that Easterday did not pay the payroll taxes because he used the money to pay other company bills in order to keep the nursing homes operational. Easterday asked the court to instruct the jury that the government, in order to prove a willful failure to pay taxes, must prove that at the time the taxes were due, the taxpayer had the funds, and hence the ability to pay the obligation. Easterday's proposed instruction was drawn in part from the opinion in United States v. Poll, and provided as follows:

The word "willfully" means a voluntary, intentional violation of a known legal duty, and not through ignorance, mistake, negligence, even gross negligence, or accident. In other words, the defendant must have acted voluntarily and intentionally and with the specific intent to do something he knew the law prohibited; that is to say, with the intent either to disobey or disregard the law.

. . . .

In the context of this case, in order for the government to meet its burden of willfulness beyond a reasonable doubt, it must prove that on the dates the taxes were due the taxpayer possessed sufficient funds to be able to meet his legal obligations to the government or that the lack of sufficient funds on such date was created by (or was the result of) a voluntary and intentional act, without justification in light of the financial circumstances of the taxpayer.

The district court declined to give this instruction, but did instruct the jury that the government had the burden of proving that the defendant did not have a good faith belief that he was complying with the tax laws, and that a defendant's belief could be in good faith even if it was unreasonable. The court also instructed the jury that "[t]he tax laws do not permit an employer to choose to use the monies held in trust for the United States for other purposes, such as to pay business expenses."

Following a six-day jury trial, Easterday was found guilty on 107 of 109 counts. The district court denied Easterday's motion for a judgment of acquittal or a new trial and sentenced him to 30 months imprisonment, followed by three years supervised release. Easterday now appeals from the judgment and sentence.

Easterday's principal contention on appeal is that pursuant to United States v. Poll, he was entitled to a jury instruction on the ability to pay "element" of 26 U.S.C. § 7202, and he was entitled to present evidence to negate that "element." Accordingly, Easterday argues that the district court erred in declining to give a Poll instruction and that it abused its discretion by limiting the testimony Easterday could offer concerning the financial situation of, and burdens on, his companies.

Discussion

The statute under which Easterday was found guilty is 26 U.S.C. § 7202, a fairly rarely invoked provision that criminalizes a willful failure to pay over employees' federal income withholding taxes on wages. Section 7202 provides that "[a]ny person required ... to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall ... be guilty of a felony."

The main issue in this appeal, as well as a subject of considerable debate before the district court, pertains to the status of Poll, and to what constitutes "willfulness" under the Tax Code. Specifically, the parties disagree as to whether "willfulness" requires an affirmative showing by the government that a defendant had an ability to pay his tax obligations and whether it can be negated by a showing that a defendant was financially unable to satisfy his tax debt. This court has not meaningfully revisited this issue since the 1970s.

In United States v. Andros, 484 F.2d 531, 533-34 (9th Cir.1973), we said that to establish the "wilful failure to pay the taxes assessed," the government must prove that, on the date the taxes were due, the taxpayer possessed "sufficient funds" to pay the taxes, and that the taxpayer voluntarily and intentionally did not pay them. We went on to say: "the requirement of wilfulness connotes `bad faith or evil intent' or `evil motive and want of justification...