Joseph F. Purcell, v. United States of America, U.S. Court of Appeals, 9th Circuit, 1 F3d 932 (1993)

In the case of Joseph F. Purcell v. United States of America, the U.S. Court of Appeals for the Ninth Circuit affirmed a directed verdict in favor of the government, holding that Joseph F. Purcell, the president and sole shareholder of Purcell Temporaries, Incorporated, was a “responsible person” under 26 U.S.C. § 6672 and had willfully failed to pay over federal withholding taxes.

Key Points:

1. Background: Joseph F. Purcell was the president and sole shareholder of Purcell Temporaries, Incorporated. He delegated financial responsibilities to Lester Hatchard, who embezzled funds and failed to pay federal employment taxes for the first two quarters of 1981. After Hatchard’s resignation, Purcell reassumed control and discovered the financial mismanagement.
2. Legal Proceedings: The IRS assessed Purcell for the unpaid withholding taxes for 1981 and 1982. Purcell sought a refund for amounts paid and other relief, while the United States counterclaimed for the balance of the assessment. The district court granted a directed verdict in favor of the government, which Purcell appealed.
3. Court’s Analysis:

3. Responsible Person: The court held that Purcell was a “responsible person” under § 6672 because he had the authority to control the financial affairs of the company, even though he had delegated these responsibilities to Hatchard. The court emphasized that responsibility is determined by one’s status, duty, and authority, not by the actual exercise of control.
4. Willfulness: The court found that Purcell willfully failed to pay the taxes. Despite knowing about the unpaid taxes after reassuming control, Purcell chose to pay other creditors instead of the IRS. The court cited its previous decision in Davis v. United States, which defined willfulness as a voluntary, conscious, and intentional act to prefer other creditors over the United States.
5. Slodov Exception: The court rejected Purcell’s argument that he should be exempt from liability under the Slodov exception, which applies to new management that assumes control after a tax delinquency has occurred. The court noted that Purcell was responsible both before and after the delinquency, thus the exception did not apply.
6. Encumbered Funds: Purcell argued that the company had no unencumbered funds to pay the taxes. The court found this argument unpersuasive, noting that Purcell failed to provide sufficient evidence that the funds were legally or practically restricted from being used to pay the taxes.
7. Outcome: The Ninth Circuit affirmed the district court’s directed verdict in favor of the government, holding Purcell personally liable for the unpaid withholding taxes.

Conclusion: The Ninth Circuit’s decision in Joseph F. Purcell v. United States underscores the non-delegable duty of corporate officers to ensure that withheld taxes are paid to the government. The court’s analysis focused on the statutory definitions of “responsible person” and “willfulness” under § 6672, ultimately holding Purcell liable for the unpaid taxes due to his authority and conscious decision to prioritize other creditors over the IRS.