Chipping Away at Potential 7202 Defenses

On April 27, 2008, the Ninth Circuit issued a revised opinion in United States v. Easterday, ___ F.3d ___ (9th Cir. 2009) and denied petition for rehearing. In Easterday, the Ninth Circuit finally and explicitly sounds the death knell for taxpayer hopes founded on United States v. Poll, 521 F.2d 329 (9th Cir. 1975). Section 7202 of the Code imposes a criminal penalty on parties having an obligation to withhold tax and pay over to the Government. Section 7202 is the criminal analog tto the civil Trust Fund Recovery Penalty in § 6672 (often called the TFRP or the responsible person penalty). The Government has ramped up the use of § 7202 recently in order to increase compliance with the underlying obligation to withhold and pay over.

Persons within an organization who failed in their responsibility to have the organization withhold and pay over perceived an opportunity in Poll to avoid criminal liability where, as is often the case, the organization does not have the cash to pay over. This can occur where the organization, facing cash flow problems, is paying net wages to the employees -- perhaps using available cash for other purposes (i.e., paying the squeakier wheels) -- and thus, from that perspective, does not have and cannot payover the actual cash representing the tax that it is deemed to have withheld from the employees. Poll held that the Government must prove that the organization did have the available cash before the person can be convicted under § 7202. This holding in Poll was addressed to the "willfully" element of the statute on the notion that the person cannot have acted willfully if the cash wasn't there.

In Easterday, the Ninth Circuit held that Poll was no longer good law, having been eroded by subsequent Supreme Court and Ninth Circuit authority. The Ninth Circuit held that the holding in Poll was effectively overturn by subsequent Supreme Court refinements -- particularly in Pomponio and Cheek -- to the definition of willfully as being the intentional violation of a known legal duty. In the particular context, paying net wages where the taxpayer is not able to pay over the amount deemed withheld is a violation of a known legal duty. The employer has the option of either not paying wages at all (hence incurring no obligation to withhold and pay over) or by reducing the net wage to the employees leaving sufficient cash to pay over to the Government.

Practition Caveat: Do not be lulled into a false sense of security by the Ninth Circuit's statement that "§ 7202 [is] a fairly rarely invoked provision." That may have been true years ago, but not recently and, with the downtown in the economy and pressing needs to stem the erosion of the federal fisc, I and many practitioners believe that § 7202 prosecutions will be a key component of the Government's criminal enforcement initiative.