## Facts

- Jack E. Easterday owned and operated multiple Northern California nursing homes through related corporate entities.
- Federal law required his companies to withhold employee income and FICA taxes and remit those “trust fund” payroll taxes to the IRS.
- From Q4 1998 through Q4 2005, Easterday’s companies accurately reported payroll tax liabilities of about $44.86 million but paid only about $26.02 million.
- The IRS repeatedly demanded payment and pursued collection measures, including notices of intent to levy and liens.
- Easterday acknowledged responsibility and cooperated with the IRS, but the payroll taxes remained unpaid in substantial part.
- Easterday’s defense theory was that he lacked the financial ability to pay because he used available funds to keep the businesses operating rather than closing them.
- The government charged Easterday with 109 felony counts of willfully failing to pay over payroll taxes under 26 U.S.C. § 7202.

## Issues

1. Whether “ability to pay” is an element of 26 U.S.C. § 7202 that the government must prove as part of “willfulness.”
2. Whether financial hardship or using withheld taxes to keep a business operating can negate willfulness or otherwise provide a defense to a § 7202 charge.
3. Whether the district court erred by refusing an “ability to pay” jury instruction and excluding financial-hardship evidence offered to support that theory.

## Decision

- The Ninth Circuit affirmed Easterday’s convictions (107 of 109 counts) and 30-month sentence.
- The court held that “ability to pay” is not an element of § 7202 and rejected a requested instruction based on earlier circuit precedent.
- The court held that financial hardship and business survival reasons do not constitute a defense to willful failure to pay over trust-fund taxes.
- The court concluded the jury instructions properly framed willfulness and permitted a good-faith belief defense, including an instruction that good faith may exist even if unreasonable.

## Legal Principles

- For federal tax crimes, “willfulness” means a voluntary, intentional violation of a known legal duty; it does not require proof of evil motive.
- In § 7202 prosecutions, the government need not prove the defendant had sufficient funds to pay the taxes when due.
- A taxpayer’s decision to use withheld payroll taxes for other business expenses, while knowing the duty to remit them, supports willfulness under § 7202.
- Financial hardship or claimed business necessity does not negate willfulness and is not a defense to § 7202 when the defendant knowingly prioritized other payments over remitting trust-fund taxes.
- A defendant may argue lack of willfulness through a good-faith belief of compliance, but inability-to-pay evidence aimed at creating a legal “ability to pay” element may be excluded as tied to an invalid theory.

## Conclusion

The Ninth Circuit held that § 7202 requires proof that the defendant knowingly and intentionally failed to pay over withheld payroll taxes, not proof of an ability to pay, and it affirmed Easterday’s convictions because financial hardship and business-expense priorities do not excuse deliberate nonpayment of trust-fund taxes.


United States v. Easterday, 564 F.3d 1004 (9th Cir. 2009)