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Thursday, November 5, 2009

Who says there are no debtors' prisons in the United States?

An alert reader wrote us today with concern about a case in which a man was sent to prison for willfully failing to pay his company's payroll taxes, even though he argued that he didn't have the money to pay them. Jack Easterday operated a chain of nursing homes in Northern California. He always reported the company's federal payroll tax liability accurately, but he paid only part of it. The IRS came after him to collect what was owed, and it put liens on the company's assets, but eventually it filed criminal charges against Easterday -- 109 counts of willful failure to pay over the payroll taxes that the company had withheld from employees.

Easterday put on testimony at his trial that the nursing homes were losing millions of dollars, and thus couldn't pay all their payroll taxes. The judge ruled that that didn't excuse him from criminal liability, and the jury convicted him on 107 of the 109 counts. The court of appeals agreed with the trial judge that in order to prove the crime of willful failure to pay over taxes, the government need not prove that the taxpayer had the ability to pay; it ruled that the fact that the taxpayer is too broke to pay is irrelevant to that crime. This week, the Supreme Court let that ruling stand.

I have no doubt that Easterday is not a saint, but I agree with the reader that in incarcerating someone for failing to pay taxes -- taxes that he or she freely reported to the government -- we ought to ask whether the person had the wherewithal to pay. Otherwise, aren't we putting people in jail simply because they can't pay a debt?

Comments (25)

Sounds like he could pay but chose to pay others first:

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.

Guido really hates that.

If you're operating a money-losing facility to bankruptcy (unable to stay current on bills owed) your obligation is to find a buyer or shut down, not to keep running and getting further behind and hope you're going to get it all turned around by, in essence, helping yourself to a loan from the feds.

If you're going to show up, pull out your pockets and plead poverty as your excuse for not paying the feds, there better be a whole lot of other creditors chasing you to whom you owe a lot more money than you do to the feds.

You're missing the issue, George. If you pay the feds and screw your other creditors, you don't go to jail.

My daughter bought a student Trimet pass at Safeway, after being told it covered college students. The enforcer on the Max pointed out it only covered high school students (WTF?), and gave her not a ticket, as in a traffic ticket, but a community court date. She had to plead guilty or not guilty to "theft of services". She pleaded guilty and was sentenced to 8 hours community service. So far, this might not seem so bad, but note that this is a CONVICTION not a ticket. The conviction is on her record for three years and to expunge it after three years she'll have to file, be fingerprinted and pay a $250 fine. Remember her intent was not to steal services as she had a pass which she had bought in error but in good faith. A fine or warning would have seemed the common sense thing for the law to give her.

Now consider the cost to city taxpayers of this rigamarole.

Now consider that most of the people at community court that day, which was packed, did not seem to be of a socio-economic group that could ever easily muster up $250 or a lawyer.

And consider that the judge in question hogged everyone's time by lecturing the room about how much they should love their mothers, ordered a man in the court who was accused by a woman there of making a racial slur to be handcuffed and thrown in jail, threatened anyone who raised a question with the same, and you have the picture of a near Dickensian world right here in lovely Portland. We were shocked at the stupidity, arbitrariness, lack of fairness and waste of resources. It has certainly made us loss faith in the wisdom of our state lawmakers.

kmazz: Name names here. Who was the judge and can your daughter appeal this "conviction"? This is nearly as bad as the judges back east who sentenced juveniles to the prison for kick backs.
If this judege is elected then he/she should be defeated in the next election.

Yet another reason to NOT use public transit!

I'm frankly afraid to name names. That's how intimidating this abuse of power was for us.
My daughter had prepared a letter explaining how the error had happened that she wanted to submit to the judge but he would not let anyone speak at the court; either plead guilty or not guilty. I asked a lawyer about appealing the conviction -- I would have consulted a lawyer at the beginning if I had known about this kangaroo situation in our courtrooms -- and he said there was nothing to be done except wait out the three years. I feel really sorry for the poor souls in there with her who have fewer resources than she does. Oh and by the way the $250 is not a "fine" really it is a fee to cover the cost of the expungement. Seriously.
If anyone here is a lawyer and wants to take this on, let me know.

The debtor's prisons that the colonists rebelled against were jails that private creditors sent you for failure to pay private debts.

There's never been any suggestion that the feds wouldn't send you to prison for not paying taxes.

Isn't this more a case of tax evasion instead of debt? I know it is a very fine line, but like you said, you skip out on other kinds of debt and you don't go to jail.

Plus unlike reg debt, you can't escape tax liability thru bankruptcy, so if you're going to call taxes debt, they desrve a special "super-debt" category.

Believe me, as a self-employed person when I write the 15% check for SocSec, then Fed %, then Oregon % and marvel at how little a return I am getting for it (especially compared to 10 years ago), its tempting to do an Easterday.

Isn't this more a case of tax evasion instead of debt?

Easterday correctly report the tax obligaton to the government.

It's about the debt.

I agree the Trimet "student" ticket pricing is bogus, (I have two kids in college.)
I think college kids should get a break too. However it is very clear on the website that its for those 17 or under.

It says a youth/student fare is-

"Discounted fare for youth ages 7-17 and students in high school or pursuing a GED."

I have seen many college kids caught up by this on the morning trains to downtown. So its not just a few instances.

BTW, some local colleges offer a "three months for two" deal on Trimet passes at the beginning of the semester when you pay your fees. Thats how we do it.

Yes, she made a mistake and thus a straightforward fine or warning would have been within the realm of what is reasonable. No issue there. What transpired was out of proportion and overly punitive, so much so that it smacked of abuse of power.

Tax evasion of payroll taxes is the one area that the IRS has huge powers, to the extent of "piercing the corporate veil" and go after the principals to get that money. I know a fella that had to mortgage his house to pay the taxes his CFO "conveniently" neglected to pay, then the company went under. In this case, the CFO apparently had no or little personal assets so the IRS went after the others.

I would suspect that this fellow was last in line somehow and refused to pay.

The opinion said something about $20M in losses over some lengthy period -- that means that he paid LOTS of people rather than paying the feds. He chose badly.

There's a growing trend going around the U.S. now where municipalities and municipal water authorities are filing liens for unpaid water bills (a few hundred dollars' worth usually, at most) and then forcing sheriff sales by executing on the liens, thereby evicting the poor people from their homes -- and whereby the authorities then turn around and sell the houses to their insider developer friends who take over the neighborhoods and convert them -- 21st century urban "renewal."

Kmazz, my daughter was also a victim of the Trimet gestapo. I had taken her to work on fine day so she didn't need her fully paid Trimet pass. At the end of her work day she jumped on the bus and headed for the Max line. Lo and behold a fare inspector asked for her ticket/pass. Inadvertently she had left it in her other hand bag, after search the one she was carrying. She was kicked off the mass transit vehicle and given a citation to appear at the tribunal you spoke of. Armed with proof, via a receipt, she'd purchased a full non-student pass and had accidentally unbeknown to her left it home, went to the "guilty as charged" hearing. She too was not allowed to speak or show proof of purchase. Guilty or not guilty were the options. Stating yes in fact she was on the Max without her pass in hand, GUILTY. Now her sentence is No riding of mass transit for 30 days, and if it ever happens again, she will be arrested for theft of services. It's not the fact she didn't have her pass with her, it's the fact she wasn't allowed to speak other than to say guilty or not guilty. The end result in this instance is Trimet will be out the 70 some bucks she normally pays for the month of November, and there will be one more car downtown Portland to contend with.

Kmazz & Phill, why didn't your daughters plead "not guilty" and then get their day in court to explain?

You'd think the feds would rather have someone working and paying back their tax debt, rather than in jail making license plates.

To the Trimet whiners who have hijacked this thread - read the pass. It states that it's for high school students.

Since it looks like this is employee payroll withholding that wasn't turned over to the government one could argue that this is as much a case of embezzlement as it is a failure to pay taxes, but heh, why not just say it's a hate crime (the protected group being law-abiding taxpayers) and let it pass at that.

Interesting point, but still it's relatively unusual that the US government seriously pursues criminal tax cases (at least in comparison to the amount of criminal conduct that probably occurs in our tax system on a regular basis).

On the other hand, the much more common story about modern-day debtors' prisons is the over-use large fines & penalties on poor defendants who have no realistic way of paying. Sadly, the inability to pay means they'll stop paying child support, violate conditions of parole and/or end up back in prison. See, e.g., http://www.nationalreentryresourcecenter.org/publications/debtors_prison

I think the key may be this line: "109 counts of willful failure to pay over the payroll taxes that the company had withheld from employees."

A company doesn't "own" the money it deducts from employees. If anyone is going to keep it and not pay taxes, it would be the employees. It's their pay.

The gross pay belongs to the employee. The employer withholds some in order to pass on to the taxing authorities, but the money doesn't then belong to the employer again.

Snards is absolutely correct. This is not a jailing for failure to pay a debt, this is a jailing for stealing. Even if the money was solely the employers share of FICA it is still stealing. This indiidual took money that belonged to someone else and used it for personal private gain.

There's some outrageous episodes recounted above. Please name the public officials and "judges" who are running these railroads.

If that gets your panties in a bunch, what do you think about the existing provision in the House health care bill that mandates a tax penalty for failure to purchase health insurance and jail time for failure to pay the penalty? There is no mention of whether you have to get sick (i.e., "steal" the benefits that you didn't get) before you go to the slammer.

it's relatively unusual that the US government seriously pursues criminal tax cases

Not when you get a bunch of people hopping mad.

We once belonged to a pool where the Treasurer of the nonprofit association was also the Treasurer of a company called Presidential Airways -- surely you remember that. Well maybe not. I don't think they survived their second year.

When Presidential hit a rough spot (which would have been within about 30 days of its inception) the treasurer had the brilliant idea of using pool funds (the lifeguards' and snackbar attendants' withholding) to help finance a plane lease or two. This came to light after the first of the year, when some of the kids had a tough time getting their tax refunds from the IRS.

Is an adult stealing from high school and college kids problematic? I should say so. Our treasurer resigned, promised restitution and pled guilty to a felony count or two.

John Benton,
In my daughter's case, she pleaded "guilty" because she figured she was, technically, guilty for buying the wrong pass. She figured she would state her case and get a fine and be done with it. Never expected a conviction.

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