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United States v. Watson

United States District Court, W.D. Virginia, Abingdon Division

October 11, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
JOE WATSON, ET AL., Defendants.

          OPINION AND ORDER

          James P. Jones United States District Judge

         Caroline D. Ciraolo, Principal Deputy Attorney General, and Nelson Wagner, Trial Attorney, Tax Division, U.S. Department of Justice, Washington, D.C., for United States; Kenneth R. Russell, Jr., and Mary F. Russell, Russell Law Firm, Bristol, Virginia, for Defendant Joe Watson.

         The United States instituted this action against defendants Joe Watson (“Watson”) and his wife Betty Watson in order to collect federal payroll tax assessments. Count I of the Complaint seeks to reduce to judgment the tax assessments made against Watson, and Count II seeks to foreclose federal tax liens against real property owned by Watson and his wife. Following discovery, the United States has moved for summary judgment against Watson as to Count I.[1]

         The motion has been fully briefed and is ripe for decision.[2] For the following reasons, I find that summary judgment is warranted.

         I.

         The following undisputed facts are taken from the summary judgment record.

         The defendant Joe Watson founded Tri-Cities Industrial Builders, Inc. (“Company”) in the early 1970s and was its sole owner from 1978 until the Company ceased doing business in late 2001 or early 2002. The Company was engaged in the commercial and industrial construction business. At the height of its operations, the Company employed more than 200 people.

         Watson was the CEO of the Company. He did not report to anyone. The Company did not have a separate board of directors. Watson had the authority to hire and fire employees and to set salaries, though he delegated that authority to others. He had the authority to purchase equipment. Watson worked at the Company full-time and went to the office nearly every day until the Company closed. At some point, Watson's son Joey Watson (“Joey”) began to take a more active role in the Company, and Watson hoped eventually to transition control of the Company to him. However, Watson remained in charge and was the final decision maker.

         Kathy Swindall began working for the Company in the early 1990s. She was the office manager and oversaw the bookkeeping and payroll functions. Watson provided Swindall with a signature stamp of his signature, and she used that to sign checks and pay the Company's bills. Watson had signature authority for the Company's bank accounts, but it was unusual for him to physically sign checks. Watson closely reviewed the Company's finances at the end of each year with the Company's accountants, but he did not review financial reports on a day-to-day basis. He testified in his deposition that he did not receive a weekly or monthly report showing which of the Company's creditors needed to be paid. During his deposition, Watson was asked how he knew what money was flowing out of the Company. He responded, “I hate to admit this, but I didn't. I mean, I just trusted my people to, you know, that they paid bills like they should be paid, they paid the payroll. And I just never was an accounting-type person.” (Mot. for Summ. J. Against Joe Watson as to Count I, Ex. A, ECF No. 22-1 at 104.)[3]Watson at least occasionally received printed reports detailing the Company's finances, but he did not go through them. After Swindall left the Company, Watson's daughter-in-law, Tammy Watson (“Tammy”), took over her duties. Ensuring that federal taxes were remitted on time was within Swindall's duties and, later, Tammy's duties.

         At some point early in Swindall's tenure, she had told Watson that when she had processed the payroll, there had not been enough money to pay the payroll taxes. Swindall testified at her deposition that in the year before she left the Company, she was concerned about the Company's inability to meet its financial obligations, including paying taxes. She testified that she began creating cash flow reports and hand-delivering them to Watson. Watson told her which debts should be paid first to keep the Company operating. While Watson never specifically told Swindall not to pay the Internal Revenue Service (“IRS”), there were times when he told her to pay other creditors first. Swindall testified that she recalled giving Watson notices from the IRS. Swindall began working from home around 1999, and she did not interact with Watson from that time until the end of her employment with the Company in early 2001. While she was working from home, she interacted with Joey. Watson did not see reports of how many hours employees were working at any time after 1998.

         Gordon Vance was an accountant that the Company hired to handle the Company's taxes. Vance prepared the Company's tax returns. The Company also used an outside accounting firm for limited purposes. The outside firm did not have any role in determining which creditors would be paid.

         Vance worked as the Company's comptroller from mid-1997 through the end of 2001. In addition, he worked for Bristol Garment, another company co-owned by Watson that had also fallen behind on its payroll tax obligations. Vance worked for Bristol Garment for two to three years in the late 1990s. He testified that Watson's Bristol Garment business partner had been in charge of day-to-day operations and had failed to pay the taxes and then suddenly disappeared. The IRS attempted to collect the tax debt by placing liens against properties owned by Watson. Watson hired Vance to sort out the documentation issues and come up with a way to pay the amounts owed. Bristol Garment had already ceased operations by the time Vance began working to rectify its accounting and tax issues.

         Vance recalled the Company falling behind on its tax obligations in 2000 and 2001. He described his conversations with Watson as follows:

Well, I think the conversations were more of the nature that, you know, you've had this happen with this particular company, and, you know, the IRS has remedies and will take actions quicker than probably a general creditor would in any kind of business. I mean, I, having worked in the public-accounting realm, I knew of the liens and capabilities and stuff like that. But, you know, we ...

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