Fifth Circuit Adopts Disjunctive Reading Permitting § 7202 Conviction for Failure to Pay Over After Properly Accounting (1/12/18)

In United States v. Sertich, ___ F.3d ___, 2018 U.S. App. LEXIS 457 (5th Cir. 2018), here, the Court affirmed the convictions of Sertich, a physician, under § 7202 (failure to collect, account for and pay over trust fund tax) and § 7201(tax evasion).  The gravamen of the case, as described in the opinion, related to Sertich's pattern of conduct with respect to the trust fund tax.  He withheld the tax from the employees (including himself), accounted for withholding on the required forms and did not pay over the tax to the IRS.  Presumably, he reported the withholding to the employees (including himself) on the Form W-2 so that they (including himself) could claim the amounts withheld from them on their tax returns, Forms 1040.  (As an aside, it takes some chutzpah for a taxpayer to claim the withholding credit for his own "withheld" tax he caused not to be paid over to the IRS.) But he went beyond mere failure to pay over.  First, his accountant had told him repeatedly that he had the obligation to pay over.  Second, he resisted the IRS's attempts for years to collect the tax through avoiding IRS collection officers, filings of bankruptcy, etc.

Sertich defended his conduct by testifying at trial as follows:

He told the jury that he always intended to pay his taxes. He stated that his failure to do so was related to personal and family issues, and because he lacked the financial ability to comply. Sertich admitted he pursued bankruptcy filings to develop a payment plan, stressing that he always intended to make good on his debts. He also explained that because his accountant told him he would have to pay interest on his tax delinquency, he "assumed" the delinquency "was a loan" from the federal government.

It is not indicated whether his accountant told him that he would be subject to penalties on the failure to pay over, including the potential trust fund recovery penalty, under § 6672.

The jury convicted on all counts. 

The Court rejected Sertich's appellate argument as follows:

1.  Jury Instruction -- § 7202 Conjunctive Reading or Disjunctive Reading.

The Court lays out the law and the jury instruction as follows (italics in original):

Section 7202, titled "[w]illful failure to collect or pay over tax," 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." 26 U.S.C. § 7202 (emphasis added). The statute thus naturally breaks into two offenses: (1) willful failure to collect employees' taxes; or (2) willful failure to truthfully account for and pay over withheld taxes. At issue in Sertich's case is the second offense: willful failure to truthfully account for and pay over the taxes. The district court instructed the jury that as to this offense, "the government must prove that the defendant failed to comply with one of the two duties for which he was responsible," either accounting for or paying over a tax. The district court explained by example that § 7202 is violated if "a responsible person who collects taxes from his employees and files [returns] with the Internal Revenue Service . . . willfully fails to pay over the taxes to the United States."

Sertich's argument was:

Sertich challenges this jury instruction because he believes that liability under this portion of § 7202 requires that a person both fail to account for and pay over a tax. That is to say, Sertich suggests that § 7202 states the two elements in the conjunctive. He asserts that a disjunctive interpretation of § 7202 is contrary to the plain language, purpose, and statutory history of § 7202, and that the rule of lenity guides a decision in his favor. Under Sertich's reading, a proper jury instruction would have noted that he would not be guilty if he had truthfully accounted for the taxes but failed to pay them over. The Government asserts that § 7202 is violated by the failure to account for or pay over a tax.

The Court noted that Sertich's argument was an issue of first impression in the Fifth Circuit.  The Court then joined the holdings of the other circuits addressing the issue -- the key "and," although normally conjunctive, requires interpretation in the disjunctive (meaning that liability may be established by failure to pay over trust fund taxes even if properly account for).  United States v. Gilbert, 266 F.3d 1180, 1183-85 (9th Cir. 2001); United States v. Thayer, 201 F.3d 214, 220-21 (3d Cir. 1999), abrogation on other grounds recognized by Fahie v. Virgin Islands, 858 F.3d 162, 66 V.I. 935 (3d Cir. 1999); United States v. Evangelista, 122 F.3d 112, 120-22 (2d Cir. 1997).

The Court provides a good discussion of the basis for the holding, and I recommend it to readers interested in this issue.

2.  Sufficiency of the Evidence

The Court also held that the evidence was sufficient to establish willfulness for the failure to pay over and for the tax evasion counts.  Willfulness is determined under Cheek v. United States, 498 U.S. 192, 201 (1991) which requires "that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty."  There was sufficient evidence to support a jury inference that this level of willfulness had been met.

In a related argument addressed to tax evasion, Sertich argued that he did not have the funds to meet his tax obligations.  The Court said:

Even if financial inability to pay were a viable defense to tax offenses, but see Tucker, 686 F.2d at 233, the record reflects that Setrich's inability to pay resulted from his decision to utilize withheld funds for personal use and to "maintain a lifestyle." See United States v. Van Meter, 280 F. App'x 394, 396-97 (5th Cir. 2008) (finding sufficient evidence of willfulness where trial evidence demonstrated defendant used assets for personal use to "live an extremely comfortable lifestyle"). Sertich's suggestion that he did not willfully violate § 7201 because he was forthcoming in his filings and interactions with the IRS similarly cannot save him. Section 7201 does not require proof that the defendant was uncooperative; it requires only that a defendant willfully try to evade or defeat the payment of a tax through an affirmative act. See Miller, 588 F.3d at 907; Kawashima v. Holder, 565 U.S. 478, 487—88, 132 S. Ct. 1166, 182 L. Ed. 2d 1 (2012) (noting that tax evasion under § 7201 does not depend on fraud or deceit). Furthermore, the jury was entitled to disbelieve Sertich's contention that he had a good faith belief he was not committing any crime, and in any event, the trial evidence that the IRS and Sertich's own agents warned him cuts against that suggestion. See Cheek, 498 U.S. at 202 ("Of course, in deciding whether to credit Cheek's good-faith belief claim, the jury would be free to consider any admissible evidence from any source showing that Cheek was aware of his duty to file a return and to treat wages as income . . . ."); United States v. Kellar, 394 F. App'x 158, 166 (5th Cir. 2010) (finding evidence of willfulness when, inter alia, the IRS warned the defendant "on several occasions about the consequences of his failure to file tax returns or pay his taxes"). Accordingly, the evidence was sufficient for a reasonable juror to find a violation beyond a reasonable doubt, and we affirm Sertich's conviction pursuant to § 7201.

Then as to his defense under § 7202 that he thought he was getting a loan from the Government rather than violating a known legal duty, the Court said.

The Government contests this, pointing to the fact that the evidence showed that "Sertich's accountants repeatedly told him that he could not retain and spend amounts withheld from employee pay, but instead needed to turn those amounts over to the federal government." The Government asserts that Sertich's "pattern of conduct" of remitting little or none of the amounts he withheld, "despite his accountants' and the revenue officer's advice, support[s] the inference that Sertich knew of his legal duty but voluntarily and intentionally violated it." 

Sertich's challenge to the evidence underlying his § 7202 conviction thus turns on a credibility determination: one between his version of why he did not pay over taxes withheld (because of his belief he was receiving a "loan" from the IRS) and the considerable amount of evidence presented by the Government that he knew of his tax obligations and willfully failed to comply with them. See United States v. Zuniga, 18 F.3d 1254, 1260 (5th Cir. 1994). 

Here, the jury had sufficient evidence to find that Sertich acted willfully. Despite multiple discussions with revenue officers and his own attorneys, Sertich repeatedly failed to pay over his taxes. The jury apparently did not believe Sertich's testimony that he genuinely thought he had received a loan from the IRS, and "[w]e will not second guess the jury in its choice of which witnesses to believe." Zuniga, 18 F.3d at 1260; see also Cheek, 498 U.S. at 202. Testimony by Sertich's accountants also undermines his contention that he was unaware of his legal duties. Two accountants testified that they advised Sertich "on a regular basis" that taxes were "due and owing," that "[he] need[s] to make the deposits," and that "this has to be paid." One accountant even challenged Sertich's loan theory and told him "[y]ou're going to need to get this paid timely, and it's going to become an issue." These conversations with his accountants demonstrated Sertich's willfulness. See United States v. Smith, 3 F.3d 436, *3-4 [published in full-text format at 1993 U.S. App. LEXIS 40753] (5th Cir. 1993) (noting that defendant's disregard for accountants' warnings, inter alia, was evidence of willful intent to conceal). 

Because we find that any rational trier of fact could have found beyond a reasonable doubt that Sertich violated § 7202, we affirm Sertich's conviction.