District Court Holds that Delinquent Payment and Filing After CI Agent Contact Is Admissible in Criminal Case (7/5/21)

In United States v. Thrush, 2021 U.S. Dist. LEXIS 118742 (E.D. Mich. 6/25/21), CL here, “Thrush was indicted on multiple counts of willfully failing to pay over payroll taxes and to file tax returns.”  After being contacted by the CI agent, Thrush “began making payments on his tax liability” and filed tax returns.  In the ensuing criminal case, the Government moved in limine “to exclude evidence of Defendant's delinquent tax payments and returns.”  

The Court held that, under Sixth Circuit precedent, Thrush could introduce the evidence.  After reviewing the case authority, the Court concluded (pp. 9-10):

Defendant's version of events, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness. Accordingly, Defendant's [*10]  delinquent filings, if offered in conjunction with the assertions discussed above, would be probative of his mental state during the period in question.

In comparison, evidence of the delinquent filings poses only a modest risk of misleading the jury. The evidence will not, and cannot, be offered to show that Defendant's prior crimes, if any, were somehow vitiated, see Sansone 380 U.S. at 354, and the jury will be clearly instructed as to the elements of the charged offenses and the meaning of willfulness.

Based on the foregoing, the Government has not demonstrated that the probative value of Defendant's delinquent filings is substantially outweighed by the risk of misleading the jury.

JAT Comments:

District Court Rejects Defendant's Creative Claim that Alleged Overpayments of Other Taxes Precludes Criminal Liability (5/28/20)

In United States v. Hamdan (E.D. La. Dkt. 19-60 Order Dated 5/22/20), here, the Court denied the defendants’ motion to dismiss most of the counts in their 74-count Superseding Indictment charging (i) the conspiracy by “evading paying federal income and employment taxes” (not clear whether an offense conspiracy or defraud/Klein conspiracy charge or both, but not important for this discussion) by underreporting wages, (ii) failure to account for and pay certain trust fund taxes (§ 7202), and aiding and assisting the preparation of false individual income tax returns for third parties (§ 7206(2)).  The defendants owned food marts through which the alleged crimes were committed.

In their motion, the defendants (principally Hamdan) argued (high level summary) that:  (i) Hamdan overpaid his personal income taxes in an amount exceeding the alleged employment and income taxes charged in the indictment which should have been offset against those taxes and that the alleged overpayment negated willfulness; (ii) Hamdan’s right to a credit for the alleged overpayment of tax should estop the Government from charging because the offset mechanism somehow assures taxpayers that overpayments of one tax liability will exonerate taxpayers from criminal liability related to other internal revenue tax; and (iii) that the Government has been unjustly enriched by the alleged overpayments.

The Court did not accept any of those claims, finding that the Superseding Indictment properly alleged the offenses charged.  The Court did not accept Hamdan’s key factual claim that he had overpaid his income taxes or that, even if he had, he had properly claimed the refund so that the refund would be available to offset.  Right now, I don’t see an easy path to providing a meaningful analysis of the Court’s rejection of the defendants’ diversions (creative and unusual as they were).  I just commend the opinion to readers who might find some such interesting.

Court Affirms Conviction, Rejecting Lesser Included Offense Instruction Request (7/17/19; 7/18/19)

In United States v. Rankin, 929 F.3d 399 (6th Cir. 2019), CA6 here, and GS here, Rankin was charged with (i) seven counts of failure to collect, account for and pay over payroll withholding tax in violation of  7202, (ii) six counts of tax perjury , § 7206(1), for individual tax returns, (iii) three counts of tax perjury, § 7206(1), for corporate returns, and (iv) one count of tax obstruction, § 7212(a). After trial, he was convicted on all counts and sentenced to 60 months (5 years).

On appeal, Rankin raised a number of issues and prevailed on only one relating to the timing of restitution.  I think only one issue is particularly interesting -- the lesser included offense issue.

Defendants facing felony count charges will often want a lesser included offense instruction to give the jury an alternative to conviction on the more serious offense charged.  Rankin was charged with seven counts of § 7202, a felony 5-year charged.  Rankin asked to a lesser included offense instruction for § 7203, failure to pay, which is a 1-year misdemeanor.  The district court denied the instruction.  The Court of Appeals affirmed the denial of the instruction.

The Court starts off with the guiding law (slip op., at 8, cleaned up; 929 F.3d at 406):

If a defendant asks for a lesser included offense instruction to which he is entitled, it is generally reversible error not to give it. A defendant is entitled to an instruction on a lesser-included offense if: (1) a proper request is made; (2) the elements of the lesser offense are identical to part of the elements of the greater offense; (3) the evidence would support a conviction on the lesser offense; and (4) the proof on the element or elements differentiating the two crimes is sufficiently disputed so that a jury could consistently acquit on the greater offense and convict on the lesser.

Section 7202 (cleaned up) makes it a felony for "any person required . . . to collect, account for, and pay over any tax imposed" to "willfully fail to collect or truthfully account for and pay over such tax."

Section 7203 (cleaned up) makes it a misdemeanor for "any person required . . . to pay any estimated tax or tax, or required . . . to make a return, keep any records, or supply any information," to "willfully fail to [do so] at the time or times required by law or regulations."

Here, the Court rejected Rankin's claim that he was entitled to a § 7203 lesser included offense instruction (slip op., at pp 8-9; 929 F.3d at 406-407). The gist of the reasoning is:  While it is true that a failure to pay over withheld payroll taxes would be a crime described in both § 7202 and § 7203, § 7202, the felony did not have an extra element that would permit a jury to convict for § 7203, the misdemeanor, but acquit for § 7202, the felony.

The Court does paint in (too) broad strokes in getting there.  The Court said (929 F.3d at 407):  "all violations of § 7203 for failing to pay a tax necessarily constitute violations of § 7202."  (929 F.3d at 407) That statement is only true in the context of taxes that a person is required to collect, account for and pay over (like payroll withholding tax). My experience is that § 7203 failure to pay cases can be applied in contexts well outside withholding taxes.

JAT Comments:

Article on Justice Gorsuch's Approach to Criminal Tax Cases (5/20/2017)

I think readers will be interested in this excellent article by Jeremy Temkin:  Reading Tea Leaves: Justice Gorsuch and Criminal Tax Cases, 257 NYLJ (5/18/17), here.  The data set for the article is slim -- principally  United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here (note that the link is to the case on the UVA Law School website titled the Neil Gorsuch Project).  I have written before on the subsequent trajectory in Farr and provide the principal blog links at the end of this blog. Basically, in the 2008 case decided by then Judge Gorsuch, Farr argued successfully on the appeal that the charging document incorrectly charged her for evading "her" employment taxes (which were not her liability) rather than the trust fund penalty for which she was liable.

Here is an excerpt from Temkin's Lessons Learned:

It is, of course, necessary to exercise caution in reading tea leaves, and a narrow  sampling of cases is insufficient to conclude with confidence that Justice Gorsuch will show the same willingness as Justice Scalia to defend (certain) criminal rights. After all, Farr was a fairly unusually (sic) case, and Judge Gorsuch left open the possibility that the government could have avoided the constructive amendment problem that it had created by drafting a bare-bones indictment. That solution, of course, will not help criminal defendants who will be forced to rely on rarely granted bills of particulars to draw out the government’s case. 

In that way, Farr presents an interesting tension with Justice Scalia’s dissent in United States v. Resendiz-Ponce, 549 U.S. 102, 111 (2007). Resendiz-Ponce was convicted of illegally attempting to reenter the country based on an indictment that failed to allege that he had committed any overt act in connection with his reentry. An eight-justice majority concluded that the indictment was sufficient, reasoning that “attempt” necessarily connotes both intent and some overt act. Justice Scalia refused to give the government the benefit of that doubt. Instead he found the indictment faulty on the straightforward view that it failed to satisfy the requirement that it allege the two elements of  attempted reentry: both intent to commit the underlying crime and some act toward its commission. Thus, while both Judge Gorsuch in Farr and Justice Scalia in Resendiz-Ponce showed themselves  committed to construe indictments strictly, the former did so by encouraging the government to allege fewer particulars, while the latter concluded that more details were necessary.

JAT Note:  Of course, Farr could have been convicted of evading the employer's employment taxes (including even the employer's portion), but the charging document should not have said she evaded "her" taxes.

Prior blogs on Farr:

• Charging Decisions for Trust Fund Tax Violations (Federal Tax Crimes Blog 11/17/16), here.
• Charging Decisions for Trust Fund Tax Crimes - 7202 or 7201 (Federal Tax Crimes Blog 12/22/12), here.
• Evasion of Trust Fund Taxes and Charging Decisions (Federal Tax Crimes Blog 1/23/2012), here.
• Tenth Circuit Summarizes Double Jeopardy in Rejecting the Argument (Federal Tax Crimes Blog 1/16/10), here.

Charging Decisions for Trust Fund Tax Violations (11/17/16)

DOJ Tax issued this press release:  Nevada Woman Indicted For Evading Payment of Trust Fund Recovery Penalties (11/16/16), here.  The key excerpts are:

According to the superseding indictment, Maria Larkin aka Maria Bella-Larkin, owned and operated Five Star Home Health Care Inc. (FSHHC) from 1996 through 2009 and was responsible for collecting, accounting for, and paying over income, social security, and Medicare tax withheld from employees’ wages.  The tax withheld is referred to as “trust fund tax” because the employer holds those funds in trust until the amounts are paid over to the Internal Revenue Service (IRS) on behalf of the employee.  If a responsible person willfully fails to pay over trust fund taxes, the IRS may impose a penalty equal to the amount of the trust fund taxes on the responsible person.  This penalty is known as the trust fund recovery penalty.  

The superseding indictment alleges that from 2004 through 2009, FSHHC failed to pay over the tax withheld from its employees’ wages and, as a result, the IRS assessed trust fund recovery penalties against Larkin equal to the amount withheld and not paid over. 

According to the superseding indictment, Larkin willfully attempted to evade and defeat the payment of the trust fund recovery penalties assessed against her by concealing and attempting to conceal from the IRS her access to personal funds and assets.  Specifically, the superseding indictment alleges that Larkin purchased a home in the name of a nominee, engaged in currency transactions with financial institutions in amounts less than $10,000 to prevent the filing of currency transaction reports, changed the name of her business and placed the business in the name of a nominee, and provided false information to the IRS regarding her ability to pay the trust fund recovery penalties.

The superseding indictment is here:

This is a fairly routine prosecution as described in the press release and superseding indictment.  Trust fund prosecutions have been increasing for a number of years now.  See DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16), here (noting DOJ Tax's request, adopted in the 2016 Guidelines under § 2T1.6, to drop the description in the Sentencing Guidelines that § 7202 is "infrequently prosecuted"); see also Michael Chittenden and Yongo Ding, DOJ Repeatedly Signals Intent to Ramp Up Criminal Prosecutions for Employment Tax Failures (Miller & Chevalier Blog 4/16/16), here; and an ABA slide presentation titled Civil and Criminal Employment Tax Enforcement Efforts - Employers Beware (5/18/16), here, presented by Josh Ungerman, Leigh Kessler and Dennis L. Perez.

The question I address in this blog is the overlap between willful failure to collect and pay over tax § 7202, here, and other tax crimes, such as tax evasion § 7201, here.  I have addressed this subject before:  Evasion of Trust Fund Taxes and Charging Decisions (1/23/2012), here, where I discuss the Farr case referenced in the CTM quote below; United States v. Farr, 536 F.3d 1174 (10th Cir. 2008), here; and Criminal Restitution for Employment Taxes and Trust Fund Liability Under Section 6672 (6/18/13), here.  The ABA slide presentation above indicates that the following crimes are often present:

Tax Attorney Convicted of Employment Tax Fraud (9/8/16; 9/10/16)

This DOJ Tax press release, here, caught my eye because the title was:  Pittsburgh Tax Attorney and Owner of Iceoplex Convicted of Employment Tax Fraud.  The 16 counts are for convictions under § 7202, here, titled "Willful failure to collect or pay over tax."  Don't know the details or,  really anything else noteworthy, except the following excerpted from the press release:

According to the evidence presented at trial, between 2004 and 2015, Steven Lynch, a tax attorney, co-owned and operated the Iceoplex at Southpointe, a recreational sports facility located in Washington County, Pennsylvania.  The Iceoplex included a fitness center, ice rink, soccer court, restaurant and bar.  Lynch controlled the finances for these businesses and was responsible for collecting income and employment taxes withheld from employee wages, accounting for these taxes and filing Forms 941, payroll tax returns, and paying these taxes over to the Internal Revenue Service (IRS).  The jury found that between 2012 through 2015, Lynch failed to timely pay over to the IRS more than $790,000 in taxes withheld from the wages of the employees for these businesses. 

JAT Comments:

1.  For some years, the IRS and DOJ Tax have been stepping up their criminal enforcement efforts in the employment tax area.  The point the IRS and DOJ Tax wants to make that those who think that this is just a civil tax issue may be mistaken, and may be criminally investigated, charged, convicted, sentenced and spend some time in jail, all the while remaining liable for the taxes evaded (and  a host of related costs, including other penalties and fines).  And, even if they are lucky enough to avoid all those criminal related costs, they are still subject to potential trust fund recovery penalty liability under § 6672, here, titled "Failure to collect and pay over tax, or attempt to evade or defeat tax."  (Readers should note that, although the titles of the criminal and civil provisions are slightly different, the substantive language is virtually the same, with the criminal statute simply requiring proof for conviction beyond a reasonable doubt.  Not a comforting thought for those who play this game, as the IRS and DOJ Tax increase their criminal enforcement efforts.

2.  Based solely on the sentencing factors noted  in the press release (indicated tax loss over $790,000, no acceptance of responsibility downward adjustment, and presuming the pre-2015 Guidelines), the indicated Guidelines level is 20 (according to my Guidelines spreadsheet) and the indicated sentencing range is 33-41 months.  (By contrast, had Lynch pled guilty to achieve an acceptance of responsibility downward adjustment (or, in the rare even he might otherwise qualify for acceptance of responsibility) the sentencing level would have been 17 with an indicated range of 24-30 months, so that he could have achieved a 9 month lesser sentence at the bottom of each Guidelines range.) Of course, the judge can always do a Booker variance, which, in tax cases, is almost always downward.  But that will depend upon factors not evident from the press release.  Those additional factors are produced for the court in the Pre-Sentence Report ("PSR") and the parties sentencing submissions after review the PSR.  When the sentence is announced, I will dig around what is the in public report (usually not the PSR, but perhaps some contested portions of it) and report back.

Addendum on 9/10/16 12:30pm:

3. Robert Horwitz, a seasoned criminal tax attorney, here, called my attention to a typo on the blog and to a more substantive issue.  I have corrected the typo.  More important is the substantive question he raised.  Paraphrased, he asked whether, as specifically stated in the press release, the jury found that Lynch failed to timely pay over $790,000.  Readers will recall that, in tax evasion cases, the jury finds only that the defendant committed tax evasion, but does not find a specific amount.  (This was the issue addressed in the blog entries on the Senyszen case discussed in 3 blogs, here.)  The conviction here was for willful failure to collect and pay over, § 7202, here.  The amount involved is not an element of this crime, so Robert's question was whether the DOJ press release was correct that the jury made a finding on amount of over $790,000.

So, I went to Pacer and pulled down the jury verdict form, here.  From the jury verdict, the following went to the jury:

• Tax obstruction, § 7212(a) (one count, presented as Count 1): Jury verdict:  NOT GUILTY.
• 2. Failure to collect and pay over, § 7202 (28 counts, one per employer per quarter, presented as Counts ___ - ___, with one in  that series dismissed):  NOT GUILTY ON 11 COUNTS, GUILTY ON 16 COUNTS. 

Most importantly for the present discussion, the jury verdict does not find any amount of tax involved.  But, the jury verdict does find the defendant guilty of 16 counts and the counts, as alleged in the superseding indictment, here, does contain the approximate numbers for each quarter.  So, the jury verdict although not explicit as to amounts might make the finding by incorporation from the superseding indictment.  Since, however, the amount of tax involved is not an element of the crime, I presume that the authority for § 7201 might be applicable here as well/

My calculations from the superseding indictment shows the following:  tax amount for 16 counts of conviction  $725,728; tax amount for 11 not guilty counts $694,044, tax amount dismissed count (count 12) $24,998, aggregate tax amount $1,444,260.  I am not sure where the reported $790,000 amount comes from, but I do note that the amounts could have been refined in the presentations at trial.  In any event, the key break point for the sentencing calculations is $1,000,000.

As readers know, the intended tax loss ("tax loss") is determined at the sentencing phase for the first, most critical, step in the sentencing guidelines calculation.  Importantly, in terms of the guidelines calculations, though, the tax loss for the guidelines calculations also includes the tax loss for "relevant conduct."  See §1B1.3.  Relevant Conduct (Factors that Determine the Guideline Range), here.  The tax loss involved in not guilty counts may well be in play in calculating the guidelines range because the standard of proof is preponderance of the evidence rather than beyond a reasonable doubt.  Using the indicated tax loss for the counts of not guilty verdicts, the aggregate loss will move the calculation to the next bracket (which covers the range from $1,000,000 to $2,500,000, so that is a comfortable conclusion for the not guilty counts).  That will move the sentencing table calculation to offense level 22 and an indicated sentencing range of 41-51 months.

Finally, with 16 counts of conviction for the 5 year § 7202 felony, the maximum sentence could be 80 years.  As indicated, even with relevant conduct, the guidelines calculations will produce a sentence of far less than that.

DOJ Tax Promotes Employment Tax Criminal Prosecutions (3/10/16)

I have previously posted on certain comments at a recent Federal Bar Conference.  See Report on Remarks of AAG Tax and Practitioner Regarding Nonwillfulness and Foreign Account Enablers (3/7/16), here, and Acting AAG Remarks to Tax Conference - the Criminal Topics (3/4/16), here. A significant portion of the  AAG's prepared remarks related to criminal enforcement initiatives for prosecutions under § 7202, Willful failure to collect or pay over tax, here.  This is the criminal analog to the trust fund recovery penalty, § 6672, Failure to collect and pay over tax, or attempt to evade or defeat tax, here.  The article is Matthew R. Madara,  DOJ Seeking to Change Employment Tax Sentencing Guideline, 2016 TNT 45-8 (3/8/16) [no link available].

Key points and extrapolations from the article are:

1.  As DOJ Tax has made clear both in pronouncements and prosecutions, it is very serious about § 7202 prosecutions.

2.  DOJ Tax is seeking to amend the Sentencing Guidelines statement in the background to the § 7202 Guideline, §2T1.6.Failing to Collect or Truthfully Account for and Pay Over Tax, here, that "The offense is a felony that is infrequently prosecuted."  Specifically, DOJ Tax wants the vestige reference to infrequently dropped (which would probably mean dropping out all after felony).  The proposed amendments are here, with the proposal on § 7202 at pp. 3-4 which says in pertinent part:

The Background commentary to §2T1.6 states that “[t]he offense is a felony that is infrequently prosecuted.” The Department of Justice in its annual letter to the Commission has proposed that the “infrequently prosecuted” statement should be deleted. The Department points out that while that statement may have been accurate when the relevant commentary was originally written (in 1987), the number of prosecutions under section 7202 have since increased substantially. The use of §2T1.6 increased from three cases in 2002 to 46 cases in 2014. See United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2002), at http://www.ussc.gov/research-and-publications/federal-sentencingstatistics/guideline-application-requencies/guideline-application-frequencies-2002; United States Sentencing Commission, Use of Guidelines and Specific Offense Characteristics: Guideline Calculation Based (Fiscal Year 2014), at http://www.ussc.gov/sites/default/files/pdf/research-andpublications/federal-sentencing-statistics/guideline-applicationfrequencies/2014/Use_of_SOC_Guideline_Based.pdf

3.  Besides being inaccurate because of the increase in § 7202 prosecutions, the statement is being deployed by defense lawyers to minimize the gravity of the offense in sentencings.  I would not think, however, that sentencing judges are much swayed by that genre of argument.

4.  As to characteristics of failure to withhold and pay over cases that are prosecutors, a DOJ Tax attorney said that DOJ Tax is particularly looking for cases where the responsible parties have lied to the IRS.  (As I has said often on the blog, criminal tax cases, like many or most white collar crimes cases, are principally about the lie, in one form or another.)  The lie is what will help make the substantial burden to prove willfulness beyond a reasonable doubt.

5.  Proving willfulness -- and thus obtaining conviction -- is relatively straightfoward despite the criminal burden of proof.  If the employer -- with the action of the responsible person -- has withheld from the wages, any defense by the responsible person with regard to failing to pay over "falls by the wayside."

Good Case on Grouping for Tax Crimes for Sentencing Purposes (5/16/12)

In United States v. Register, 678 F.3d 1262 (11th Cir. 2012), here, the Eleventh Circuit held that grouping under SG § 3D1.2(d), here, is required for counts of conviction for failure to pay over,  §  7202 (13 counts), and tax perjury,  §  7212 (4 counts).  Generally, for a defendant, grouping is good and not grouping is bad.  Bottom line, the Court on the facts found sufficient nexus between the two crimes to group.  The opinion is very good and I highly recommend it to readers.

Because the opinion is so good and reasonably succinct, I don't try to summarize.  Rather, I refer readers interested in the grouping concept to read the opinion.  For persons not that familiar with the concept, I offer the following from my Federal Tax Crimes book (as revised for the Register case, but omitting the footnotes).

To Group or Not to Group - That is a Question.

I noted repeatedly in the crimes section that a pattern of criminal activity that is essentially a unified crime may violate more than one criminal statute and thus could give rise to several or even many criminal counts in an indictment drafted at the discretion / whim of the prosecutor.  For example, a pattern of conduct might constitute tax evasion and tax perjury – i.e., the taxpayer files a false return underreporting his or her tax liability.  Should the prosecutor be able to squeeze out a greater sentence by charging tax evasion and tax perjury for the same pattern of activity?

New Sixth Circuit Failure to Pay Over Case

In United States v. Blanchard, ___ F.3d ___ (6th Cir. 2010), the defendant was "convicted of fifteen counts of Failure to Account for and Pay Over Withholding and FICA Taxes, in violation of 26 U.S.C. § 7202, and three counts of Making and Causing the Making of a False Claim for a Tax Refund, in violation of 18 U.S.C. § 287." The decision in the case is useful because it covers a lot of the key issues presented in failure to pay over cases which seem to be coming more frequently in recent years

1. Statute of Limitations. The Court holds that the statute of limitations under § 6531 is 6 years. The defendant's argument was that "pay" in the 6 year statute (§ 6531(4)) was a different concept than "pay over" which is the concept in § 7202 and thus that the default tax crimes statute of limitations of 3 years applied. The defendant argued that, not only was it a different concept, but analysis of the 1954 Code predecessor -- the 1939 Code -- supported this reading of § 6531(4). The Court rejected the argument, consistent with the mainstream (but not unanimous) holdings. The Sixth Circuit provides a good discussion of the cases on the subject.

2. Admission of Evidence of Discretionary Expenditures. The Court held that the evidence of defendant's discretionary expenditures was relevant to his willfulness and thus was properly admitted at trial.

3. Ability to Pay is Not An Element. Following the Ninth Circuit's holding in Easterday (discussed here), the Court rejects the argument that the Government must prove ability to pay as an element of the offense. The essence of the holding is that a defendant cannot immunize himself or herself from criminal tax charges by avoiding having the resources to pay -- such as by spending the money otherwise available to pay.

4. Failure to Instruct on the Defendant's Theory of the Case. Failure to properly instruct on a defendant's theory of defense is viewed as reversible error (at least if not harmless), as we noted in discussing Kottwitz. But, unlike Kottwitz, the Sixth Circuit finds no reversible error because the other instructions covered the gravamen of the defense. So, let's see. The defendant's claim was that he relied upon his accountant / return preparer. There was sufficient evidence that he did so, at least sufficient to support the requested instruction on the defense. The Sixth Circuit held that there was no reversible error because the defense was subsumed in the willfulness and good faith instructions the trial court did properly give to the jury. In other words, if the jury understood those instructions, it would have known that the defendant would have a defense if he indeed relied upon the accountant / return preparer. This notion, of course, relies upon the legal construct that juries understand jury instructions as given and are able to extend the concepts beyond the instructions. Finally, the Court does state as its final sentence that there was "no error here." I read the analysis as being a no reversible error opinion. I think that in a case with the proper evidentiary predicate for a reliance defense, the defendant is entitled to the instruction and the general willfulness and good faith instructions will not cover the ground. Hence, I think the Court's concluding sentence is unfortunate.

5. The Net Wage Entitlement to Credit for Withheld Taxes. In reporting his personal income tax liability, the defendant claimed a credit for the tax he was supposed to cause his "employer" to withhold and pay over but did not; based on this notion, the defendant claimed that he could not be guilty under 18 USC § 287 (false claims) for claiming those credits. The general scheme for withholding is that, upon payment of net wages, the employee gets the credit for taxes withheld whether or not the withholding agent (the employer) ever pays over those withheld (or deemed withheld) amounts to the IRS. Of course, that is the general scheme. This general scheme was not designed to benefit the person who is responsible for the failure to pay over in the first instance. Interestingly, in this regard, the Sixth Circuit relied (or at least found persuasive) an unpublished decision affirming a § 7201 conviction in a similar circumstance. The defense is just a bit too cute.

6. Amount of Restitution for Tax Crimes. The Court reversed the imposition of restitution related to the tax crimes (as opposed to the Title 18 crimes). Restitution is just not available for tax crimes except as a condition for some benefit (such as condition of probation) conferred on the defendant.

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.