P.C. v. USA
| Decision Date | 27 May 2010 |
| Docket Number | No. 4:08-cv-442.,4:08-cv-442. |
| Citation | 714 F.Supp.2d 954 |
| Parties | DAVID E. WATSON, P.C., Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Southern District of Iowa |
OPINION TEXT STARTS HERE
Jan Mohrfeld Kramer, Smith & Kramer PC, Ronald L. Mountsier, Schneider Stiles Serangeli & Mountsier PC, Des Moines, IA, for Plaintiff.
Miranda J. Bureau, Robert E. Fay, U.S. Dept. of Justice Civil Tax Division, Washington, DC, for Defendant.
Before the Court is a Motion for Summary Judgment and Request for Oral Argument, filed March 10, 2010 by David E. Watson, P.C. (“Plaintiff” or “DEWPC”). Clerk's No. 13. The United States of America (“Defendant”) filed a resistance to the Motion on April 5, 2010. Clerk's No. 14. Plaintiff filed a Reply on April 13, 2010. Clerk's No. 15. Despite Plaintiff's request, the Court does not believe oral arguments would substantially aid it in resolving the present Motion. The matter is, therefore, fully submitted.
The facts of this case are largely undisputed. David Watson (“Watson”) graduated from the University of Iowa in 1982, with a bachelor's degree in business administration and a specialization in accounting. Def.'s Statement of Additional Facts (hereinafter “Def.'s Facts”) ¶ 1. Watson became a Certified Public Accountant (“CPA”) in 1983, and received a master's degree in taxation from Drake University in 1993. Id. ¶ 2. Between 1982 and 1992, Watson practiced accounting at Ernst & Young, where he specialized in partnership taxation. Id. ¶ 3. In 1992, after leaving Ernst & Young, Watson joined with Tom Larson (“Larson”), Jeff Bartling (“Bartling”), and Dale Eastman (“Eastman”) to form an accounting firm named Larson, Watson, Bartling & Eastman (“LWBE”). 1 Id. ¶ 5; Def.'s App. at 21. According to Watson, LWBE became profitable “within the first couple years.” Def.'s Facts ¶ 7.
On October 11, 1996, Watson incorporated DEWPC as an Iowa Professional Corporation (“PC”). Pl.'s Statement of Material Facts (hereinafter “Pl.'s Facts”) ¶ 1. Larson, Bartling, and Eastman also formed PCs, and on October 11, 1996, each of the four partners replaced their individual ownership in LWBE with ownership by their respective PC. Def.'s Facts ¶¶ 8-9; Def.'s App. at 62-72. On the same date, LWBE, DEWPC, and Watson entered into an employment agreement whereby Watson became DEWPC's employee and agreed to provide his accounting services exclusively to LWBE. Def.'s Facts ¶¶ 12-13. By 1998, Paul Jeffer, PC, had replaced Dale Eastman, PC as a partner, causing LWBE to be reformed as Larson, Watson, Bartling, and Jeffer (“LWBJ”), though neither the work performed by the firm, nor the employment arrangement between the firm, DEWPC, and Watson, changed significantly. Id. ¶¶ 10-11.
As structured in 2002 and 2003, the years relevant to the present lawsuit, Watson provided accounting services exclusively to LWBJ and its clients as an employee of DEWPC. Pl.'s Facts ¶ 6; Def.'s Facts ¶ 14. Under the arrangement between Watson, DEWPC, and LWBJ, LWBJ provided professional liability insurance for Watson and had the authority to determine how much vacation Watson could take. Def.'s Facts ¶ 15. From 2002 to 2003, and continuing to the present, LWBJ's website listed Watson, rather than DEWPC, as a partner, and Watson held himself out to the public as a specialist in partnership taxation, who spends “a significant amount of time structuring and restructuring businesses and real estate investments for tax purposes” and who “consistently designs tax-advantaged ownership structures using various combinations of entities.” Id. ¶¶ 16-17.
Since its inception, DEWPC has elected to be taxed as an S Corporation, and Watson has been its sole shareholder, employee, director, and officer. Pl.'s Facts ¶¶ 3-4, 7; Def.'s Facts ¶¶ 18-19. As such, Watson had complete control over the flow of money through DEWPC. See Def.'s Facts ¶ 22; Pl.'s Response to Def.'s Facts (hereinafter “Pl.'s Response”) ¶ 22. Watson is the only person to whom DEWPC distributed money in 2002 or 2003. 2 Def.'s Facts ¶ 20. DEWPC has only one checking account, and Watson is the only person authorized to sign checks on that account. Id. ¶ 23. At shareholder meetings Watson held with himself in 2000-2002, Watson authorized for himself a salary from DEWPC in the amount of $24,000.00 annually. Id. ¶ 25. In selecting $24,000.00 as his salary, Watson did no research other than to talk to Larson, Bartling and Jeffer to reach an agreement on what salary each would pay himself. Id. ¶ 27. In 2002 and 2003, DEWPC did, in fact, pay Watson $24,000.00 in funds designated as salary and paid federal employment taxes on that amount. Id. ¶ 24.
DEWPC's 2002 and 2003 income came exclusively in the form of distributions from LWBJ. Def.'s Facts ¶ 32. DEWPC apparently then passed the distributions on to Watson, though Watson admits that, on occasion, he may have taken distributions from LWBJ and placed them directly in his personal checking account without first placing the money in DEWPC's checking account. Id. ¶ 35. In 2002, in addition to his $24,000.00 salary, Watson received checks from DEWPC totaling $203,651.00. Pl.'s Response ¶ 28. Watson received these checks in twenty-four separate installments during 2002, and eighteen of the installments were for exactly $5,000.00. Def.'s Facts ¶ 29. DEWPC recorded $118,159.00 of the payments to Watson in 2002 as dividend distributions to Watson. Pl.'s Response ¶ 28. In 2003, in addition to his $24,000.00 salary, Watson received $221,577.00 in dividend payments from DEWPC. Def.'s Facts ¶ 30; Pl.'s Response ¶ 30. 3 In both years, Watson worked for DEWPC an average of 35 to 45 hours per week for about 46 weeks per year. Def.'s Facts ¶ 33; Pl.'s Response ¶ 33. Watson also admitted that for both years, his monthly living expenses exceeded the $2,000.00 in “salary” he was receiving from DEWPC. Def.'s Facts ¶ 36.
On or about February 5, 2007, the Internal Revenue Service (“IRS”) assessed $48,519.30 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. Def.'s Facts ¶ 37. The IRS made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should be recharacterized as wages paid to Watson, subject to employment taxes under 26 U.S.C. § 3101 and § 3111. Pl.'s Facts ¶ 8. Specifically, the IRS contended that $130,730.05 of the dividend payments to Watson for 2002 should be recharacterized as wages subject to employment taxes, and that $175,470.00 of the dividend payments to Watson for 2003 should be recharacterized as wages subject to employment taxes. Pl.'s Facts ¶¶ 9-10; Def.'s Response to Pl.'s Facts (hereinafter “Def.'s Response”) ¶¶ 9-10. Since the initial assessments were made, Defendant's expert witness, Igor Ostrovsky, has amended his opinion regarding how much of the dividend payments should be recharacterized as wages several times. See Pl.'s Facts ¶¶ 11-13. Currently, Defendant takes the position that $67,044.00 of the dividend distributions should be recharacterized as wages for each of 2002 and 2003. Id. ¶ 13. On April 11, 2007, DEWPC paid Defendant $4,063.93 toward the assessments. 4 Compl. ¶¶ 11-12; Def.'s Answer ¶¶ 11-12. On June 27, 2007, DEWPC filed a claim for a refund of its payment, but the claim was denied by the IRS on November 16, 2007. Compl. ¶¶ 13-14. DEWPC filed the present action on October 31, 2008, claiming that Defendant improperly recharacterized dividend payments to Watson as wages and incorrectly determined that DEWPC owed employment taxes on the improperly recharacterized funds. See generally Compl. Accordingly, Plaintiff requests that the Court order judgment in its favor in the amount of $4,063.93, plus interest, costs, and reasonable litigation expenses. Id.
Summary judgment has a special place in civil litigation. The device “has proven its usefulness as a means of avoiding full-dress trials in unwinnable cases, thereby freeing courts to utilize scarce judicial resources in more beneficial ways.” Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir.1991). In operation, the role of summary judgment is to pierce the boilerplate of the pleadings and assay the parties' proof in order to determine whether trial is actually required. See id.; see also Garside v. Osco Drug, Inc., 895 F.2d 46, 50 (1st Cir.1990). “[S]ummary judgment is an extreme remedy, and one which is not to be granted unless the movant has established his right to a judgment with such clarity as to leave no room for controversy and that the other party is not entitled to recover under any discernible circumstances.” Robert Johnson Grain Co. v. Chem. Interchange Co., 541 F.2d 207, 209 (8th Cir.1976) (citing Windsor v. Bethesda Gen. Hosp., 523 F.2d 891, 893 n. 5 (8th Cir.1975)). The purpose of the rule is not “ ‘to cut litigants off from their right of trial by jury if they really have issues to try,’ ” Poller v. Columbia Broad. Sys., Inc., 368 U.S. 464, 467, 82 S.Ct. 486, 7 L.Ed.2d 458 (1962) (quoting Sartor v. Ark. Natural Gas Corp., 321 U.S. 620, 627, 64 S.Ct. 724, 88 L.Ed. 967 (1944)), but to avoid “useless, expensive and time-consuming trials where there is actually no genuine, factual issue remaining to be tried.” Anderson v. Viking Pump Div., Houdaille Indus., Inc., 545 F.2d 1127, 1129 (8th Cir.1976) (citing Lyons v. Board of Educ., 523 F.2d 340, 347 (8th Cir.1975)).
The plain language of Federal Rule of Civil Procedure 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The precise standard for granting summary judgment is...
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