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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

DAVID S. SAVAGE,

CASE NO. CIV. S-04-2316 WBS KJM

Plaintiff,

v. MEMORANDUM AND ORDER RE: 

MOTION FOR SUMMARY JUDGMENT 

UNITED STATES OF AMERICA,

Defendant.

 

UNITED STATES OF AMERICA,

Counterclaim Plaintiff,

v.

DAVID S. SAVAGE and PHYLISS SAVAGE,

Counterclaim Defendants.

----oo0oo----

Plaintiff David Savage filed suit against the United

States seeking a refund of $24.14, paid in partial satisfaction

of a tax penalty assessed against him as the person responsible

for Precision Construction, Inc.’s (“PCI”) failure to pay its

payroll taxes. The government responded with a counterclaim

against plaintiff and Phyliss Savage to reduce PCI’s overdue

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Pursuant to PCI’s articles of incorporation, the same 1

officer serves as both President and CEO. (Def.’s Mem. in Supp.

of Mot. for Summ. J. Ex. A-3 at 10 (Articles of Incorporation).) 

However, as part of the “reorganization” approved at the annual

meeting on December 31, 1998, Allison assumed only the role of

President and plaintiff stayed on as CEO. (Id. Ex. A-10 at 2

(Minutes of the Board of Directors and Shareholders).)

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assessments to a judgment against the named parties. The

government now moves for summary judgment on its counterclaim

against David Savage pursuant to Federal Rule of Civil Procedure

56.

I. Factual and Procedural Background

Plaintiff served as PCI’s President and Chief Executive

Officer (“CEO”) from 1974, when he acquired the company, through

December 1998. (Savage Decl. ¶¶ 2-3.) However, citing health

problems including obesity, diabetes, high cholesterol, and gout,

plaintiff resigned his position as president on December 31,

1998. (Id. ¶ 4.) Concurrently, John Allison took over as

President and counterclaim defendant Phyliss Savage assumed 1

responsibility for PCI’s finances as the new Chief Financial

Officer (“CFO”).

Plaintiff’s health problems were not resolved quickly. 

He suffered a heart attack in February 1999 and an angina attack

in September 2000. (Id. ¶¶ 6-7.) On the advice of his doctors,

he began an “intensive diet treatment program” that helped him

trim down significantly by September 2001. (Id. ¶ 8.) During

this time, he was frequently absent from work and did not

participate in the day-to-day management of the business. (Id.

¶¶ 6-10.) He did, however, retain the right to sign checks and

occasionally exercised this power despite being only marginally

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involved in the business. (Id. ¶ 5.)

PCI struggled financially during plaintiff’s absence. 

Plaintiff learned in March 2001 that the company suffered a

“large net operating loss for the year 2000.” (Id. ¶ 11.) He

also learned at some point that CFO Phyliss Savage failed to pay

federal payroll taxes for the last two quarters of 1998 and the

first three quarters of 1999. (Id.) Eventually, she resolved

these liabilities, but then “began to miss payroll tax payments

[again], beginning with the third quarter of 2000 through the end

of 2001.” (Id. ¶¶ 11, 13.)

Plaintiff received multiple notices regarding this

second round of delinquent payroll taxes; however, Phyliss

assured him that the taxes had actually been paid. (Savage Decl.

¶ 15.) Her accounting books and records, showing that the taxes

had been paid in full, were reviewed by PCI’s CPA. (Id.) 

Phyliss also “provided a letter, purportedly from the IRS, but

later found to be a forgery, stating that the tax[es,] [through

December 31, 2000, were] fully paid.” (Id. ¶ 16.) Based on this

evidence, plaintiff was persuaded that the matter had been

resolved and was under control. (Id. ¶ 17.)

Meanwhile, plaintiff resumed active control of the

business in August 2001. (Id. ¶ 18.) Discouraged by continuing

losses, plaintiff decided to shut down PCI and began selling

company assets and settling outstanding accounts. (Id.) As part

of this process, he learned in December 2001 that PCI’s payroll

company, Paychex, had stopped making federal tax deposits “in

September” because PCI had insufficient funds. (Id. at 19.) 

Between August, 2001 and January 9, 2002, plaintiff

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In his complaint, plaintiff states that on March 15, 2

2004, the government made an assessment against him of only

$27,332.43, which represents the amount owed for the quarter

ending on June 30, 2001. However, the government, through its

counterclaim and this motion for summary judgment, seeks to

recover from plaintiff the entire amount owed, $130,974.98, which

includes missed payments for the last two quarters of 2000 and

all four quarters of 2001. (Answer & Countercl. ¶¶ 7-8; Def.’s

Mem. in Supp. of Mot. for Summ. J. 12.) The remaining balance

due, plus interest, was $126,103.62 as of December 31, 2005. 

(Reynolds Decl. ¶ 8.) Although the government’s counterclaim

seeks recovery from both plaintiff and Phyliss Savage, the

government can, and hereby does, move to hold plaintiff liable

for the entire amount because liability under § 6672 is joint and

several. See Schultz v. United States, 918 F.2d 164, 167 (Fed.

Cir. 1990); Brown v. United States, 591 F.2d 1136, 1142 (5th Cir.

1979); Hartman v. United States, 538 F.2d 1336, 1340 (8th Cir.

1976). 

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loaned PCI $230,000 of his personal funds to pay off existing

debts. (Id. at 18.) Two days later, after a visit from Revenue

Officer Mike Flath, plaintiff realized that PCI’s delinquent

payroll taxes dated back to September 2000, not 2001 as he

mistakenly believed, based on Paychex’s statement in December

2001 that it stopped paying the taxes “in September.” (Pl.’s

Stmt. of Disputed Facts ¶¶ 10-11.) Shortly after the discussion

with Officer Flath, plaintiff repaid himself $70,000, which the

government, as the preferred creditor, objected to as violative

of 26 U.S.C. § 6672. (Def.’s Mot. to Dismiss 10.)

The government now estimates that PCI’s unpaid

assessments total $126,103.62. (Reynolds Decl. ¶ 8.) Plaintiff

paid $24.14 on April 23, 2004 and concurrently filed for a

refund, alleging that the a portion of the assessment made

against him, $27,332.43, was erroneous and illegal. (Compl. ¶ 2

8.) Several months later, plaintiff filed suit in federal court

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26 U.S.C. § 6532(a)(1) provides that: 3

[A] suit . . . for the recovery of any internal revenue

tax, penalty, or other sum, shall [not begin] before

the expiration of 6 months from the date of filing the

[refund] claim . . . unless the Secretary renders a

decision thereon within that time, nor after the

expiration of 2 years from the date of mailing by

certified mail or registered mail by the Secretary to

the taxpayer of a notice of the disallowance of the

part of the claim to which the suit or proceeding

relates.

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pursuant to 26 U.S.C. § 6532(a)(1) to collect the refund and 3

abate the tax assessment. (Id. ¶ 11.) The government answered

with a counterclaim, seeking to reduce PCI’s overdue assessments

to a judgment against plaintiff and Phyliss. The focus of the

government’s instant motion for summary judgment is its

counterclaim. 

II. Discussion

A. Legal Standard

Summary judgment is proper “if the pleadings,

depositions, answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party

is entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(c). A material fact is one that could affect the outcome of

the suit, and a genuine issue is one that could permit a

reasonable jury to enter a verdict in the non-moving party’s

favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986). The party moving for summary judgment bears the initial

burden of establishing the absence of a genuine issue of material

fact and can satisfy this burden by presenting evidence that

negates an essential element of the non-moving party’s case. 

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Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). 

Alternatively, the movant can demonstrate that the non-moving

party cannot provide evidence to support an essential element

upon which it will bear the burden of proof at trial. Id.

Once the moving party meets its initial burden, the

non-moving party must “go beyond the pleadings and by her own

affidavits, or by ‘the depositions, answers to interrogatories,

and admissions on file,’ designate ‘specific facts showing that

there is a genuine issue for trial.’” Id. at 324 (quoting Fed.

R. Civ. P. 56(e)). The non-movant “may not rest upon the mere

allegations or denials of the adverse party’s pleading.” Fed. R.

Civ. P. 56(e); Valandingham v. Bojorquez, 866 F.2d 1135, 1137

(9th Cir. 1989). However, any inferences drawn from the

underlying facts must be viewed in the light most favorable to

the party opposing the motion. Matsushita Elec. Indus. Co., Ltd.

v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). 

The substantive law governing a case determines the

materiality of a fact. T.W. Elec. Serv., Inc. v. P. Elec.

Contractors Ass’n, 809 F.2d 626, 630 (9th Cir. 1987). Here, the

applicable tax law provides, pursuant to 26 U.S.C. § 6672(a),

that a person may be liable for penalties assessed against a

company that are “equal to the total amount of tax evaded, or not

collected, or not accounted for and paid over.” A “person” for

the purposes of § 6672 includes “an officer or employee of a

corporation, or a member or employee of a partnership, who as

such officer, employee, or member is under a duty to perform the

act in respect of which the violation occurs.” 26 U.S.C. §

6671(b). Additionally, such individuals must be “responsible”

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This figure does not account for applicable interest 4

that has accrued since December 31, 2005. (See Reynolds Decl. ¶

8 (prospectively calculating interest through the end of the

year).)

7

and act wilfully in failing to collect or pay over the withheld

taxes. Davis v. United States, 961 F.2d 867, 869-70 (9th Cir.

1992). 

B. Analysis

 The government here seeks to hold plaintiff personally

liable for $126,103.62 as a “responsible person” who wilfully 4

failed to comply with § 6672. (See Decl. of Richard Reynolds,

Ex. FF (Certificates of Assessment and Payment showing the extent

of PCI’s overdue taxes)). Plaintiff does not dispute the

existence or amount of this assessment. Hotly contested however,

are the government’s assertions that plaintiff was both a

“responsible person” and a willful offender.

1. Plaintiff as a “Responsible Person”

The Ninth Circuit has consistently identified persons

who have “the final word as to what bills should or should not be

paid, and when” as “responsible” persons under § 6672. Purcell

v. United States, 1 F.3d 932, 936 (9th Cir. 1993) (quoting Wilson

v. United States, 250 F.2d 312, 316 (9th Cir. 1958)). A person

has the final word if that person had “the authority required to

exercise significant control over the corporation’s financial

affairs, regardless of whether he exercised such control in

fact.” Purcell, 1 F.3d at 937. In other words, responsibility

is a matter of status, duty, and authority, not knowledge. 

Davis, 961 F.2d at 873 (upholding the trial court’s finding of

“responsible person” based on the plaintiff’s position as the

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Plaintiff’s absences are allegedly due to an angina 5

attack, a drastic weight loss program necessary to prevent its

recurrence, and knee surgery. (Savage Decl. ¶¶ 7-10.) According

to the plaintiff, these maladies forced prolonged absences and,

when his health permitted, 20 hour work weeks. (Id. ¶ 7.)

8

president, member of the board, and major shareholder, even

though the plaintiff had no knowledge of the tax default). 

“Authority turns on the scope and nature of an individual’s power

to determine how the corporation conducts its financial affairs;

the duty to ensure that withheld employment taxes are paid over

flows from the authority that enables one to do so.” Purcell, 1

F.3d at 936.

Plaintiff contests any characterization of himself as a

“responsible person” during the relevant time frame, and rather

casts himself as passive investor who was plagued by health

issues that prevented him from participating in the management of

PCI. (Pl.’s Opp’n to Mot. for Summ. J. 7.) Indeed, as a result

of his recurring health problems and an intensive weight loss

program, plaintiff’s physical presence at PCI’s corporate office

was limited and sporadic. (Savage Decl. ¶¶ 7-10.) Plaintiff’s 5

frequent absences forced the day-to-day management of the company

into the hands of Phyliss Savage and John Allison. (Pl.’s Opp’n

to Mot. for Summ. J. 2.) However, regardless of these absences,

plaintiff does not dispute that, through his title as CEO, he

retained significant formal authority in the management of PCI.

(Id. at 7-8.) “Courts must look beyond official titles to the

actual decision-making process,” but they need not ignore them

altogether. See Jones, 33 F.3d at 1140.

Moreover, plaintiff also describes several instances

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Plaintiff asserts that his prolonged absences and 6

deficiencies in computer training impeded his check-writing

ability. (Savage Decl. ¶ 5). However, in light of plaintiff’s

admitted successful exercise of check writing power, this

argument is irrelevant. 

Plaintiff’s deposition testimony further reveals that 7

he “participated any time a vehicle was bought”, that he was

responsible for signing loan security agreements from 1999

through 2001, and that he paid a property tax bill for PCI in

March, 2001. (Savage Decl. Ex. 2 (David Savage Dep. 53: 14, 20-

23 and 59:9-16).)

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when he exercised his formal authority to control PCI’s financial

affairs during the time period at issue. First, plaintiff, as a

signatory on the corporate checking account, wrote and signed 27

checks during the relevant 18 month period. (Savage Decl. ¶ 5.) 6

Second, starting in “mid-2001,” plaintiff instructed his CFO to

pay some creditors ahead of others. (Latterell Decl. Ex. AA

(Pl.’s Resp. to Def.’s Interrog. No. 8).) Third, plaintiff

secured a $100,000 loan against his personal residence to fund

PCI and, on two other occasions, infused personal funds into PCI

that were acquired through the sale of his personal property.7

(Savage Decl. ¶ 12.) 

In these instances, plaintiff’s authority exceeded mere

nominal authority. By exercising his ability to write and sign

checks, prefer one creditor over another, and supplement

corporate accounts with personal funds, plaintiff determined how

PCI would conduct its financial affairs. See Hochstein v. United

States, 900 F.2d 543 (2d Cir. 1990) (holding that the controller

of a business who had check-signing authority, made the initial

determination of the order in which bills were to be paid, and

who requested funds on behalf of the business, is a “responsible

person” under § 6672). It is of no consequence that this power

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Significantly, plaintiff does not offer any evidence 8

that he lacked the authority to pay PCI’s taxes. See Alsheskie

v. United States, 31 F.3d 837, 839 (9th Cir. 1994)

(distinguishing the district court’s finding that the plaintiff

was not a responsible party from a case where “the record

contained no evidence that . . . the responsible party[] was

without authority to pay the taxes.”). His arguments regarding

his responsibility focus almost entirely on his inability to

exercise his authority during his health-related absence. (Pl.’s

Opp’n to Mot. for Summ. J. 9). This argument misses the mark. 

The “responsibility” prong of the liability analysis addresses

only the existence of authority; the “willfulness” prong

considers the ability of the individual to act upon his

authority. See Phillips v. IRS, 73 F.3d 939, 943 (9th Cir. 1995)

(addressing the absence caused by an individual’s paralysis as

part of the “willfulness” element in § 6672); Keith v. United

States, No. BK-76-1342, 1978 WL 1160, at *8 (E.D. Va. Feb. 21,

1978) (plaintiff’s medical excuse did not negate wilfulness). 

10

was exercised infrequently as long as the plaintiff possessed

this power during the relevant period. Purcell, 1 F.3d at 937

(“That an individual’s day-to-day function in a given enterprise

is unconnected to financial decision making or tax matters is

irrelevant where that individual has the authority to pay or to

order the payment of delinquent taxes.”). Plaintiff thus

undisputedly possessed the authority required to exercise

significant control over the corporation’s financial affairs at

different times throughout the period at issue. These facts 8

thus establish that plaintiff was a “responsible person” under §

6672 for all six quarters. Cf. Schlicht v. United States, No.

03-1606, 2005 WL 2083103, at *3 (D. Ariz. Aug. 25, 2005) (holding

that a corporation’s president, who “was charged with ‘general

active management’ . . ., had check signing authority, hired and

fired employees, and on at least one occasion . . . paid trust

fund taxes” was a responsible party even though he did not

exercise his authority over finances on a regular basis). 

///

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2. Plaintiff’s Willfulness

Willfulness, under § 6672, has long been defined as “a

voluntary, conscious and intentional act to prefer other

creditors over the United States.” Purcell, 1 F.3d at 938

(quoting Davis, 961 F.2d at 871). Willfulness does not require

the intent to defraud the government or any other bad motive. 

Davis, 961 F.2d at 871. “Once a responsible person gains

knowledge of a payroll tax deficiency, he is liable for all

periods during which he was a responsible party, regardless of

whether those periods precede or follow the date he gained that

knowledge.” Schlicht, 2005 WL 2083103, at *4 (citing Davis, 961

F.2d at 873). Accordingly, a deliberate decision to use

corporate funds after receiving knowledge of a payroll tax

deficiency “falls within the literal terms of this Circuit’s

definition of willfulness.” Davis, 961 F.2d at 871; see also

Thomsen v. United States, 887 F.2d 12 (1st Cir. 1989) (holding

that once a person is aware of the liability to government, that

person has a duty to ensure that the taxes are paid before any

payments are made to other creditors (citing Mazo v. United

States, 591 F.2d 1151, 1157 (5th Cir. 1979)).

Plaintiff contends that his physical ailments raise a

genuine issue of material fact as to whether he could exert

control over the payroll taxes and intentionally withhold

payment. (Pl.’s Opp’n to Mot. for Summ. J. 10.) Likewise,

plaintiff contends there is a genuine issue of material fact as

to whether Phyliss Savage successfully misled him into a

reasonable belief that there was no payroll tax deficiency. (Id.

at 11.) Because these circumstances could bear on whether

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plaintiff willfully, voluntarily, or intentionally ignored his

duty to pay PCI’s taxes, factual questions remain as to whether,

prior to January 11, 2002, plaintiff acted willfully. See United

States v. Rem, 38 F.3d 634, 644 (2d Cir. 1994) (“Where . . .the

individual’s position makes his claim of ignorance of nonpayment

plausible and there are no other indicia of knowledge, the matter

of his willfulness is an issue to be tried.”).

However, these arguments are not material to

plaintiff’s willfulness after January 11, 2002, given that

plaintiff was undisputably aware of the unpaid employment taxes

from that day forward. (Savage Decl. ¶ 19.) Significantly then,

despite this knowledge, plaintiff, who had personally loaned the

corporation $230,000, repaid himself $70,000 “after [he] became

aware that [PCI] had tax problems.” (Latterell Decl. Ex. CC

(David Savage Dep. 88:5-18, Aug. 18, 2005) (emphasis added).) 

Through this act, plaintiff consciously and intentionally

preferred himself, as a creditor, over the United States. 

These facts are determinative of plaintiff’s liability

because once a responsible person consciously and intentionally

prefers another creditor over the United States, factual issues

as to prior ignorance of non-payment are irrelevant. Teel v.

United States, 529 F.2d 903, 905-06 (9th Cir. 1976) (holding that

the use of funds received from the sale of old inventories and

the sale of new merchandise, after knowledge of arrearages in

employee tax payments, forecloses an inquiry into prior ignorance

regarding the willfulness element of § 6672). Plaintiff

therefore cannot rely on his previous physical inability to pay

the deficient taxes or his previous ignorance of the deficient

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Plaintiff argues for an application of the exception to 9

§ 6672 liability recognized by the Supreme Court in Slodov v.

United States, 436 U.S. 238 (1978). That exception, however,

applies only in situations where new management of a corporation

assumes control after the failure to collect and withhold

employment taxes has occurred. Slodov, 436 U.S. at 259-60.

Moreover, at the time the new management assumes control, there

can be no funds available to satisfy the obligation to the

government and subsequently generated funds cannot be directly

traceable to the withheld employment taxes. Id. In the instant

case, plaintiff remained in management as a responsible person

from the time the withholding tax obligation arose until the time

it was willfully avoided. “In the case of individuals who are

responsible persons both before and after withholding tax

liability accrues . . . there is a duty to use unencumbered funds

acquired after the withholding obligation becomes payable to

satisfy that obligation; failure to do so when there is knowledge

of the liability . . . constitutes willfulness.” Purcell, 1 F.3d

at 938 (quoting Davis, 961 F.2d at 876).

13

taxes to evade liability, even assuming that he could prove these

theories at trial. As a matter of law, plaintiff acted willfully

in accordance with § 6672. Pursuant to Davis, this finding of 9

willfulness extends to all quarters where plaintiff was a

responsible person, or all six quarters in issue.

At oral argument, plaintiff’s attorney vigorously took

the position that plaintiff should at most be liable for $70,000,

rather than the full amount of the tax delinquency, because he

only willfully preferred other creditors by this amount. (See

also Pl.’s Opp’n to Mot. for Summ. J. 12 n.10.) The court is

aware that some courts have limited a responsible person’s

liability to the extent that the corporation had funds available

to pay the government when that person first learned of the

delinquency. See, e.g., Kinnie v. United States, 994 F.2d 279,

285 (6th Cir. 1993); Ross v. United States, 949 F. Supp. 536, 543

(D. Ohio 1996) (citing Gephart v. United States, 818 F.2d 469

(6th Cir. 1987)). Under this approach, the fact that the court

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If there were any doubt about this result, it has been 10

made explicit in an unpublished decision which this court is not

permitted to cite, in which the Ninth Circuit expressly rejected

a request to limit liability to the amount available to the

corporation at the time the plaintiff willfully preferred other

creditors. 

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only has evidence that $70,000 was available to pay PCI’s debts

on January 11, 2002 would be significant. 

However, in Davis, 961 F.2d at 871, the Ninth Circuit

noted that the taxpayer “had sufficient income to satisfy in full

[the corporation’s] tax delinquency” but also stated that the

decision “to pay commercial creditors rather than to diminish

[the corporation’s] tax debt falls within the literal terms of

the Circuit’s definition of willfulness.” (emphasis added); see

also Sorenson v. United States, 521 F.2d 325, 328 n.3 (9th Cir.

1975) (suggesting that inability to pay is not relevant in a §

6672 willfulness assessment). Thus, the Ninth Circuit has

declined to take the approach of limiting liability for

willfulness to the amount available to the corporation at the

time other creditors were preferred over the government.10

Allowing plaintiffs to discount their liability based

on the amount they actually wrongfully divert to other creditors

would seem to be inconsistent with the language of the statute,

which punishes any attempt to evade payment of the tax owed with

“a penalty equal to the total amount of the tax evaded[] or not

collected . . . .” 26 U.S.C. § 6672(a) (emphasis added). 

Moreover, although it is often the case that the assets wrongly

and willfully diverted to creditors other than the United States

would have been sufficient to cover the corporation’s entire §

6672 tax liability, the court is not aware of any case where a

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responsible party preferred other creditors and escaped liability

for the total amount owed because the corporation, at the time,

could not have paid its entire debt anyway. But cf. Alabama v.

King, No. 91-B-2121-S, 1995 WL 423171, at *7 (N.D. Ala. Mar. 29,

1995) (holding plaintiff liable for the full amount owed even

though, at the time plaintiff preferred other creditors, the

company only had “nearly the sufficient unencumbered funds with

which [plaintiff] could have paid the state and federal tax

liabilities” (emphasis added)). 

III. Conclusion

As a matter of law, plaintiff is a “responsible person”

who willfully avoided federal tax obligations under § 6672. In

accordance with that section, plaintiff can be personally liable

for the outstanding assessments owed by PCI, in the amount of

$126,103.62, plus interest accrued during the pendency of this

motion until paid, pursuant to 26 U.S.C. §§ 6601, 6621-22 and 28

U.S.C. § 1961(c).

IT IS THEREFORE ORDERED that defendant’s motion for

summary judgment on its counterclaim against plaintiff be, and

the same hereby is, GRANTED.

DATED: February 21, 2006

Case 2:04-cv-02316-WBS -KJM Document 46 Filed 02/22/06 Page 15 of 15