Petition for Writ of Certiorari — Easterday v. United States (No. 09-28)

Supreme Court, U.S.

\ — (I) PILE D

No. 09- 09-28 JUL 2 - 2009

OFFICE OF THE CLERK

In The

Supreme Court of the Anited States

¢

JACK EASTERDAY,

Petitioner,

VS.

UNITED STATES,

Respondent.

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

DENNIS RIORDAN*

DONALD HORGAN

TED SAMPSELL JONES

RIORDAN & HORGAN

523 Octavia Street

San Francisco, CA 94102

(415) 431-3471

Attorneys for Petitioner

Jack Easterday

“Counsel of Record

UCKLE LAW BRIEF PRINTING CO (800) 225-6964

OR CALL COLLECT (402) 342-2831

IT.

QUESTIONS PRESENTED

IS FINANCIAL HARDSHIP A DEFENSE TO

CIVIL AND CRIMINAL TAX PENALTIES FOR

FAILURE TO PAY PAYROLL TAXES, A QUES-

TION ON WHICH THE CIRCUIT COURTS OF

APPEAL ARE IN CONFLICT?

IS THERE A DEFENSE OF NECESSITY IN

FEDERAL CRIMINAL CASES, AN ISSUE THAT

THIS COURT HAS RECOGNIZED IS IMPOR-

TANT BUT THUS FAR LEFT UNDECIDED?

il

TABLE OF CONTENTS

Page

QUES TIONS Frere oan sneecccs5cc.00.0....00000. i

TABLE OF AUTHORITIES. .................ssecccccscscvees iv

CITATION OF OPINION BELOW. ...................... 1

STATEMENT OF JURISDICTION ..................... 1

STATUTORY AND REGULATORY PROVISIONS

TIN VOL Be cr ees nce tdcccovecnssscccecevcess 2

STATEMENT OF THE CASE....................c0ceeee008 2

REASONS FOR GRANTING THE WRIT ........... 5

1. Review is Necessary to Settle a Division of

Authority Regarding Whether Inability to

Pay is a Defense to Civil or Criminal

Penalties for Failing to Pay Payroll Taxes... 6

2. Review is Necessary to Settle Whether

There is a Specific Necessity Defense to

Federal Tax Prosecutions and Also

Whether There is a General Necessity

Defense to Federal Crimes.....................0.... 11

CONC] Urea ccscceecee 15

APPENDIX

United States v. Easterday, 564 F.3d 1004 (9th

Cir. 2009), including Order Denying Petition

for eRe reece scencsccsc sconces App. l

District Cousat sai roicacssescccc0.0.00.. App. 27

District Court Order Denying Motion for Judg-

ment of Acquittal or Alternatively for a New

TYial .......ccscseeeee EE iredaccacasc00.<0. ...App. 38

111

TABLE OF CONTENTS — Continued

Be dare © ND cova tcccccesvississdcve eee App. 46

BO AAs 0 Ee cise ae App. 51

re Fes Be RO BPE vies cesrctcicesrcen App. 54

iV

TABLE OF AUTHORITIES

Page

CASES

Bemiar vi. £705, SOG UB, Te CY sine scincincssssccsnvsenionsss 6

Carcieri v. Salazar, 129 S. Ct. 1058 (2009) ................. 9

Cheek v. United States, 498 U.S. 192 (1991) ............. 10

Diamond Plating Co. v. United States, 390 F.3d

eR rs SE isis paccticavacecceeenctanacasoigscdsschissesines 7

Dixon v. United States, 548 U.S. 1 (2006).................. 13

East Wind Corp., Inc. v. United States, 196 F.3d

Oe Se ee | I isis ccc dincscicsaseeeceedaseclcrsenieee 7,9

Fran Corp. v. United States, 164 F.3d 814 (2d

ee 7 I rca do ese ers edatac van nctariechdcnacieen cececueaiacsaseate 7

Queen v. Dudley & Stephens, 14 QB 273 (1884)........ 12

Slodov v. United States, 436 U.S. 238 (1978).......... 6,7

Staff IT, Inc. v. United States, 482 F.3d 792 (5th

EEF aikcaccsscavtaeeauseu. aractireescareseradntinia eave clinics 7

United States v. Bailey, 444 U.S. 394 (1980)............. 12

United States v. Baker, 523 F.3d 1141 (10th Cir.

| ARENA Rl BPO nA eRe RNA SE tee Run A oF fu Rene sone AOE PE 13

United States v. Brewery, 33 F.3d 589 (1994).............. 7

United States v. Easterday, 539 F.3d 1176 (9th

RE cn. oe ogi vecbagcteaneinelamaseeeiace ie: 1,4,5

United States v. Easterday, 564 F.3d 1004 (9th

o_o ae rn REAR PRON RAT RPO INE ER eet ny 1.5

United States v. Hludson, 11 U.S. 32, 7 Cranch

ae age es 8 Oe ES olan scossioavknccnusutnssasendienseous 12

TABLE OF AUTHORITIES — Continued

Page

United States v. Oakland Cannabis Buyers’

Cooperative, 532 U.S. 483 (2001)...................66 41, I3

United States v. Poll, 521 F.2d 329 (9th Cir.

RENE roe Tee nOPE COOP oP na mane NiO 3,4, 7,8

United States v. Pomponio, 429 U.S. 10 (1976)........... 4

United States v. Rutherford, 442 U.S. 544

5g. SOIR RH NER OS REO Tere POG of eNO AME ORE RR 12

Van Camp & Bennion v. United States, 251

ae ee CE Ee ED en vvinsvesvccenesincassorveciuseccaseesdvncees 8

STATUTES AND REGULATIONS

ee eo cos nn pyc ons vasencgdavdsuveasessnvacounierseanaiceateees 3

Oe on ann ca cl ovawusiidide seeenane eee eT 6

NN os on i evivn cin xvas suvedinsanesaicey eerie eee 6

RE I so cosine Snga'svedavedRawsaewalecedeane nade 2, 7,8

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Re eo os cca canecugshacndactanchvekvacnnicenaeben 2, 7,8

EE bone cy ncasexensovecenasesesonsannbesieneeneuel passim

A PE pc casas vdxnsceesscsnsncviesusateyennoeenee eee 6

PN oe nvvncvinsanacansmuvevsercace gener 7

ee ey os cen cienspa sce enarsasavinnnencheeendeeee eee 2

28 U.S.C. § 1291 ........... PTR R Nahe A cae 4

yom we Ae 5 E.On enn tey See tenne Suan

es aa BRE Beis dwkccivadasciuercncsaccuncseuaneaesend 9

v1

TABLE OF AUTHORITIES — Continued

Page

MISCELLANEOUS

2B N. Singer, Sutherland on Statutory Con-

struction § 51.1 (7th ed. 2008) ..........0.00..000.... eae 9

ALI, Model Penal Code 3.02 (1962)......................0c000. li

Jay S. Bybee, Memorandum for Alberto R.

Gonzales, Counsel to the President, from Jay

S. Bybee, Assistant Attorney General, Office

of Legal Counsel, Re: Standards of Conduct

for Interrogation under 18 U.S.C. $$ 2340-

I RN Bg IE ins. caicacatuvassetacensesnsiecencesesesvece 14

LaFave, Criminal Law § 10.1(a) (4th ed. 2003)......... 11

Eric A. Posner & Adrian Vermeule, Should

Coercive Interrogation Be Legal?, 104 Mich.

i a saashanwass dcuueusabiadedeneeseces 14

Stephen S. Schwartz, /s There a Common Law

Necessity Defense in Federal Criminal Law?,

TEP Gs. GoM, Bas BROW, LOW (OOD ossccscescsscensssescesvessesent 13

PETITION FOR WRIT OF CERTIORARI

Petitioner Jack Easterday respectfully prays that

a Writ of Certiorari issue to review the judgment and

decision of the of United States Court of Appeal for

the Ninth Circuit entered on April 27, 2009.

‘

CITATION OF OPINION BELOW

The published opinion of the United States Court

of Appeal for the Ninth Circuit is reproduced at

Appendix (“App.”) 1-26. The official reporter citation

of the opinion is United States v. Easterday, 564 F.3d

1004 (9th Cir. 2009).

STATEMENT OF JURISDICTION

c

On August 22, 2008, a divided three-judge panel

of the United States Court of Appeal for the Ninth

Circuit issued a published opinion affirming peti-

tioner’s criminal conviction. United States v. Easter-

day, 539 F.3d 1176 (9th Cir. 2008). Petitioner filed a

timely petition for rehearing en banc. On April 27,

2009, the same panel, again by a 2-1 vote, issued an

order amending the opinion and denying the petition

for rehearing en banc. l/nited States v. Easterday, 564

F.3d 1004 (9th Cir. 2009). The amending order is

reproduced at App. 2.

2

The jurisdiction of this Court is invoked under 28

U.S.C. § 1254.

STATUTORY AND REGULATORY

PROVISIONS INVOLVED

Section 7202 of Title 26 of tre United States Code

states:

Any person required under this title 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, in addition to other penalties

provided by law, be guilty of a felony and,

upon conviction thereof, shall be fined not

more than $ 10,000, or imprisoned not more

than 5 years, or both, together with the costs

of prosecution.

Sections 6651 and 6656 of Title 26 of the United

States Code are reproduced at App. 46-53. Section

301.6651-1 of Title 26 of the Code of Federal

Regulations is reproduced at App. 54-66.

¢

STATEMENT OF THE CASE

Petitioner Jack Easterday was convicted of

failing to pay payroll taxes in violation of 26 U.S.C.

§ 7202. Mr. Easterday owned and operated several

nursing homes in Northern California. Between 1998

and 2005, he failed to pay the full amount of payroll

3

taxes due. Mr. Easterday consistently filed tax re-

turns that correctly reflected his tax liability, but

during the charged period, he only paid approxi-

mately two-thirds of the amount due. As a result, he

fell millions of dollars behind in his tax payments,

and he was ultimately charged with over 100 criminal

counts under § 7202. He was tried, convicted, and

sentenced to prison for thirty months in the District

Court for the Northern District of California, which

had jurisdiction pursuant to 18 U.S.C. § 3231.

At trial, Mr. Easterday sought to establish that

he had good cause for failing to pay the full amount

due. He sought to demonstrate that his nursing

homes faced extraordinarily difficult financial circum-

stances, and that as a result, he was forced to choose

between paying the full amount of his tax liability

and continuing to operate the nursing homes, which

provided critical care for hundreds of sick and elderly

clients. He could not afford to do both, and he sought

to show that using tax funds to pay other obligations

was the lesser of two evils.

Consistent with that defense of financial hard-

ship, Mr. Easterday sought to present evidence that

would have demonstrated the nursing homes’ trou-

bled finances. He also sought a jury instruction that

inability to pay was a defense to criminal tax liability

under § 7202.

Mr. Easterday’s proffered evidence and requested

jury instruction were based on the Ninth Circuit’s

decision in United States v. Poll, 521 F.2d 329 (9th

4

Cir. 1975). In Poll, the Ninth Circuit established an

inability-to-pay defense in criminal cases. Poll held

that in order to obtain a conviction under § 7202, the

government “must establish beyond a _ reasonable

doubt that at the time payment was due the taxpayer

possessed sufficient funds to enable him to meet his

obligation.” Jd. at 333.

Although neither this Court nor the Ninth Cir-

cuit had ever explicitly overruled Poll, the district

court held that Poll was no longer binding law. See

App. 41-45. It thus denied Mr. Easterday’s request for

a jury instruction on inability to pay, and it also

excluded much of Mr. Easterday’s evidence regarding

financial distress.

Mr. Easterday timely appealed to the Ninth

Circuit, which had jurisdiction under 28 U.S.C.

§ 1291. He argued that Poll remained good law, and

thus that the district court had erred by rejecting his

instruction and excluding his evidence. A divided

panel of the Ninth Circuit affirmed his conviction.

United States v. Easterday, 539 F.3d 1176 (9th Cir.

2008). The majority conceded that the Ninth Circuit

had “not ... explicitly overruled Poll.” 539 F.3d at

1181. It nonetheless concluded that Poll was irrecon-

cilable with this Court’s ruling in United States v.

Pomponio, 429 U.S. 10 (1976). Td.

Judge N. Randy Smith dissented. He argued that

“Pomponio also did not overrule Poll because

Pomponio and Poll address different issues.” 539 F.3d

at 1185 (Smith, J., dissenting). According to Judge

ul

Smith, the judges in the majority had “chosen to

write around circuit precedent in order to avoid a

result that they do not like.” Jd. at 1183.

Mr. Easterday timely filed a petition for rehear-

ing en banc. On April 27, 2009, the panel issued an

order amending the opinion and denying his petition.

App. 1-17; United States v. Easterday, 564 F.3d at

1005-1011 (9th Cir. 2009). Judge Smith once again

dissented. App. 18-26; 564 F.3d at 1011-1015.

Mr. Easterday now petitions this Court for a Writ

of Certiorari from the decision of the Ninth Circuit

Court of Appeals.

REASONS FOR GRANTING THE WRIT

The panel below arguably violated the law by

overruling prior Ninth Circuit precedent without con-

vening an en banc panel. See 564 F.3d at 1012 (Smith,

J., dissenting). But even setting that issue to one

side, there are two reasons why this Court should

grant review.

First, review is necessary to settle a complicated

split of authority among the circuit courts. While the

ruling below holds that ability to pay is irrelevant in

criminal prosecutions under 26 U.S.C. § 7202, several

circuits, including the Ninth Circuit, have ruled, and

continue to hold, that inability to pay is a defense to

civil tax penalties for failing to pay over payroll taxes.

6

Second, review is warranted to settle an impor-

tant question of federal law — namely, whether in the

absence of contrary direction from Congress, the com-

mon law defense of necessity exists for federal crimes.

That question has never been clearly settled by this

Court, and it should be now.

1. Review is Necessary to Settle a Division of

Authority Regarding Whether Inability to

Pay is a Defense to Civil or Criminal Pen-

alties for Failing to Pay Payroll Taxes

In order to fund the nation’s vast entitlement

programs, employers are required to withhold payroll

taxes from their employees. 26 U.S.C. §§ 3101, 3102.

Withheld funds are held “in trust for the United

States,” id. § 7501(a),’ and must be paid to the gov-

ernment in quarterly installments.

The IRS has a variety of mechanisms, both civil

and criminal, to ensure that employers pay over their

employees’ payroll taxes. See Slodov v. United States,

436 U.S. 238, 243-245 (1978). First, if an employer

fails to comply with its obligations, the IRS may

require creation of a special, segregated bank account

' As this Court has recognized, however, the § 7501 trust “is

radically diflerent from the common-law paradigm” trust, in

part because the trustee is not required to segregate trust

assets. Begier v. IRS, 496 U.S. 53, 62 (1990). Congress’s primary

purpose in creating the § 7501 “trust” was to give the federal

government priority over other creditors in bankruptcy pro-

ceedings. See td. at 63-66

for payroll taxes. 26 U.S.C. § 7512. Second, the IRS

may pursue civil penalties (in the form of percentage

fines) for failure to make timely payments. /d.

§§ 6651, 6656. Third, and most seriously, the govern-

ment may pursue criminal penalties for willful failure

to pay. Id. § 7202.

Payroll trust funds are undoubtedly a “tempting

source of ready cash” for corporations, especially cor-

porations in financial distress. Slodov, 4386 U.S. at

243. The legal question presented here is whether a

showing of financial distress can ever constitute a

defense to the civil or criminal penalties provided by

the Internal Revenue Code. On that question, there is

currently a division of authority among the circuits.

As noted above, in Poll, the Ninth Circuit estab-

lished an inability to pay defense in criminal cases.

The Sixth Circuit was the next court to address the

question. In United States v. Brewery, 33 F.3d 589,

592 (1994), it held that because payroll taxes are held

in trust, financial distress can never constitute rea-

sonable cause for failure to pay payroll taxes. Several

other circuits, however, subsequently reached a

contrary result — they have held that in at least some

circumstances, a showing of financial hardship may

constitute a defense to the civil penalties provided in

§§ 6651 and 6656. See Diamond Plating Co. v. United

States, 390 F.3d 1035, 1038 (7th Cir. 2004); Kast Wind

Corp., Inc. v. United States, 196 F.3d 499, 507-508 (3d

Cir. 1999); Fran Corp. v. United States, 164 F.3d 814,

819 (2d Cir. 1999); see also Staff IT, Inc. v. United

8

States, 482 F.3d 792, 794 (5th Cir. 2007) (recognizing

the circuit split but declining to take a side).

The Ninth Circuit’s ruling in this case creates an

even more complicated — and more senseless — divi-

sion of authority. The Ninth Circuit had already held

that inability to pay can constitute a defense to civil

tax penalties. See Van Camp & Bennion v. United

States, 251 F.3d 862 (9th Cir. 2001). But by overruling

Poll and rejecting Mr. Easterday’s appeal, the Ninth

Circuit has now held that inability to pay cannot

constitute a defense to criminal tax penalties.”

Thus, under the Ninth Circuit’s current law, an

employer who can demonstrate serious financial

hardship may be liable for criminal penalties under

§ 7202 even though he may not be liable for civil

penaities under §§ 6651 and 6656. That result makes

sense neither as a matter of statutory interpretation

nor as a matter of logic.

Neither the civil statutes nor the criminal statute

explicitly mention financial distress. The criminal

statute states that criminal penalties may be imposed

only where an employer “willfully fails” to pay over

payroll taxes. 26 U.S.C. § 7202. The civil statute

states that civil penalties may be imposed for failures

to pay unless such failures are “due to reasonable

* Although both Mr. Easterday and the government dis-

cussed the applicability of Van Camp in their arguments to the

panel, the panel did not attempt to reconcile its holding with

Van Camp. In fact, it failed to cite Van Carp.

9

cause and not due to willful neglect.” 26 U.S.C.

§ 6651(a) (reproduced in full at App. 46-47). In other

words, as a textual matter, neither statute mentions

ability to pay, but both statutes rest liability on

willfulness. The Treasury regulations interpreting the

civil provision state that:

A failure to pay will be considered to be due

to reasonable cause to the extent that the

taxpayer has made a satisfactory showing

that he exercised ordinary business care and

prudence in providing for payment of his tax

liability and was nevertheless either unable

to pay the tax or would suffer an undue

hardship . .. if he paid on the due date.

26 C.F.R. § 301.6651-1(c)(1) (reproduced in full at

App. 58-60). Thus, the Treasury Department itself

has concluded that the willfulness provision in the

civil statute implicitly provides that undue financial

hardship negates liability for civil penalties. A major-

ity of circuit courts have in turn held that taxpayers

may not be liable if they “chose to pay other creditors

and employees instead of the IRS” so long as that

decision was reasonable in the exercise of ordinary

business prudence. East Wind, 196 F.3d at 506.

It is a fundamental principle of statutory con-

struction that terms should be interpreted consis-

tently with their use in other statutes, especially

other statutes concerning the same subject matter.

See Carcieri v. Salazar, 129 S. Ct. 1058, 1064 (2009):

2B N. Singer, Sutherland on Statutory Construction

§ 51.1 (7th ed. 2008) (discussing the “principle that

10

statutes in pari materia should be construed togeth-

er”). Absent an explicit direction to the contrary from

Congress, the criminal penalty provision should be

read in pari materia with the civil penalty provision.

Thus, if willfulness in the civil statute may be ne-

gated by a showing of financial hardship, willfulness

in the criminal statute may also be negated by a

showing of financial hardship.

Moreover, even aside from the principles of

statutory construction, it makes no sense as a matter

of policy that criminal tax liability would be broader

than civil tax liability. Civil tax liability is intended to

be broader than criminal tax liability. See e.g., Cheek

v. United States, 498 U.S. 192, 207-209 (1991) (Scalia,

J., concurring). It thus defies logic to allow a financial

hardship defense to the former but not the latter. If

anything, the defenses available to criminal sanctions

ought to be broader. At a minimum, given that finan-

cial hardship has been recognized by several circuits

as a defense to civil liability, it should also be recog-

nized as a defense to criminal liability.

Prior to the Ninth Circuit’s ruling in this case,

there was already a division of authority among the

circuits as to whether financial distress constitutes a

defense to civil tax penalties. The Ninth Circuit’s

ruling below has added to the confusion by creating a

new division of authority between civil and criminal

cases. The taxpayer is caught in the middle. Is it true

that a taxpayer may not be liable if they “chose to pay

other creditors and employees instead of the IRS” so

long as that decision was reasonable in the exercise of

11

ordinary business prudence, as the Third Circuit and

others have held? Or will the taxpayer suffer a

substantial prison term if he follows that rule, as

happened to Mr. Easterday? Review is necessary to

clarify the law and to eliminate the growing confusion

in the lower courts.

2. Review is Necessary to Settle Whether

There is a Specific Necessity Defense to

Federal Tax Prosecutions and Also Wheth-

er There is a General Necessity Defense to

Federal Crimes

In addition to settling the specific conflict dis-

cussed above, review is also warranted for a broader

reason: to settle whether there exists a general neces-

sity or “choice-of-evils” defense in federal law. The

necessity defense exculpates a defendant who com-

mits a crime in order to avoid some greater harm or

evil. See LaFave, Criminal Law § 10.1(a) at 523 (4th

ed. 2003); see also ALI, Model Penal Code § 3.02

(1962) (“Conduct which the actor believes to be neces-

sary to avoid a harm or evil to himself or another is

justifiable, provided that ... the harm or evil sought

to be avoided by such conduct is greater than that

sought to be prevented by the law defining the offense

charged... .”).

This Court addressed the necessity defense in

United States v. Oakland Cannabis Buyers’ Cooper-

ative, 532 U.S. 483 (2001). In that case, the Cooper-

ative argued that the Controlled Substances Act

12

contained an implicit necessity defense. This Court

rejected that specific argument, but left open the im-

portant question regarding the general availability of

the necessity defense in federal criminal law.

[W]e note that it is an open question whether

federal courts ever have authority to recog-

nize a necessity defense not provided by

statute. A necessity defense “traditionally

covered the situation where physical forces

beyond the actor’s control rendered illegal

conduct the lesser of two evils.” United States

v. Bailey, 444 U.S. 394, 410 (1980). Even at

common law, the defense of necessity was

somewhat controversial. See, e.g., Queen uv.

Dudley & Stephens, 14 QB 273 (1884). And

under our constitutional system, in which

federal crimes are defined by statute rather

than by common law, see United States v.

Hudson, 11 U.S. 32, 7 Cranch 32, 34, 3 L. Ed.

259 (1812), it is especially so. As we have

stated: “Whether, as a policy matter, an

exemption should be created is a question for

legislative judgment, not judicial inference.”

United States v. Rutherford, 442 U.S. 544,

559 (1979). Nonetheless, we recognize that

this Court has discussed the possibility of

a necessity defense without altogether re-

jecting it. See, e.g., Bailey, supra, at 415.

We need not decide, however, whether neces-

sity can ever be a defense when the federal

statute does not expressly provide for it. In

this case, to resolve the question presented,

we need only recognize that a medical

necessity exception for marijuana is at odds

13

with the terms of the Controlled Substances

Act. The statute, to be sure, does not explic-

itly abrogate the defense. But its provisions

leave no doubt that the defense is unavail-

able.

Id. at 490-491 (footnotes omitted).

The concurring opinion agreed with the specific

holding but argued that “our precedent has expressed

no doubt about the viability of the common-law de-

fense, even in the context of federal criminal statutes

that do not provide for it in so many words.” /d. at

501 (Stevens, J., concurring).

Several lower courts and commentators inter-

preted the Oakland Cannabis Buyers’ Cooperative

opinion as questioning the validity of the necessity

defense. But only a few years later, in Dixon v. United

States, 548 U.S. 1, 13 (2006), this Court recognized an

implicit duress defense to the Safe Streets Act.

Duress and necessity are closely related defenses, so

the opinion in Dixon muddied the waters further.

This Court’s failure to take a clear stand on the

necessity defense has created confusion and uncer-

tainty in the lower courts. See, e.g., United States

v. Baker, 523 F.3d 1141, 1142 (10th Cir. 2008)

(McConnell, J., dissenting from denial of rehearing en

banc); see also Stephen S. Schwartz, Is There a

Common Law Necessity Defense in Federal Criminal

Law?, 75 U. Chi. L. Rev. 1259 (2008). The question,

moreover, has increased salience in light of recent

arguments that coercive interrogation of suspected

14

terrorists, even if otherwise illegal, might be justified

by necessity. See Eric A. Posner & Adrian Vermeule,

Should Coercive Interrogation Be Legal?, 104 Mich. L.

Rev. 671 (2006).°

A defense of financial distress to a criminal tax

prosecution is simply a species of the general neces-

sity defense. In this case, Mr. Easterday sought to

demonstrate that using payroll tax money to fund his

nursing homes was the lesser of two evils. He sought

to argue, in other words, that paying his taxes on

time would have required him to cease operations,

which would have caused immense distress to his

employees and, above all, to his elderly patients. The

district court, however, held as a matter of law that

no such defense is available in tax prosecutions. It

implicitly held, in other words, that necessity is never

a defense to prosecutions under § 7202.

The specific question of whether there is a choice-

of-evils defense to tax prosecutions is itself important.

Addressing that question would also allow this Court

to address the more general — and immensely impor-

tant — question of whether there is a necessity de-

fense available for federal crimes. That is a question

° See also Jay S. Bybee, Memorandum for Alberto R. Gonzales,

Counsel to the President, from Jay S. Bybee, Assistant Attorney

General, Office of Legal Counsel, Re: Standards of Conduct for

Interrogation under 18 U.S.C. $$ 2340-2340A at 2 (August l,

2002) (“We conclude that, under the current circumstances, ne-

cessity or self-defense may justify interrogation methods that

might violate Section 2340A [the criminal torture statute].”)

that this Court has intentionally left open in past

cases. This case offers an opportunity to settle it.

®

CONCLUSION

Mr. Easterday sought to present a defense that

due to the financial distress of his nursing homes,

paying his payroll taxes would have caused an im-

mensely greater evil. He was prevented from doing

so. Currentiy, there is a split of authority regarding

whether inability to pay constitutes a defense to civil

or criminal tax penalties. That split is one part of the

larger theoretical dispute about whether there is a

general necessity defense in federal law. This Court

should grant certiorari in order to settle these

important questions.

Dated: July 2, 2009

Respectfully submitted,

DENNIS RIORDAN

DONALD HORGAN

TED SAMPSELL JONES

Attorneys for Petitioner

App. l

2009 WL 1109422

United States Court of Appeals,

Ninth Circuit.

UNITED STATES of America, Plaintiff-Appellee,

v.

Jack E. EASTERDAY, Defendant-Appellant.

No. 07-10347.

Argued and Submitted June 10, 2008.

Filed Aug. 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, 1* District Judge.

Opinion by Judge SCHROEDER; Dissent by

Judge N.R. SMITH.

* The Honorable Valerie Baker Fairbank, United States

District Judge for the Central Distmet of California, sitting by

designation.

App. 2

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 con-

viction 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

App. 3

“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 sub-

sequently 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

cradicated by subsequent Supreme Court authority.

Kasterday 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 require-

ment 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.

App. 4

604, 112 L.Ed.2d 617 (1991). “Willful” in the tax con-

text 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

App. 5

of an intent to levy against each company’s assets.

Although Easterday was cooperative with the IRS

and took full responsibility for tne tax delinquency,

his pattern of nonpayment continued. The IRS as-

sessed 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 L/nited States v

Poll, and provided as follows:

App. 6

The word “willfully” means a voluntary,

intentional violation of a known legal duty,

and not through ignorance, mistake, neg-

ligence, 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 hght 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.”

App. 7

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 concern-

ing 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 “laJny 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

App. 8

court, pertains to the status of Poll, and to what

constitutes “willfulness” under the Tax Code. Spe-

cifically, the parties disagree as to whether “will-

fulness” 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 require-

ment of wilfulness connotes ‘bad faith or evil intent’

or ‘evil motive and want of justification in view of all

the financial circumstances of the taxpayer.” Jd. at

534 (quoting United States v. Bishop, 412 U.S. 346, 93

S.Ct. 2008, 36 L.Ed.2d 941 (1973)).

Two years later, in United States v. Poll, this

court apparently found plausible the taxpayer’s

contention that the failure to pay over the taxes could

not be considere. “willful” because he had offered to

prove “that the corporation lacked the liquid re-

sources to pay the full amounts due and that he

intended to make up the deficiencies later.” 521 F.2d

at 330-31. Citing to Andros and Spies v. United

States, 317 U.S. 492, 497-98, 63 S.Ct. 364, 87 L.Ed.

418 (1943), we held that Poll’s offer of proof regarding

App. 9

the liquid resources of the corporation was relevant to

the determination of whether the failure to pay over

taxes was willful. 521 F.2d at 332. In the language

that Easterday sought to include as part of the charge

to the jury in this case, we said:

[T]o establish willfulness the Government

must establish beyond a reasonable doubt

that at the time payment was due the

taxpayer possessed sufficient funds to enable

him to meet his obligation 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 view

of all the financial circumstances of the

taxpayer.

Id. at 333.

This holding in Poll regarding ability to pay

relied upon a definition of willfulness, taken from

Spies and Andros, that included an element of “evil

motive.” 521 F.2d at 333 (citing Spies, 317 U.S. at

498, 63 S.Ct. 364). We recognized this in Sorenson v.

United States, 521 F.2d 325, 328 n.3 (9th Cir.1975)

(quoting Spies, 317 U.S. at 498, 63 S.Ct. 364), where

we said: “The Poll holding is only applicable to the

criminal test of willfulnmess which requires ‘some

element of evil motive and want of justification in view

of all the financial circumstances of the taxpayer.’”

The year after this court decided Poll, the United

States Supreme Court decided United States v.

Pomponio, 429 U.S. 10, 97 S.Ct. 22, 50 L.Ed.2d 12

(1976) (per curiam), in which it repudiated this

App. 10

formulation of willfulness. In Pomponio, the Court

examined the various formulations that had been

used for the definition of “willfully” in the Tax Code.

See id. at 12, 97 S.Ct. 22. The Court attempted to

dissipate the confusion that had arisen from its

decision in United States v. Bishop, 412 U.S. 346, 93

S.Ct. 2008, 36 L.Ed.2d 941 (1973), in which the Court

referred to a number of formulations of the standard,

including the formulation it used in Spies, of “evil

motive and want of justification in view of all the

financial circumstances of the taxpayer.”

The troublesome paragraph in Bishop was the

following:

The Court, in fact, has recognized that the

word ‘willfully’ in these statutes generally

connotes a voluntary, intentional violation of

a known legal duty. It has formulated the

requirement of willfulness as ‘bad feith or

evil intent, United States v. Murdock, 290

U.S. 389, 398, 54 S.Ct. 223, 78 L.Ed. 381, or

‘evil motive and want of justification in view

of all the financial circumstances of the

taxpayer, Spies v. United States, 317 U.S.

492, 498, 63 S.Ct. 364, 87 L.Ed. 418, or

knowledge that the taxpayer ‘should have

reported more income than he did.’ Sansone

v. United States, 380 U.S. 343, 353, 85 S.Ct.

1004, 13 L.Ed.2d 882. See James v. United

States, 366 U.S. 213, 221, 81 S.Ct. 1052, 6

L.Ed.2d 246; McCarthy v. United States, 394

U.S. 459, 471, 89 S.Ct. 1166, 22 L.Ed.2d 418.

412 US. at 360, 93 S.Ct. 2008.

App. 11

The court in Pomponio endeavored to erase the

misconception that such different formulations, in-

cluding the “evil motive” formulation of Spies, ac-

tually established different standards. The Court

clarified that “willfulness” means a voluntary, inten-

tional violation of a known legal duty, and does not

“require[ ] proof of any [other] motivative.” 429 U.S.

at 12, 97 S.Ct. 22. The Court said, “Our references to

other formulations of the standard did not modify

[that] standard.” Id. The Court explained that Bishop

“did not ... hold that the term requires proof of any

motive other than an intentional violation of a known

legal duty.” Id.

Accordingly, the portion of our decision in Poll

which created an additional requirement of proving

ability to pay has been undermined by the Supreme

Court’s subsequent decision in Pomponio. Poll is not

consistent with the intervening authority of the

United States Supreme Court that must control our

decision here.

In support of his contention that Poll never-

theless remains good law, Easterday argues that

Pomponio is “coextensive” with this court’s earlier

determination in United States v. Hawk, 497 F.2d

365, 368 (9th Cir.1974), that neither bad purpose nor

evil motive is an independent element of willfulness.

Easterday reasons that because Poll stated that it

was consistent with Hawk, and Pomponio approved

Hawk, then Poll is still good law.

App. 12

This argument does not withstand close analysis.

Poll involved a charge of willful failure to collect or

pay over tax. Poll distinguished Hawk on the basis

that the offense charged in Hawk “was a willful

failure to file federal income tax returns.” Poll, 521

F.2d at 332 (emphasis in original). Therefore, instead

of following Hawk, Poll followed our earlier decision

in Andros because Andros involved prosecution of a

willful failure to pay a tax. Jd. Andros, in turn, had

followed the Supreme Court’s decision in Spies. In

Poll, we quoted at length from Spies, highlighting its

statement with respect to a charge of willful failure to

pay a tax, that “/w/e would expect willfulness in such

a case to include some element of evil motive and want

of justification in view of all the financial circum-

stances of the taxpayer.” Poll, 521 F.2d at 333 (citing

Spies, 317 U.S. at 498, 63 S.Ct. 364) (emphasis in

original). Because Poll applied the Spies “evil motive”

formulation of willfulnmess, and expressly distin-

guished Hawk, Poll held that financial circumstances

were relevant to proof of willfulness under 26 U.S.C.

§ 7202.

Later, in Pomponio, the Supreme Court approved

the willfulness formulation of Hawk, but disapproved

the “evil motive” formulation of Spies, holding that

the standard is the same in all tax contexts. It approved

the standard iterated in Bishop: “a voluntary, inten-

tional violation of a known legal duty,” and continued,

“fojur references to other formulations of the standard

did not modify the standard set forth in [Bishop].”

Pomponio, 429 U.S. at 12-13, 97 S.Ct. 22. Pomponio

App. 13

thus undermines the heart of Poll’s holding that

financial circumstances are relevant to a determination

of willfulness under § 7202, failure to collect or pay

over tax. This is because Pomponio expressly repu-

diates Spies’ “evil motive” formulation on which Poll

relied. 429 U.S. at 11-12, 97 S.Ct. 22.

The dissent, however, insists that the basis for

Poll’s requirement of proving an “ability to pay” has

not been undermined. It does so because it fails to

recognize that the Poll requirement was founded

upon the Spies formulation of willfulness that the

Supreme Court rejected in Pomponio. Although the

dissent agrees that Pomponio intended to do away

with the misconception that the “evil motive” for-

mulation of Spies established a different standard of

willfulness, the dissent fails to recognize that Poll’s

holding rested on just such a misconception.

This court, in Poll, thus held that the ability to

pay was relevant to the charge of willful failure to

collect or pay over tax because of Spies’ incorporation

of an element of “evil motive” into the requirement of

willfulness in such tax cases. After Pomponio, we

must hold that there is no longer any requirement of

evil motive, upon which Poll’s holding rested.

We therefore hold that insofar as Poll may be

interpreted as requiring the government, in a failure

to pay case under § 7202, to prove that defendant had

the money to pay the taxes when due, and allowing

the defendant to defend on the ground that he had

App. 14

spent the money for other expenses, Poll is incon-

sistent with Pomponio. It is also inconsistent with

common sense, for we think it unlikely that even

under Poll and Spies, a defendant could succeed in

arguing that he did not willfully fail to pay because

he spent the money on something else. Cf United

States v. Gilbert, 266 F.3d 1180, 1185 (9th Cir.2001)

(concluding that defendant’s “act of paying wages to

his employees, instead of remitting withholding taxes

to the IRS, shows that he voluntarily and inten-

tionally violated § 7202”).

Indeed, in rejecting Andros and Poll, two of our

sister circuits have made that very point. In United

States v. Tucker, 686 F.2d 230 (5th Cir.1982), a

prosecution for willfully failing to pay income taxes,

under 26 U.S.C. § 7203, the defendant argued that he

could not pay the taxes when they were due because

he had no assets to satisfy the debt and that his

failure to pay was not willful. The Fifth Circuit said

that “[t]his argument borders on the ridiculous. ...

[A] financial ability to pay the tax when it comes due

is not a prerequisite to criminal liability under § 7203.

Otherwise, a recalcitrant taxpayer could simply dis-

sipate his liquid assets at or near the time when his

taxes come due and thereby evade criminal liability.”

Id. at 233. In United States v. Ausmus, 774 F.2d 722,

725 (6th Cir.1985), the Sixth Circuit “rejected” the

language in Andros that suggested financial ability to

pay was relevant to criminal liability. The court said,

“[o]therwise, a recalcitrant taxpayer could spend his

money as fast as he earns it and evade criminal

App. 15

liability while not paying taxes as long as his bank

balance is zero when the taxpayer’s taxes are due.”

Id. Despite what we consider to be the unassailable

logic presented by our sister circuits here, Easterday

asks us to follow the contrary reasoning of Andros

and Poll essentially because we have never formally

repudiated it before now.

While we may not have explicitly overruled Poll

or Andros in the more than three decades since we

issued those opinions, neither have we cited them for

the proposition that Easterday asserts here. Poll is

not completely dead, for it has been used as a

shorthand term describing the standard of “willful

failure” to pay that has been discussed in the context

of child support. See United States v. Ballek, 170 F.3d

871, 874 (9th Cir.1999); H.R.Rep. No. 102-771, at 6

(1992). In the tax field, however, 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.

The only remaining question is whether we are

nevertheless bound by Poll because it has not been

overruled by an en banc court. Generally, a panel

opinion is binding on subsequent panels unless and

until overruled by an en banc decision of this circuit.

See, e.g., Ross Island Sand & Gravel v. Matson, 226

F.3d 1015, 1018 (9th Cir.2000) (per curiam) (“[A]bsent

a rehearing en banc, we are without authority to

overrule [controlling circuit precedent].”).

App. 16

In Miller v. Gammie, 335 F.3d 889 (9th Cir.2003),

we convened an en banc court to consider the

question of when a panel decision may be overruled

by intervening higher authority that, while not on an

identical issue or expressly repudiating the panel

decision, is inconsistent with its reasoning. We held

that en banc review is not required to overturn a case

where “intervening Supreme Court authority is

clearly irreconcilable with our prior circuit authority.”

Id. at 900. We explained that we must avoid incon-

sistencies between our decisions and the decisions of

a court of last resort. We said:

We must recognize that we are an

intermediate appellate court. A goal of our

circuit’s decisions, including panel and en

banc decisions, must be to preserve the

consistency of circuit law. The goal is codified

in procedures governing en banc review. See

28 U.S.C. §46; Fed. R.App. P. 35. That

objective, however, must not be pursued at

the expense of creating an inconsistency

between our circuit decisions and the rea-

soning of state or federal authority embodied

in a decision of a court of last resort.

We hold that the issues decided by the

higher court need not be identical in order to

be controlling. Rather, the relevant court of

last resort must have undercut the theory or

reasoning underlying the prior circuit

precedent in such a way that the cases are

clearly irreconcilable.

335 F.3d at 900.

App. 17

Pursuant to Miller, we conclude that it is not

necessary to convene an en banc court in order to hold

that Poll, and its antecedent Andros, are no longer

binding authority for the proposition that a defen-

dant’s ability to pay his tax liability is relevant to the

determination of willfulness under 26 U.S.C. § 7202.

In keeping with Pomponio, 429 U.S. at 12, 97 S.Ct.

22, and Cheek, 498 U.S. at 201-02, 111 S.Ct. 604, we

hold that willfulness does not require the government

to prove that a defendant had the ability to meet his

tax obligations. The district court’s refusal to give a

Poll instruction to the jury and the instruction it did

give on willfulness were thus proper.

For similar reasons, the district court did not

abuse its discretion in refusing to admit evidence

proffered by Easterday in order to show how and why

he spent money owed to the IRS to pay other business

expenses. Such evidence would have been relevant

only if a defendant were entitled to defend on the

ground that he had spent the tax money for other

needs. Because the financial circumstances of a

defendant do not bear on the determination of will-

fulness under § 7202, Easterday’s proffered evidence

was irrelevant, and the district court did not abuse its

discretion by excluding it. See Fed.R.Evid. 401.

Easterday’s remaining contentions are without

merit.

AFFIRMED.

App. 18

N.R. SMITH, Circuit Judge, dissenting:

In this case, I find myself between “the prover-

bial rock and a hard place.” I can either adhere to

precedent (with which I do not agree) or I can join the

majority and try to overrule bad circuit precedent.

Although I agree that United States v. Poll, 521 F.2d

329 (9th Cir.1975) is bad law, Poll is the controlling

law of this circuit and I understand a three-judge

panel is not able to undo precedent set forth by

another three-judge panel. See Hulteen v. AT & T Corp.,

498 F.3d 1001, 1009 (9th Cir.2007) (“A three-judge

panel must follow a prior circuit decision unless a

subsequent decision by a relevant court of last resort

either effectively overrules the decision in a case

‘closely on point’ or undercuts the reasoning under-

lying the circuit precedent rendering the cases

‘clearly irreconcilable.’” (citation omitted)). In my

view, because Poll is not irreconcilable with United

States v. Pomponio, 429 U.S. 10, 97 S.Ct. 22, 50 L.Ed.2d

12 (1976) (per curiam), we are required to either follow

Poll or make a sua sponte en banc call. See In re

Complaint of Ross Island Sand & Gravel, 226 F.3d

1015, 1018 (9th Cir.2000) (per curiam) (“[A]bsent a

rehearing en banc, we are without authority to over-

rule [controlling circuit precedent].”).

The majority, however, has chosen to write

around circuit precedent in order to avoid a result

that they do not like. I therefore respectfully dissent

for the following reasons. First, the majority legally

errs by finding that Poll is no longer good law.

Second, because of its error in finding that Poll was

App. 19

overruled by Pomponio, the majority incorrectly

affirms the district court in its refusal to instruct the

jury that the government must prove that Easterday

had the financial ability to meet his tax obligations.

Thus, I would reverse and remand for a new trial,

because Easterday’s ability to pay was an element of

the crime the government needed to prove beyond a

reasonable doubt.

I. Discussion

Poll discusses two separate questions: (a) will-

fulness, and (b) the relevance of evidence demon-

strating an inability to pay in order to rebut the

willfulness of a failure to pay over employee payroll

taxes. See 521 F.2d at 331 (“These actions raise two

questions: Viz. whether the foregoing definition of

‘willfully’ is correct and whether the evidence offered

to rebut the presence of willfulnmess was irrelevant

and inadmissible.”). In Poll, we held that the will-

fulness definition was correct, and that the evidence

of inability to pay was relevant to rebut the presence

of willfulness. See id.

The majority, however, incorrectly concludes that

“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.” In Poll, we based our

holding, in part, on Supreme Court precedent found

in Spies v. United States, 317 U.S. 492, 498, 63 S.Ct.

364, 87 L.Ed. 418 (1943), which states that “lwle

App. 20

would expect willfulness ... to include some element

of evil motive and want of justification in view of all

the financial circumstances of the taxpayer.” Poll, 521

F.2d at 333. We also, however, relied on United States

v. Hawk, 497 F.2d 365 (9th Cir.1974) to recognize that

it is “not error to fail to include the words ‘and/or evil

motive’” when determining the “willfully” standard.

Poll, 521 F.2d at 332.

The majority correctly recognizes that the

Supreme Court “in Pomponio endeavored to erase the

misconception that such different formulations, in-

cluding the ‘evil motive’ formulation of Spies, actually

established different standards.” In Pomponio, the Court

held that the term “willfully” does not require “proof

of any motive other than an intentional violation of a

known legal duty.” 429 U.S. at 12, 97 S.Ct. 22. The

Court explained the meaning of willfulness by stating

that

[he Court, in fact, has recognized that the

word “willfully” ... generally connotes a

voluntary, intentional violation of a known

legal duty. It has formulated the requirement

of willfulness as “bad faith or evil intent,” or

“evil motive and want of justification in view

of all the financial circumstances of the

taxpayer,” or knowledge that the taxpayer

“should have reported more income than he

did.”

Our references to other formulations of the

standard did not modify the standard [that

the word ‘willfully’... generally connotes a

App. 21

voluntary, intentional violation of a known

legal duty).

Id. (internal citations and quotations omitted).

Thus, even when the formulation of “evil motive”

or “bad purpose” is used in explaining the standard

for willfulness, the standard is not modified. Will-

fulness, in the context of tax laws, “simply means a

voluntary, intentional violation of a known legal

duty.” Jd. at 12-13, 97 S.Ct. 22 (emphasis added)

(citing Hawk, 497 F.2d at 368); see also Cheek uv.

United States, 498 U.S. 192, 201-02, 111 S.Ct. 604,

112 L.Ed.2d 617 (1991). There is no requirement the

government prove bad purpose or evil motive and

want of justification. See Pomponio, 429 U.S. at 12-

13, 97 S.Ct. 22; Hawk, 497 F.2d at 368. The holding in

Poll is therefore consistent with the Pompontio

definition of willfulness.

In Poll, we held that “to establish willfulness the

Government must establish beyond a _ reasonable

doubt that at the time payment was due the taxpayer

possessed sufficient funds to enable him to meet his

obligation 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 view of all

the financial circumstances of the taxpayer.” 521 F.2d

at 333 (emphasis added). Our holding in Poll therefore

relied on the same definition of willfulness as deter-

mined in Pomponio (“a voluntary, intentional violation

of a known legal duty”). In fact, Pomponio actually

App. 22

supports that idea that Poll used the correct def-

inition of willfulness. See 429 U.S. at 12-13, 97 S.Ct.

22 (noting that “as the other Courts of Appeals that

have considered the question have recognized, will-

fulness in this context simply means a voluntary,

intentional violation of a known legal duty” (citing

Hawk, 497 F.2d at 366-69)).

As discussed, our determination of willfulness in

Poll relied, in part, on Hawk, which the Supreme

Court approved in Pomponio. In Hawk, we noted that

the Supreme Court, in United States v. Murdock, 290

U.S. 389, 54 S.Ct. 223, 78 L.Ed. 381 (1933), held that

[Willfulness requires proof that the act was

done with knowledge it was wrongful. The

Court discussed a number of ways of ex-

pressing this type of specific intent, and

among the terms mentioned were “bad

purpose” and “evil motive.”

However, neither bad purpose nor evil

motive is an independent element of a willful

failure to file under § 7203. The term “evil

motive” is merely a “convenient shorthand

expression to distinguish liability based on

conscious wrongdoing from liability based on

mere carelessness or mistake.” Thus the

term expresses, in a brief way, the more

cumbersomely stated concept of specific

intent in Murdock, a concept the instructions

must ultimately convey. This, we think, was

all that Murdock — and Bishop — meant by

the use of that term.

App. 23

Hawk, 497 F.2d at 368 (internal citations omitted).

Thus, although Poll quoted Supreme Court

precedent regarding the inclusion of “evil motive and

want of justification” to determine willfulness, we

were referencing the “voluntary, intentional violation

of a known legal duty” formulation discussed in

Pomponio. Even though the wording was different,

Supreme Court precedent dictates that the meaning

underlying the term “willfulness” in Poll was the

same as used in Hawk and Pomponio. Poll’s definition

of willfulnmess was not premised on a belief that

willfulness requires an evil motive or bad purpose.

Poll, therefore, still holds that the ability to pay is

relevant to demonstrate willfulness, anc Pomponio

did not state otherwise. Although Pomponio did

discuss the willfulness question, see 429 U.S. at 12-

13, 97 S.Ct. 22, the portion of our decision in Poll that

created an additional requirement of proving ability

to pay was not undermined by Pomponio. The basis

for Poll’s requirement of proving ability to pay has

therefore not been eliminated. No subsequent decision

from this circuit or from a relevant court of last resort

has overruled the requirement presented in Poll that

evidence regarding inability to pay is relevant to

rebut the presence of willfulness. See Poll, 521 F.2d at

332 (“We believe, and so hold, that the defendant’s

offer of proof regarding the liquid resources of the

corporation and his intention to make up the defi-

ciencies later was relevant and admissible in his

effort to refute the willfulness of the failure to pay

over.”).

App. 24

Pomponio also did not overrule Poll because

Pomponio and Poll address different issues. In

Pomponio, the Supreme Court, affirming this court’s

holding in Hawk, held that evil motive is not an

independent element of filing false income tax

returns under 26 U.S.C. § 7206 and that instructions

regarding evil motive are thus unnecessary. 429 U.S.

at 12-13, 97 S.Ct. 22. In Poll, by contrast, this court

considered whether the government must prove that

a defendant was capabic of meeting his tax obli-

gations. 521 F.2d at 333. We specifically noted that

the ability to pay rule was not contrary to Hawk

because Hawk addressed “a [wlillful failure to file [a]

federal income tax return{ ],” not a crime “involving a

failure to pay.” 521 F.2d at 332. Because Pomponio

affirmed Hawk, and because this court held, in Poll,

that the ability to pay rule is consistent with Hawk,

Poll is consistent with Pomponio. Thus, Pomponio is

not “clearly irreconcilable” with Poll, and Poll remains

good law. See Hulteen, 498 F.3d at 1009. We are there-

fore bound by Poll because it has not been overruled

by an en banc court. See In re Complaint of Ross

Island Sand & Gravei, 226 F.3d at 1018.

The majority also references this court’s decision

in United States v. Gilbert, 266 F.3d 1180 (9th Cir.2001),

for the proposition that Poll is inconsistent with both

Pomponio and common sense. In Gilbert, the defen-

dant argued “that his failure to pay over the with-

holding tax was not willful because [his business] did

not have the funds to pay the taxes.” 266 F.3d at

1185. The government responded “that it presented

App. 25

sufficient evidence at trial that Gilbert voluntarily

and intentionally paid net wages to his employees

with knowledge that withholding taxes were not

being remitted to the IRS.” Jd. This court affirmed on

the basis that the evidence was sufficient. See Ia.

This court, however, did not explicitly or implicitly

overrule the ability to pay rule. The district court in

Gilbert had given a Poll instruction, and this court

did not criticize the district court for having done so.

In fact, this court did not reference the ability to pay

rule or Pomponio. This court instead discussed how

Poll did not concern “whether § 7202 required the

failure [to both account for and pay over withholding

tax], but instead addressed the issue of how to define

willfulness under § 7202.” Jd. at 1183. This court held

that “whether § 7202 required the failure to both

account for and pay over the tax, were dicta.” Jd. That

holding, however, does not address whether the

ability to pay can be used as a defense. Gilbert

therefore merely discusses whether § 7202 requires

the failure to both account for and pay over with-

holding tax. Thus, there is no basis in Gilbert for the

proposition that Pomponio overruled Poll.

To the extent the district court excluded evidence

regarding the financial situation of Easterday’s

companies and his inability to pay (based on its flawed

interpretation of Pomponio), the district court abused

its discretion. See United States v. Gallagher, 99 F.3d

329, 331-32 (9th Cir.1996). Moreover, the district

court’s failure to instruct the jury that the govern-

ment must prove that Easterday had the ability to

App. 26

meet his tax obligations is a constitutional error

“because the jury did not have the opportunity to find

each element of the crime beyond a reasonable doubt.”

Martinez v. Borg, 9387 F.2d 422, 423 (9th Cir.1991).

The district court rejected a large amount of evidence

regarding Easterday’s nursing homes’ financial

difficulties. Because this evidence “could rationally

lead to a contrary finding with respect to the omitted

element,” the district court’s error was not harmless

and Easterday is entitled to a new trial. Neder uv.

United States, 527 U.S. 1, 19, 119 S.Ct. 1827, 144

L.Ed.2d 35 (1999).

App. 27

United States District Court

Northern District of California

UNITED STATES JUDGMENTINA

OF AMERICA CRIMINAL CASE

Vv. (Filed July 19, 2007)

JACK EDWARD USDC Case Number:

EASTERDAY CR-05-00150-001 CRB

BOP Case Number:

DCAN305CRO000150-000

USM Number:

Defendant’s Attorney:

Ted Cassman/Lauren Disston

THE DEFENDANT:

[ ] pleaded guilty to count(s)

[ ] pleaded nolo contendere to count(s) __ which

was accepted by the court.

[x] was found guilty on counts 1 thru 44, 46 thru 107

and 109 of the Superseding Information after a

plea of not guilty

The defendant is adjudicated guilty of these offense(s):

Title & Nature of Offense

Section Offense Ended Counts

26 U.S.C. Willful Failure to 2005 1 through 44

§ 7202 ‘Truthfully account for 46 through

and Pay Over Taxes 107 and 109

The defendant is sentenced as provided in pages 2

through 6 of this judgment. The sentence is imposed

pursuant to the Sentencing Reform Act of 1984.

App. 28

[x] The defendant has been found not guilty on

counts 45 and 108 of the Superseding Information

[ } Count(s) _ _ (is) (are) dismissed on the motion

of the United States.

IT IS ORDERED that the defendant must notify

the United States Attorney for this district within 30

days of any change of name, residence, or mailing

address until all fines, restitution, costs, and special

assessments imposed by this judgment are fully paid.

If ordered to pay restitution, the defendant shall

notify the court and United States attorney of

material change in the defendant’s economic

circumstances.

July 13, 2007 ore

Date of Imposition of Judgment

/s/ Charles R. Breyer

Signature of Judicial Officer

Honorable Charles R. Breyer,

U.S. District Judge |

Name & Title of Judicial Officer

July 19, 2007

Date

IMPRISONMENT

The defendant is hereby committed to the

custody of the United States Bureau of Prisons to be

imprisoned for thirty (30) months on counts 1 through

44, thirty (30) months on counts 46 through 107 and

thirty (30) months on count 109 with eavcn count to

App. 29

run concurrent with one another for a total term of

thirty (30) months.

| } The court makes the following recommen-

dations to the Bureau of Prisons:

| | The defendant is remanded to the custody of

the United States Marshal. The appearance

bond is hereby exonerated.

[ ] The defendant shall surrender to the United

States Marshal for this district:

[ J] at (jJam.[]pm.on

| | as notified by the United States Marshal.

The appearance bond shall be deemed exon-

erated upon the surrender of the defendant.

[x] The defendant shall surrender for service of

sentence at the institution designated by the

Bureau of Prisons once judgment becomes final.

[ ] before 2:00 p.m. on

{ ] as notified by the United States Marshal.

{ } as notified by the Probation or Pretrial Services

Office.

The defendant is continued on bail pending his

appeal under the same conditions set at pretrial/post

trial.

RETURN

I have executed this judgment as follows:

App. 30

Defendant delivered on to at

with a certified copy of this judgment.

UNITED STATES MARSHAL

By

SUPERVISED RELEASE

Upon release from imprisonment, the defendant

shall be on supervised release for a term of three (3)

years as to counts 1 through 44, three (3) years on

counts 46 through 107 and three (3) years on count

109 with each count to run concurrent.

The defendant must report to the probation office in

the district to which the defendant is released within

72 hours of release from the custody of the Bureau of

Prisons.

The defendant shall not commit another federal, state

or local crime.

The defendant shall not unlawfully possess a

controlled substance. The defendant shall refrain

from any unlawful use of a controlled substance. The

defendant shall submit to one drug test within 15

days of release from imprisonment and two periodic

drug tests thereafter.

{x} The above drug testing condition is suspended

based on the court’s determination that the

App. 31

defendant poses a low risk of future substance

abuse. (Check if applicable. )

[x] The defendant shall not possess a firearm,

ammunition, destructive device, or any other

dangerous weapon. (Check if applicable.)

[x] The defendant shall cooperate in the collection

of DNA as directed by the probation officer.

(Check if applicable.)

[ ] The defendant shall register with the state sex

offender registration agency in the state where

the defendant resides, works, or is a student, as

directed by the probation officer. (Check if

applicable.)

{ ] The defendant shall participate in an approved

program for domestic violence. (Check if

applicable.)

If this judgment imposes a fine or restitution

obligation, it is a condition of supervised release

that the defendant pay in accordance with the

Schedule of Payments sheet of this judgment.

The defendant must comply with the standard

conditions that have been adopted by this court as

well as with any additional conditions in this

judgment.

STANDARD CONDITIONS

1) the defendant shall not leave the judicial district

without the permission of the court or probation

officer;

2)

4)

D)

6)

7)

8)

9)

1O)

App. 32

The defendant shall report to the probation officer

and shall submit a truthful and complete written

report within the first five days of each month;

The defendant shall answer truthfully all

inquiries by the probation officer and follow the

instructions of the probation officer;

The defendant shall support his or her de-

pendents and meet other family responsibilities;

The defendant shall work regularly at a lawful

occupation, unless excused by the _ probation

officer for schooling, training, or other acceptable

reasons;

The defendant shall notify the probation officer

at least ten days prior to any change in residence

or employment;

The defendant shall refrain from excessive use of

alcohol and shall not purchase, possess, use,

distribute, or administer any controlled substance

or paraphernalia related to any _ controlled

substances, except as prescribed by a physician;

The defendant shall not frequent places where

controlled substances are illegally sold, used,

distributed, or administered;

The defendant shall not associate with any

persons engaged in criminal activity and shall

not associate with any person convicted of a

felony unless granted permission to do so by the

probation officer;

The defendant shall permit a probation officer to

visit him or her at any time at home or elsewhere,

App. 33

and shall permit confiscation of any contraband

observed in plain view by the probation officer;

11) The defendant shall notify the probation officer

within seventy-two hours of being arrested or

questioned by a law enforcement officer;

12) The defendant shall not enter into any agree-

ment to act as an informer or a special agent of a

law enforcement agency without the permission

of the Court; and

13) As_ directed by the probation officer, the

defendant shall notify third parties of risks that

may be occasioned by the defendant’s [sic]

SPECIAL CONDITIONS OF SUPERVISION

1) The defendant shall pay any (restitution and

special assessment) (fine and special assessment)

(restitution, fine and special assessment) (special

assessment) that is imposed by this judgment, (and

that remains unpaid at the commencement of the

term of supervised release),

The defendant shall provide the probation officer

access to any requested financial information,

including tax returns, and shall authorize the

probation office to conduct credit checks and

obtain copies of income tax returns.

The defendant shall not open any new lines of

credit and/or incur new debt without the prior

permission of the probation officer.

App. 34

The defendant shall comply and cooperate with

the IRS in a good-faith effort to pay any out-

standing tax liability, to include any assessed

penalty and interest.

The defendant shall provide the U.S. Probation

Office with a copy of any written and approved

agreement with the IRS for the payment of any

outstanding tax liability, to include penalty and

interest, within 10 days from the execution of

such agreement.

The defendant shall timely and accurately file all

future income tax returns required by law during

the term of supervision, unless an extension of

time is granted by the IRS.

CRIMINAL MONETARY PENALTIES

The defendant must pay the total criminal

monetary penalties under the schedule of payments

on Sheet 6.

Assessment Fine Restitution

Totals: $10,700.00 $-0- $8,710,795.84

{ ] The determination of restitution is deferred

until __. An Amended Judgment in a Criminal

Case (AO 245C) will be entered after such

determination.

{ } The defendant shall make restitution (in-

cluding community restitution) to the following

payees in the amount listed helow.

App. 35

If the defendant makes a partial payment, each

payee shall receive an approximately proportional

payment unless specified otherwise in the priority

order or percentage payment column below. However,

pursuant to 18 U.S.C. § 3664(1), all nonfederal victims

must be paid before the United States is paid.

Name of Restitution Priority or

Payee(s) Total Loss* Ordered Percentage

United $8,710,795.84 $8,710,795.84

States

Totals: $8,710,795.84 $8,710,795.84

[x] Restitution amount ordered pursuant to plea

agreement $ 8,710,795.84

[x] The defendant must pay interest on restitution

and a fine of more than $2,500, unless the

restitution or fine is paid in full before the

fifteenth day after the date of the judgment,

pursuant to 18 U.S.C. § 3612(f). All of the pay-

ment options on Sheet 6, may be subject to

penalties for delinquency and default, pursuant

to 18 U.S.C. § 3612(g).

[ ] The court determined that the defendant does not

have the ability to pay interest, and it is ordered

that:

| | The interest requirement is waived for the

[ ]fine [ ] restitution.

* Findings for the total amount of losses are required under

Chapters 109A, 110, 110A, and 113A of Title 18 for offenses

committed on or after September 13, 1994, but before April 23,

1996

App. 36

[ | The interest requirement for the

[ ]fine [| J restitution is modified as follows:

SCHEDULE OF PAYMENTS

Having assessed the defendant’s ability to pay,

payment of the total criminal monetary penalties are

due as follows:

A [x] Lump sum payment of $10,700.00 due imme-

diately, balance due

[ | not later than

[x] im accordance (x)C, ( )D, ( )E, or (x) F below;

or

B { ] Payment to begin immediately (may be com-

bined with( ) C, ( )D, ( )F below); or

C [x] Payment in equal quarterly installments of

$25.00 after the date of this judgment; or

D [| ] Payment in equal (e.g., weekly, monthly, quar-

terly) installments of $ over a period of

(e.g., months or years), to commence (e.g.,

30 or 60 days) after release from imprisonment

to a term of supervision; or

E [ ] Payment during the term of supervised

release will commence within (e.g., 30 or 60

days) after release from imprisonment to a

term of supervision; or

F [x] Special instructions regarding the payment of

criminal monetary penalties: While incarcerated,

payment of restitution is due during impris-

onment at the rate of not less than $25 per quar-

ter and payment shall be through the Bureau

of Prisons [nmate Financial Responsibility

App. 37

Program. Restitution payments shall be made to

the Clerk of U.S. District Court, Attention:

Financial Unit, 450 Golden Gate Ave., Box

36060, San Francisco, CA 94102, in the amount

of $2,500.00 due on the 15th of each month.

Unless the court has expressly ordered otherwise, if

this judgment imposes imprisonment, payment of

criminal monetary penalties is due during impris-

onment. All criminal monetary penalties, except

those payments made through the Federal Bureau of

Prisons’ Inmate Financial Responsibiiity Program,

are made to the clerk of the court.

The defendant shall receive credit for all payments

previously made toward any criminal monetary pen-

alties imposed.

[ ] Joint and Several

Defendant |Case Total Joint Corresponding

and co- Numbers |Amount jand Payee (if

defendant |(including Several | appropriate)

Names defendant Amount

number)

Payments shall be applied in the following order: (1)

assessment, (2) restitution principal, (3) restitution

interest, (4) fine principal, (5) fine interest, (6) commu-

nity restitution, (7) penalties, and (8) costs, including

cost of prosecution and court costs.

App. 38

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES No. CR J5-00150 CRB

OF AMERICA, ORDER DENYING

Plaintiff. MOTION FOR

, JUDGMENT OF

ACQUITTAL OR

JACK E. EASTERDAY, ALTERNATIVELY

Nefandant. FOR A NEW TRIAL

/ (Filed Jul. 12, 2007)

A jury convicted defendant of 107 out of 109

counts of willfully failing to collect, truthfully account

for and pay over payroll taxes. Now pending before

the Court is defendant’s motion for judgment of ac-

quittal or for a new trial. After carefully considering

the parties’ papers, and the evidence submitted at

trial, the motion is DENIED.

BACKGROUND

On February 9, 2006 a jury convicted defendant

of violating 26 U.S.C. section 7202 by failing to pay to

the United States payroll taxes withheld from his

employees. As defendant did not contest that he owed

and failed to pay the taxes, a key issue in the case

was willfulness. At the request of the defense, the dis-

trict court to whom this case was previously assigned

instructed the jury on the issue of willfulness as

follows:

App. 39

The word “willfully” means a voluntary, in-

tentional violation of a known le» at duty. In

other words, the defendant must have acted

voluntarily and intentionally, not through

ignorance, mistake, or accident 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 ‘ye law.

In the context of this case, in order for the

government to establish willfulness beyond a

reasonable doubt, it must prove that on the

date the taxes were due, the taxpayer pos-

sessed 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, and the taxpayer

vountarily [sic] and intentionally, without

justification in light of all the financial

circumstances of the taxpayer, did not pay

such taxes

The latter paragraph was derived, almost verbatim,

from United States v. Poll, 521 F.2d 329, 333 (Sth Cir.

1975).

The Poll instruction confused the jury. During

deliberations the jury’s first note explained that the

jury was unclear as to what is meant by: “without

justification in light of all the financial circumstances

of the taxpayer, did not pay such taxes.” In response,

the district court instructed the jury as follows:

Evidence that the defendant caused the

corporation to pay other expenses may be

App. 40

evidence that the defendant’s failure to

assure that the corporation paid its taxes

was willful. Evidence that the defendant

caused the corporation to pay other expenses

in a particular quarter knowing that the

taxes had not been paid in previous quarters,

and that funds would not be available to pay

the taxes in the current quarter, may be

evidence that the defendant’s failure to

assure that the corporation paid its taxes

was willful.

Defendant objected to this instruction and moved for

a mistrial on the ground that it eliminated his

“ability to pay” defense, that is, his Poll defense.

The jury sent another note that suggested it was

considering whether an installment pian to pay back

taxes negated an inference of willfulness. Defendant

then requested that the district court give the jury a

good faith instruction, an instruction the court had

previously refused to give. The court again refused.

The jury subsequently convicted defendant.

Defendant moved for a new trial on the ground,

among others, that the district court’s supplemental

instruction during deliberations unfairly eliminated

defendant’s ability to pay defense, a defense which

was proper under the Poll instruction initially given

by the court. The district court agreed and ordered a

new trial. The case was subsequently transferred to

this Court for tral.

On retrial, the Court refused to give defendant's

requested Poll instruction on the ground that it did

App. 41

not adequately reflect the law or the evidence in the

record. The Court did, however, instruct the jury on

good faith over the government’s objection. In par-

ticular, the Court instructed the jury that the govern-

ment had the burden of proving that defendant did

not have a good faith belief that he was complying

with the tax laws, and that defendant’s belief could be

in good faith even if it was unreasonable.

DISCUSSION

Defendant’s primary argument is that the Court

erred in refusing to give the jury the Poll instruction.

The Court did not do so because Poll, which was

decided in 1975, no longer accurately reflects the law.

Poll involved charges similar to this case and was

tried to the district court on stipulated facts. The

court refused to consider evidence that the defen-

dant’s corporation “lacked the liquid resources to pay

the full amounts due and that he intended to make

up the deficiencies later.” Jd. at 331. The Ninth Cir-

cuit held that such evidence was relevant to “willful-

ness” and that to prove willfulness the government

“must establish beyond a reasonable doubt that at the

time payment was due the taxpayer possessed suffi-

cient funds to enable him to meet his obligation or

that lack of sufficient funds on such date was created

by (or was the result of) a voluntary and intentional

act without justification in view of all the financial

circumstances of the taxpayer.” Jd. at 333. The court’s

holding was based on its belief that willfulness

App. 42

requires an evil motive or improper purpose. Jd. at

331-33; see also Sorenson v. United States, 521 F.2d

325, 328 n.3 (9th Cir. 1975) (noting that “[t]he Poll

holding is applicable to the criminal test of will-

fulness which requires ‘some element of evil motive

and want of justification in view of all the financial

circumstances of the taxpayer.’”); Uniied States v.

Brennick, 908 F.Supp. 1004, 1016 (D. Mass. 1995)

(citation omitted) (explaining that Poll held that evi-

dence of defendant’s financial condition is relevant to

“evil motive” or “improper purpos*”).

The following year, however, the Supreme Court

ruled that “willfulness” in the context of the tax laws

“simply means a voluntary, intentional violation of a

known legal duty;” there is no requirement the gov-

ernment prove evil motive or improper purpose and

want of justification. United States v. Pomponio, 429

U.S. 10, 12, (1976); see also United States v. Powell,

955 F.2d 1206, 1210 (9th Cir. 1992) (“‘Willfulness’

in the context of criminal tax cases is defined as a

‘voluntary, intentional violation of a known legal

duty’.... [It] need not include bad faith or bad pur-

pose.”) (citation omitted). Thus, the basis for Poll’s

creation of an additional element was effectively

overruled by Pomponio.

Fifteen years later the Supreme Court expounded

further on the definition of willfulness. In Cheek v.

United States, 498 U.S. 192 (1991), the Supreme

Court held that under the tax laws, unlike other

laws, to prove willfulness the government has the

burden of negating a defendant's claim of ignorance

App. 43

of the law or a claim that because of a misunder-

standing of the law, he had a good-faith belief that he

was not violating any provision of the tax laws. Id. at

201-02. “This is so because one cannot be aware that

the law imposes a duty upon him and yet be ignorant

of it, misunderstand the law, or believe that the duty

does not exist. In the end, the issue is whether, based

on all the evidence, the Government has proved that

the defendant was aware of the duty at issue, which

cannot be true if the jury credits a good-faith

misunderstanding and belief submission, whether or

not the claimed belief or misunderstanding is

objectively reasonable.” Jd. at 202.

Accordingly, in this case the government did not

have the burden of proving that defendant had the

“ability to pay” — whatever that may mean; instead,

the government had the burden of proving that

defendant knew he was violating the tax laws by not

paying over the payroll taxes, even if defendant

believed that he did not have the ability to pay, or

believed that the only way he could pay was to not

pay his nursing homes’ operating expenses. This

burden is greater than that imposed by Poll because

even if the government proves that defendant had the

ability to pay, it must still prove that defendant did

not believe that he did not have the ability to pay and

therefore was not in violation of the tax laws, or that

he did not otherwise believe that his conduct was law-

ful. Moreover, the defendant’s belief can be unreason-

able and still negate the element of willfulness.

App. 44

Thus, all the evidence admitted in the first trial

was admissible in the second because it was relevant

to defendant’s good faith belief that he was not

violating a known legal duty. And defendant was free

to argue that he did not believe he was violating the

tax laws because to pay the amounts owed he would

have to close his nursing homes or at least not make

full payroll. The verdict, however, demonstrates that

the jury found beyond a reasonable doubt that

defendant did not hold such belief. What defendant is

arguing, in essence, is that even though the jury

found that he did not believe that his financial con-

dition excused his compliance with the tax laws, the

Court should have instructed the jury that his

financial condition could somehow excuse his compli-

ance. Such a result does not comport with common

sense.

Defendant’s contention that the Court directed a

verdict by instructing 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 pur-

poses, such as to pay other business expenses” there-

fore fails. First, defendant does not cite any cases

that suggest that this instruction is legally incorrect.

As the government argued at trial, the tax laws do

not allow a business to use payroll taxes held in trust

for the United States as a personal bank account. See

United States v. Gilbert, 266 F.3d 1180, 1185 (9th Cir.

2001) (“We agree with the Government that Gilbert’s

act of paying wages to his employees, instead of

remitting withholding taxes to the IRS, shows that he

App. 45

voluntarily and intentionally violated § 7202.”). Sec-

ond, the instruction did not direct a verdict because

the government still had to prove beyond a reason-

able doubt that defendant did not believe that he

could use the monies held in trust to pay other

expenses, at least in his particular circumstances.

CONCLUSION

For the reasons stated above, and the reasons

stated orally during these proceedings, defendant’s

motion for judgment of acquittal or alternatively a

new trial is DENIED. The Court will not further

address the evidentiary issues raised by defendant.

IT IS SO ORDERED.

Dated: July 12, 2007 /s/ Charles Breyer ee

CHARLES R. BREYER

UNITED STATES

DISTRICT JUDGE

App. 46

26 U.S.C. §§ 6651, 6656

§ 6651. Failure to file tax return or to pay tax.

(a) Addition to the tax. In case of failure

(1) to file any return required under authority

of subchapter A of chapter 61 [26 USCS §§ 6001 et

seq.] (other than part III thereof [26 USCS §§ 6031 et

seq.]), subchapter A of chapter 51 [26 USCS §§ 5001

et seq.] (relating to distilled spirits, wines, and beer),

or of subchapter A of chapter 52 [26 USCS §§ 5701 et

seq.| (relating to tobacco, cigars, cigarettes, and

cigarette papers and tubes), or of subchapter A of

chapter 53 [26 USCS §§ 5801 et seq.| (relating to

machine guns and certain other firearms), on the

date prescribed therefor (determined with regard to

any extension of time for filing), unless it is shown

that such failure is due to reasonable cause and not

due to willful neglect, there shall be added to the

amount required to be shown as tax on such return 5

percent of the amount of such tax if the failure is for

not more than 1 month, with an additional 5 percent

for each additional month or fraction thereof during

which such failure continues, not exceeding 25

percent in the aggregate;

(2) to pay the amount shown as tax on any

return specified in paragraph (1) on or before the date

prescribed for payment of such tax (determined with

regard to any extension of time for payment), unless

it is shown that such failure is due to reasonable

cause and not due to willful neglect, there shall he

added to the amount shown as tax on such return 0.5

App. 47

percent of the amount of such tax if the failure is

for not more than 1 month, with an additional 0.5

percent for each additional month or fraction thereof

during which such failure continues, not exceeding 25

percent in the aggregate; or

(3) to pay any amount in respect of any tax

required to be shown on a return specified in

paragraph (1) which is not so shown (including an

assessment made pursuant to section 6213(b) [26

USCS § 6213(b)]) within 21 calendar days from the

date of notice and demand therefor (10 business days

if the amount for which such notice and demand is

made equals or exceeds $ 100,000), unless it is shown

that such failure is due to reasonable cause and not

due to willful neglect, there shall be added to the

amount of tax stated in such notice and demand 0.5

percent of the amount of such tax if the failure is for

not more than 1 month, with an additional 0.5

percent for each additional month or fraction thereof

during which such failure continues, not exceeding 25

percent in the aggregate.

In the case of a failure to file a return of tax imposed

by chapter 1 [26 USCS §§ 1 et seq.] within 60 days of

the date prescribed for filing of such return

(determined with regard to any extensions of time for

filing), unless it is shown that such failure is due to

reasonable cause and not due to willful neglect, the

addition to tax under paragraph (1) shall not be less

than the lesser of $ 135 or 100 percent of the amount

required to be shown as tax on such return.

App. 48

(b) Penalty imposed on net amount due. For

purposes of —

(1) subsection (a)(1), the amount of tax required

to be shown on the return shall be reduced by the

amount of any part of the tax which is paid on or

before the date prescribed for payment of the tax and

by the amount of any credit against the tax which

may be claimed on the return,

(2) subsection (a)(2), the amount of tax shown

on the return shall, for purposes of computing the

addition for any month, be reduced by the amount of

any part of the tax which is paid on or before the

beginning of such month and by the amount of any

credit against the tax which may be claimed on the

return, and

(3) subsection (a)(3), the amount of tax stated in

the notice and demand shall, for the purpose of

computing the addition for any month, be reduced by

the amount of any part of the tax which is paid before

the beginning of such month.

(c) Limitations and special rule.

(1) Additions under more than one paragraph.

With respect to any return, the amount of the

addition under paragraph (1) of subsection (a) shall

be reduced by the amount of the addition under

paragraph (2) of subsection (a) for any month (or

fraction thereof) to which an addition to tax applies

under both paragraphs (1) and (2). In any case

described in the last sentence of subsection (a), the

App. 49

amount of the addition under paragraph (1) of

subsection (a) shall not be reduced under the

preceding sentence below the amount provided in

such last sentence.

(2) Amount of tax shown more than amount

required to be shown. If the amount required to be

shown as tax on a return is less than the amount

shown as tax on such return, subsections (a)(2) and

(b)(2) shall be applied by substituting such lower

amount.

(d) Increase in penalty for failure to pay tax in

certain cases.

(1) In general. In the case of each month (or

fraction thereof) beginning after the day described in

paragraph (2) of this subsection, paragraphs (2) and

(3) of subsection (a) shall be applied by substituting

“1 percent” for “0.5 percent” each place it appears.

(2) Description. For purposes of paragraph (1),

the day described in this paragraph is the earlier of —

(A) the day 10 days after the date on which

notice is given under section 6331(d) [26 USCS

§ 6331(d)], or

(B) the day on which notice and demand for

immediate payment is given under the last sentence

of section 633 l(a) [26 USCS § 633 I(a)].

(e) Exception for estimated tax. This section shall

not apply to any failure to pay any estimated tax

App. 50

required to be paid by section 6654 or 6655 [26 USCS

§ 6654 or 6655].

(f) Increase in penalty for fraudulent failure to file.

If any failure to file any return is fraudulent,

paragraph (1) of subsection (a) shall be applied —

(1) by substituting “15 percent” for “5 percent”

each place it appears, and

(2) by substituting “75 percent” for “25 percent”.

(g) Treatment of returns prepared by Secretary

under section 6020(b). In the case of any return made

by the Secretary under section 6020(b) [26 USCS

§ 6020(b)] —

(1) such return. shall be disregarded for

purposes of determining the amount of the addition

under paragraph (1) of subsection (a), but

(2) such return shall be treated as the return

filed by the taxpayer for purposes of determining the

amount of the addition under paragraphs (2) and (3)

of subsection (a).

(h) Limitation on penalty on individual’s failure to

pay for months during period of installment agree-

ment. In the case of an individual who files a return

of tax on or before the due date for the return

(including extensions), paragraphs (2) and (3) of

subsection (a) shall each be applied by substituting

“0.25” for “0.5” each place it appears for purposes of

determining the addition to tax for any month during

which an installment agreement under section 6159

ere

App. 51

[26 USCS § 6159] is in effect for the payment of such

tax.

§ 6656. Failure to make deposit of taxes.

(a) Underpayment of deposits. In the case of any

failure by any person to deposit (as required by this

title or by regulations of the Secretary under this

title) on the date prescribed therefor any amount of

tax imposed by this title in such government

depository as is authorized under section 6302(c) [26

USCS § 6302(c)] to receive such deposit, unless it is

shown that such failure is due to reasonable cause

and not due to willful neglect, there shall be imposed

upon such person a penalty equal to the applicable

percentage of the amount of the underpayment.

(b) Definitions. For purposes of subsection (a) —

(1) Applicable percentage.

(A) In general. Except as provided in

subparagraph (B), the term “applicable percentage”

means -

(i) 2 percent if the failure is for not

more than 5 days,

(11) 5 percent if the failure is for more

than 5 days but not more than 15 days, and

(1) 10 percent if the failure is for more

than 15 days.

App. 52

(B) Special rule. In any case where the tax

is not deposited on or before the earlier of —

(i) the day 10 days after the date of the

first delinquency notice to the taxpayer under section

6303 [26 USCS § 6303], or

(ii) the day on which notice and de-

mand for immediate payment is given under section

6861 or 6862 [26 USCS § 6861 or 6862] or the last

sentence of section 6331(a) [26 USCS § 6331],

the applicable percentage shall be 15

percent.

(2) Underpayment. The term “underpayment”

means the excess of the amount of the tax required to

be deposited over the amount, if any, thereof

deposited on or before the date prescribed therefor.

(c) Exception for first-time depositors of employment

taxes. The Secretary may waive the penalty imposed

by subsection (a) on a person’s inadvertent failure to

deposit any employment tax if —

(1) such person meets the _ requirements

referred to in section 7430(c)(4)A)Gi) [26 USCS

§ 7430(c)(4)(A)(i1)],

(2) such failure —

(A) occurs during the first quarter that

such person was required to deposit any employment

tax; or

App. 53

(B) if such person is required to change the

frequency of deposits of any employment tax, relates

to the first deposit to which such change applies, and

(3) the return of such tax was filed on or before

the due date.

For purposes of this subsection, the term “employ-

ment taxes” means the taxes imposed by subtitle C

[26 USCS §§ 3101 et seq.].

(d) Authority to abate penalty where deposit sent to

Secretary. The Secretary may abate the penalty

imposed by subsection (a) with respect to the first

time a depositor is required to make a deposit if the

amount required to be deposited is inadvertently sent

to the Secretary instead of to the appropriate

government depository.

(e) Designation of periods to which deposits apply.

(1) In general. A deposit made under this

section shall be applied to the most recent period or

periods within the specified tax period to which the

deposit relates, unless the person making such

deposit designates a different period or periods to

which such deposit is to be applied.

(2) Time for making designation. A person may

make a designation under paragraph (1) only during

the 90-day period beginning on the date of a notice

that a penalty under subsection (a) has been imposed

for the specified tax period to which the deposit

relates.

App. 54

26 CFR 301.6651-1

§ 301.6651-1 Failure to file tax return or to pay

tax.

(a) Addition to the tax — (1) Failure to file tax

return. In case of failure to file a return required

under authority of —

(i) Subchapter A, chapter 61 of the Code, relating to

returns and records (other than sections 6015 and

6016 (26 USCS §§6015 and 6016], relating to

declarations of estimated tax, and part III thereof,

relating to information returns);

(ii) Subchapter A, chapter 51 of the Code, relating to

distilled spirits, wines, and beer;

(iii) Subchapter A, chapter 52 of the Code, relating

to cigars, cigarettes, and cigarette papers and tubes;

or

(iv) Subchapter A, chapter 53 of the Code, relating

to machine guns, destructive devices, and certain

other firearms; and

The regulations thereunder, on or before the date

prescribed for filing (determined with regard to any

extension of time for such filing), there shall be added

to the tax required to be shown on the return the

amount specified below unless the failure to file the

return within the prescribed time is shown to the

satisfaction of the district director or the director of

the service center to be due to reasonable cause and

not to willful neglect. The amount to be added to the

tax is 5 percent thereof if the failure is for not more

App. 55

than 1 month, with an additional 5 percent for each

additional month or fraction thereof during which the

failure continues, but not to exceed 25 percent in the

aggregate. The amount of any addition under this

subparagraph shall be reduced by the amount of the

addition under subparagraph (2) of this paragraph for

any month to which an addition to tax applies under

both subparagraphs (1) and (2) of this paragraph (a).

(2) Failure to pay tax shown on return. In case of

failure to pay the amount shown as tax on any return

(required to be filed after December 31, 1969, without

regard to any extension of time for filing thereof)

specified in subparagraph (1) of this paragraph (a), on

or before the date prescribed for payment of such tax

(determined with regard to any extension of time for

payment), there shall be added to the tax shown on

the return the amount specified below unless the

failure to pay the tax within the prescribed time is

shown to the satisfaction of the district director, or, as

provided in paragraph (a) of this section, the

Assistant Regional Commissioner (Alcohol, Tobacco

and Firearms), the director of the service center, to be

due to reasonable cause and not to willful neglect.

Except as provided in paragraph (a)(4) of this section,

the amount to be added to the tax is 0.5 percent of the

amount of tax shown on the return if the failure is for

not more than 1 month, with an additional 0.5

percent for each additional month or fraction thereof

during which the failure continues, but not to exceed

25 percent in the aggregate.

App. 56

(3) Failure to pay tax not shown on return. In the

case of failure to pay any amount of any tax required

to be shown on a return specified in paragraph (a)(1)

of this section that is not so shown (including an

assessment made pursuant to section 6213(b) [26

USCS § 6213(b)]) within 21 calendar days from the

date of the notice and demand (10 business days if

the amount assessed and shown on the notice and

demand equals or exceeds $ 100,000) with respect to

any notice and demand made after December 31,

1996, there will be added to the amount stated in the

notice and demand the amount specified below unless

the failure to pay the tax within the prescribed time

is shown to the satisfaction of the district director or

the director of the service center to be due to

reasonable cause and not to willful neglect. Except as

provided in paragraph (a)(4) of this section, the

amount to be added to the tax is 0.5 percent of the

amount stated in the notice and demand if the failure

is for not more than 1 month, with an additional 0.5

percent for each additional month or fraction thereof

during which the failure continues, but not to exceed

25 percent in the aggregate. For purposes of this

paragraph (a)(3), see § 301.6601-1(f)(5) for the

definition of calendar day and business day.

(4) Reduction of failure to pay penalty during the

period an installment agreement is in effect — (i) In

general. In the case of a return filed by an individual

on or before the due date for the return (including

extensions) —

App. 57

(A) The amount added to tax for a month or fraction

thereof is determined by using 0.25 percent instead of

0.5 percent under paragraph (a)(2) of this section if at

any time during the month an installment agreement

under section 6159 [26 USUS § 6159] is in effect for

the payment of such tax; and

(B) The amount added to tax for a month or fraction

thereof is determined by using 0.25 percent instead of

0.5 percent under paragraph (a)(3) of this section if at

any time during the month an installment agreement

under section 6159 [26 USCS § 6159] is in effect for

the payment of such tax.

Gi) Effective date. This paragraph (a)(4) applies for

purposes of determining additions to tax for months

beginning after December 31, 1999.

(b) Month defined. (1) If the date prescribed for

filing the return or paying tax is the last day of a

calendar month, each succeeding calendar month or

fraction thereof during which the failure to file or pay

tax continues shall constitute a month for purposes of

section 6651 [26 USCS § 6651].

(2) If the date prescribed for filing the return or

paying tax is a date other than the last day of a

calendar month, the period which terminates with

the date numerically corresponding thereto in the

succeeding calendar month and each such successive

period shall constitute a month for purposes of

section 6651 [26 USCS § 6651]. If, in the month of

February, there is no date corresponding to the date

prescribed for filing the return or paying tax, the

App. 58

period from such date in January through the last

day of February shall constitute a month for purposes

of section 6651 [26 USCS § 6651]. Thus, if a return is

due on January 30, the first month shall end on

February 28 (or 29 if a leap year), and the succeeding

months shall end on March 30, April 30, etc.

(3) Ifa return is not timely filed or tax is not timely

paid, the fact that the date prescribed for filing the

return or paying tax, or the corresponding date in any

succeeding calendar month, falls on a Saturday,

Sunday, or a legal holiday is immaterial in deter-

mining the number of months for which the addition

to the tax under section 6651 [26 USCS § 6651]

applies.

(c) Showing of reasonable cause.

(1) Except as provided in subparagraphs (3) and (4) of

this paragraph (b), a taxpayer who wishes to avoid

the addition to the tax for failure to file a tax return

or pay tax must make an affirmative showing of all

facts alleged as a reasonable cause for his failure to

file such return or pay such tax on time in the form of

a written statement containing a declaration that it is

made under penalties of perjury. Such statement

should be filed with the district director or the

director of the service center with whom the return is

required to be filed; Provided, That where special tax

returns of liquor dealers are delivered to an alcohol,

tobacco and firearms officer working under the

supervision of the Regional Director, Bureau of

Alcohol, Tobacco and Firearms, such statement may

be delivered with the return. If the district director,

App. 59

the director of the service center, or, where applicable,

the Regional Director, Bureau of Alcohol, Tobacco and

Firearms, determines that the delinquency was due

to a reasonable cause and not to willful neglect, the

addition to the tax will not be assessed. If the

taxpayer exercised ordinary business care and

prudence and was nevertheless unable to file the

return within the prescribed time, then the delay is

due to a reasonable cause. A failure to pay will be

considered to be due to reasonable cause to the extent

that the taxpayer has made a satisfactory showing

that he exercised ordinary business care and

prudence in providing for payment of his tax liability

and was nevertheless either unable to pay the tax or

would suffer an undue hardship (as described in

§ 1.6161-1(b) of this chapter) if he paid on the due

date. In determining whether the taxpayer was

unable to pay the tax in spite of the exercise of

ordinary business care and prudence in providing for

payment of his tax liability, consideration will be

given to all the facts and circumstances of the

taxpayer's financial situation, including the amount

and nature of the taxpayer's expenditures in light of

the income (or other amounts) he could, at the time of

such expenditures, reasonably expect to receive prior

to the date prescribed for the payment of the tax.

Thus, for example, a taxpayer who incurs lavish or

extravagant living expenses in an amount such that

the remainder of his assets and anticipated income

will be insufficient to pay his tax, has not exercised

ordinary business care and prudence in providing for

the payment of his tax liability. Further, a taxpayer

who invests funds in speculative or illiquid assets has

App. 60

not exercised ordinary business care and prudence in

providing for the payment of his tax liability unless,

at the time of the investment, the remainder of the

taxpayer’s assets and estimated income will be

sufficient to pay his tax or it can be reasonably

foreseen that the speculative or illiquid investment

made by the taxpayer can be utilized (by sale or as

security for a loan) to realize sufficient funds to

satisfy the tax liability. A taxpayer will be considered

to have exercised ordinary business care and

prudence if he made reasonable efforts to conserve

sufficient assets in marketable form to satisfy his tax

liability and nevertheless was unable to pay all or a

portion of the tax when it became due.

(2) In determining if the taxpayer exercised

ordinary business care and prudence in providing for

the payment of his tax liability, consideration will be

given to the nature of the tax which the taxpayer has

failed to pay. Thus, for example, facts and

circumstances which, because of the taxpayer's efforts

to conserve assets in marketable form, may constitute

reasonable cause for nonpayment of income taxes

may not constitute reasonable cause for failure to pay

over taxes described in section 7501 [26 USCS § 7501}

that are collected or withheld from any other person.

(3) If, for a taxable year ending on or after

December 31, 1995, an individual taxpayer satisfies

the requirement of § 1.6081-4(a) of this chapier

(relating to automatic extension of time for filing an

individual income tax return), reasonable cause will

App. 61

be presumed, for the period of the extension of time to

file, with respect to any underpayment of tax if —

(i) The excess of the amount of tax shown on the

individual income tax return over the amount of tax

paid on or before the regular due date of the return

(by virtue of tax withheld by the employer, estimated

tax payments, and any payment with an application

for extension of time to file pursuant to § 1.6081-4 of

this chapter) is no greater than 10 percent of the

amount of tax shown on the individual income tax

return; and

Gi) Any balance due shown on the individual income

tax return is remitted with the return.

(4) If, for a taxable year ending on or after

December 31, 1972, a corporate taxpayer satisfies the

requirements of §1.6081-3(a) (relating to an

automatic extension of time for filing a corporation

income tax return), reasonable cause shall be pre-

sumed, for the period of the extension of time to file,

with respect to any underpayment of tax if —

(i) The amount of tax (determined without regard to

any prepayment thereof) shown on Form 7004, or the

amount of tax paid on or before the regular due date

of the return, is at least 90 percent of the amount of

tax shown on the taxpayer's Form 1120, and

Gi) Any balance due shown on the Form 1120 is paid

on, or before the due date of the return, including any

extensions of time for filing.

App. 62

(d) Penalty imposed on net amount due — (1) Credits

against the tax. The amount of tax required to be

shown on the return for purposes of section 6651(a)(1)

[26 USCS § 6651(a)(1)] and the amount shown as tax

on the return for purposes of section 6651(a)(2) [26

USCS § 6651(a)(2)] shall be reduced by the amount of

any part of the tax which is paid on or before the date

prescribed for payment of the tax and by the amount

of any credit against the tax which may be claimed on

the return.

(2) Partial payments. (i) The amount of tax required

to be shown on the return for purposes of section

665l(aX2) [26 USCS § 6651(a)(2)] shall, for the

purpose of computing the addition for any month, be

reduced by the amount of any part of the tax which is

paid after the date prescribed for payment and on or

before the first day of such month.

(ii) The amount of tax stated in the notice and

demand for purposes of section 6651(a)\(3) [26 USCS

§ 6651(a)(3)] shall, for the purpose of computing the

addition for any month, be reduced by the amount of

any part of the tax which is paid before the first day

of such month.

(e) No addition to tax if fraud penalty assessed. No

addition to the tax under section 6651 {26 USCS

§ 6651} shall be assessed with respect to an

underpayment of tax if a 50-percent addition to the

tax for fraud is assessed with respect to the same

underpayment under section 6653(b) [26 USCS

§ 6653(b)]. See section 6653(d) [26 USCS § 6653(d)].

App. 63

(f) Examples. The provisions of this section may be

illustrated by the following examples:

Example 1. (a) Under section 6072(a) [26 USCS

§ 6072(a)], income tax returns of individuals on a

calendar year basis must be filed on or before the

15th day of April following the close of the calendar

year. Assume an individual filed his income tax

return for the calendar year 1969 on July 20, 1970,

and the failure to file on or before the prescribed date

is not due to reasonable cause. The tax shown on the

return is $800 and a deficiency of $200 is sub-

sequently assessed, making the tax required to be

shown on the return, $ 1,000. Of this amount, $ 300

has been paid by withholding from wages and $ 400

has been paid as estimated tax. The balance due as

shown on the return of $ 100 ($ 800 shown as tax on

the return less $700 previously paid) is paid on

August 21, 1970. The failure to pay on or before the

prescribed date is not due to reasonable cause. There

will be imposed, in addition to interest, an additional

amount under section 665l1(a)(2) [26 USCS

§ 6651(a)(2)] of $2.50, which is 2.5 percent (2% for

the 4 months from April 16 through August 15, and

0.5% for the fractional part of the month from August

16 through August 21) of the net amount due as

shown on the return of $ 100 ($800 shown on the

return less $ 700 paid on or before April 15). There

will also be imposed an additional amount under

section 665l(a)(1) [26 USCS § 665l(a)(1)] of $ 58,

determined as follows:

20 percent (5% per month for the 3 months

from April 16 through July 15 and 5% for

App. 64

the fractional part of the month from July

16 through July 20) of the net amount due

of $300 ($1,000 required to be shown on the

return less $700 paid on or before April 15) $60

Reduced by the amount of the addition

imposed under section 6651(a)(2) for those

months 2

Addition to tax under section 6651(a)(1) $ 50

(b) A notice and demand for the $ 200 deficiency is

issued on January 8, 1971, but the taxpayer does not

pay the deficiency until December 23, 1971. In addi-

tion to interest there will be imposed an additional

amount under section 665l(a)(3) [26 USCS

§ 6651(a)(3)] of $ 10, determined as follows:

Addition computed without regard to limita-

tion:

6 percent (5 1/2% for the 11 months from

January 19, 1971 through Dece:nber 18,

1971, and 0.5% for the fractional part of the

month from December 19 through December

23) of the amount stated in the notice and

demand ($200) $12

Limitation on addition:

25 percent of the amount stated in the

notice and demand ($ 200) Reduced by the $ 50

part of the addition under section 6651(a)(1)

for failure to file attributable to the $200

deficiency (20% of $200) $ 40

Maximum amount of the addition under

section 6651l(a\(3) $10

App. 65

Example 2. An individual! files his income tax return

for the calendar year 1969 on December 2, 1970, and

such delinquency is not due to reasonable cause. The

balance due, as shown on the return, of $ 500 is paid

when the return is filed on December 2, 1970. In

addition to interest and the addition for failure to pay

under section 6651(a)(2) [26 USCS § 6651(a)(2)] of

$ 20 (8 months at 0.5% per month, 4%), there will

also be imposed an additional amount under section

6651(a\(1) [26 USCS §6651(a)(1)] of $112.50,

determined as follows:

Penalty at 5 percent for maximum of $ 125.00

5 months, 25 percent of $500. Less

reduction for the amount of the addition

under section 6651(a)(2):

Amount imposed under section 6651(a)(2)

for the months in which there is also an

addition for failure to file —- 2 1/2 percent

for the 5 months April 16 through

September 15 of the net amount due

($500) $112.50

Addition to tax under section 6651(a)(1) $ 112.50

(g) Treatment of returns prepared by the Secretary

(1) In general. A return prepared by the Secretary

under section 6020(b) [26 USCS § 6020(b)] will be

disregarded for purposes of determining the amount

of the addition to tax for failure to file any return

pursuant to paragraph (a)(1) of this section. However,

the return prepared by the Secretary will be treated

as a return filed by the taxpayer for purposes of

App. 66

determining the amount of the addition to tax for

failure to pay the tax shown on any return and for

failure to pay the tax required to be shown on a

return that is not so shown pursuant to paragraphs

(a)(2) and (3) of this section, respectively.

(2) Effective date. This paragraph (g) applies to

returns the due date for which (determined without

regard to extensions) is after July 30, 1996.