Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Defining Willfullness: The Role of the Defendant's Ability to Pay in United States v. Easterday
Elizabeth M. Fialkowski
In United States v. Easterday, the Ninth Circuit affirmed the district court’s refusal to give an “ability to pay” instruction in the criminal tax prosecution of Jack Easterday for “willful failure to pay over employee payroll taxes” in violation of section 7202. The affirmation resulted in a thirty-month prison sentence for Easterday. The Ninth Circuit held that, in determining “willfulness” for purposes of section 7202, the government is not required to prove that the defendant had the financial ability to pay the taxes owed, and thus the defendant cannot defend the violation on the ground that he lacked funds to meet his tax burden.
The applicable statutory provision, section 7202, covers the “willful failure to collect or pay over tax.” Under section 7202, it is a felony for an individual who is required by law to “collect, account for, and pay over any tax,” to willfully fail to collect or truthfully account for and pay over that tax. If convicted, the individual can be fined up to $10,000, and can also be imprisoned for up to five years. In times of economic uncertainty, the issue of whether evidence of an inability to pay is relevant to rebut willfulness will become increasingly important.
This Note will argue that the Ninth Circuit’s decision in United States v. Easterday was erroneous because the defendant should have been allowed to refute the “willfulness” standard of a “voluntary, intentional violation of a known legal duty” by including an analysis of the his ability to pay. Part I will examine the applicable statute, section 7202, including judicial decisions that defined the willfulness standard and explaining the “ability to pay” rule. Part II will introduce the Ninth Circuit case of United States v. Easterday and analyze both the majority and minority opinions in the case. Part III will argue that the majority erred in deciding Easterday because the district court could have admitted evidence of Easterday’s ability to pay to refute “willfulness” while remaining within the bounds of established case law.