United States v. Easterday

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

ORDER

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

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

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

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

OPINION

SCHROEDER, Circuit Judge:

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

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

Easterday contends that Poll is binding on us because this court has never expressly overruled it. The district court held that Poll was no longer good law. We agree with the district court. Poll’s requirement that the government prove that the taxpayer had sufficient funds to pay the tax was premised on a definition of willfulness that included some element of evil motive. The Supreme Court subsequently rejected any such definition of willfulness in the tax statutes. See United *1006States v. Pomponio, 429 U.S. 10, 12, 97 S.Ct. 22, 50 L.Ed.2d 12 (1976) (per curiam); see also Cheek v. U.S., 498 U.S. 192, 201-02, 111 S.Ct. 604, 112 L.Ed.2d 617 (1991) . “Willful” in the tax context means a voluntary, intentional violation of a known legal duty. See Cheek, 498 U.S. at 201-02, 111 S.Ct. 604; United States v. Powell, 955 F.2d 1206, 1211 (9th Cir.1992). In other words, if you know that you owe taxes and you do not pay them, you have acted willfully. Poll has continued to be referred to occasionally in other contexts, principally in the child support area. See United States v. Ballek, 170 F.3d 871, 874 (9th Cir.1999); H.R.Rep. No. 102-771, at 6 (1992) . It is not, however, good tax law. We therefore affirm.

Background

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

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

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

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

The word “willfully” means a voluntary, intentional violation of a known legal duty, and not through ignorance, mistake, negligence, even gross negligence, or accident. In other words, the defendant must have acted voluntarily and intentionally and with the specific intent to do something he knew the law prohibited; that is to say, with the intent either to disobey or disregard the law.
In the context of this case, in order for the government to meet its burden of willfulness beyond a reasonable doubt, it *1007must prove that on the dates the taxes were due the taxpayer possessed sufficient funds to be able to meet his legal obligations to the government or that the lack of sufficient funds on such date was created by (or was the result of) a voluntary and intentional act, without justification in light of the financial circumstances of the taxpayer.

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

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

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

Discussion

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

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

In United States v. Andros, 484 F.2d 531, 533-34 (9th Cir.1973), we said that to establish the “wilful failure to pay the taxes assessed,” the government must prove that, on the date the taxes were due, the taxpayer possessed “sufficient funds” to pay the taxes, and that the taxpayer voluntarily and intentionally did not pay them. We went on to say: “the requirement of wilfulness connotes ‘bad faith or evil intent’ or ‘evil motive and want of justification in view of all the financial circumstances of the taxpayer.’ ” Id. 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 considered “willful” because he had offered to prove “that the corporation lacked the liquid resources to pay the full amounts due and that he intended to make up the deficien*1008cies 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 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 willfulness 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 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 faith 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 U.S. at 360, 93 S.Ct. 2008.

The court in Pomponio endeavored to erase the misconception that such different formulations, including the “evil motive” formulation of Spies, actually established different standards. The Court clarified that “willfulness” means a voluntary, intentional 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 *1009other 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 nevertheless 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.

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. Id. 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 circumstances 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 willfulness, and expressly distinguished 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, intentional violation of a known legal duty,” and continued, “[o]ur 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 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 repudiates 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” formulation 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 eases. After Pomponio, we must hold that there is no longer any requirement of evil motive, upon which Poll’s holding rested.

*1010We 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 spent the money for other expenses, Poll is inconsistent 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 intentionally 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 dissipate 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, “[ojtherwise, a recalcitrant taxpayer could spend his money as fast as he earns it and evade criminal 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) (“[Ajbsent a rehearing en banc, we are without authority to overrule [controlling circuit precedent].”).

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 *1011clearly irreconcilable with our prior circuit authority.” Id. at 900. We explained that we must avoid inconsistencies 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 reasoning 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.

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 defendant’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 willfulness 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.