United States Of America v. Watson et al

Filing 47

OPINION AND ORDER granting 36 Motion for Summary Judgment. Signed by Judge James P. Jones on 1/27/2017. (lml)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
ABINGDON DIVISION
UNITED STATES OF AMERICA,
Plaintiff,
v.
JOE WATSON, ET AL.,
Defendants.

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Case No. 1:15CV00052
OPINION AND ORDER
By: 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 Defendants.
The United States instituted this action against defendants Joe Watson and
his wife Betty Watson to collect federal payroll tax assessments. I previously
entered summary judgment in favor of the United States on Count I of the
Complaint, reducing to judgment the tax assessments made against Joe Watson.
United States v. Watson, No. 1:15CV00052, 2016 WL 5922317 (W.D. Va. Oct. 11,
2016). The United States now moves for summary judgment on Count II, which
seeks to foreclose federal tax liens against real property owned by Watson and his
wife. For the reasons that follow, I will grant the Motion for Summary Judgment.

I.
The facts underlying the tax assessment are summarized in my earlier
opinion, and I will not repeat them here.

Joe and Betty Watson own two

commercial properties as tenants by the entirety. The first property is located at
205-209 Piedmont Avenue, Bristol, Virginia, and the second property is located at
1385 Lee Highway, Bristol, Virginia (collectively, “Properties”). Aside from the
tax liens at issue in this case, no other liens or judgments attach to either of the
Properties. The United States seeks to sell the Properties at a public auction in
accordance with 28 U.S.C. §§ 2001-02, and to pay one half of the sale proceeds to
Betty Watson, retaining the other half of the proceeds to satisfy the judgment
against Joe Watson. Should any funds remain after satisfaction of the judgment,
the remaining proceeds would be transmitted to Joe Watson.
Betty Watson is 77 years old and has been a housewife for most of her 59year marriage to Joe Watson. The Watsons receive approximately $1,988 per
month in Social Security benefits. They own their residence. Betty Watson has
declared that this monthly Social Security income is about $1,500 to $2,000 less
than what is needed to cover the couple’s monthly expenses.
Both of the Properties are currently rented. The Properties are managed by
the couple’s son-in-law, who has in the past used the rental profits to purchase cars
for the Watsons and otherwise provide for their needs. Betty Watson’s car is a
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2003 model and will soon need to be replaced. The Watsons’ residence needs a
new roof and ceiling repairs. The garage roof is collapsing; the concrete walls of
the enclosed porch are crumbling, causing leaks; and the exterior trim is rotting.
Betty Watson estimates that the cost of necessary repairs would be $75,000 to
$150,000. She has not proffered any contractor quotes or expert report to support
this estimate.
Betty Watson has declared that the rental proceeds from the Properties
would be the only income available to replace the couple’s cars, repair the
residence, cover their monthly income shortfall, and address any emergency that
may arise. She does not believe a foreclosure sale would produce adequate funds
to sustain her and her husband for the remainder of their lives. Joe Watson’s
health is less than perfect, and if he predeceases his wife, she will lose the benefit
of his monthly Social Security income.
Betty Watson has submitted a declaration of Bart Long, a real estate agent
who has worked in the Bristol, Virginia, area for more than twenty years.
According to Long, the real estate market in the area has been slow to recover from
the 2008 market downturn, and the Properties, which are not located in growing
commercial areas, have few uses. In his experience, court-ordered sales of real
estate generate significantly lower sales prices than voluntary sales. Long opines
that the Properties are unlikely to sell for their tax-assessed values and might not
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even generate half of their tax-assessed values. The property located on Piedmont
Avenue is under a month-to-month lease, and the lack of a long-term lease could
negatively impact the sales price of that property.
Based on this evidence, Betty Watson asks the court to deny the Motion for
Summary Judgment and proceed to a trial on the merits to determine whether a
forced sale of the Properties would pose an undue hardship to her. The Motion for
Summary Judgment has been fully briefed and is ripe for decision.1
II.
Summary judgment is appropriate when “the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a). The nonmovant “is entitled, as on a motion
for directed verdict, to have the credibility of his evidence as forecast assumed, his
version of all that is disputed accepted, all internal conflicts in it resolved favorably
to him; the most favorable of alternative inferences from it drawn in his behalf; and
finally, to be given the benefit of all favorable legal theories invoked by the
evidence so considered,” regardless of the allocation of the burden of proof at trial.
O’Connor v. United States, 956 F.2d 48, 50 (4th Cir. 1992) (internal quotation
marks and citations omitted).

1

I will dispense with oral argument because the facts and legal contentions are
adequately presented in the materials before the court, and argument would not
significantly aid the decisional process.
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When the United States has established a claim to a taxpayer’s property due
to failure to pay a tax liability, the court “may decree a sale of such property, by
the proper officer of the court, and a distribution of the proceeds of such sale[ ]
according to the findings of the court in respect to the interests of the parties and of
the United States.” 26 U.S.C. § 7403(c).
In United States v. Rodgers, 461 U.S. 677, 680 (1983), the Supreme Court
held that a district court has the power to order the sale of a family home to satisfy
the tax debt of its owner, even when the debtor’s spouse also owns an undivided
interest in the home which is protected against forced sale under state law. The
provisions of state law at issue in Rodgers “g[a]ve each spouse in a marriage a
separate and undivided possessory interest in the homestead, which is only lost by
death or abandonment, and which may not be compromised either by the other
spouse or by his or her heirs.” Id. at 685. The Court held that this was “the sort of
property interest for whose loss an innocent third-party must be compensated under
§ 7403.” Id. at 698. But the Court concluded that “[w]hatever property rights
attach to a homestead under Texas law are adequately discharged by the payment
of compensation, and no further deference to state law is required, either by § 7403
or by the Constitution.” Id. at 702.
The Court further found, however, that § 7403 allows for some discretion
and “does not require a district court to authorize a forced sale under absolutely all
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circumstances.” Id. at 706. The Court enumerated a non-exclusive list of factors
that might warrant a district court in exercising its limited discretion and declining
to order a forced sale of the entire jointly-owned property. “First, a court should
consider the extent to which the Government’s financial interests would be
prejudiced if it were relegated to a forced sale of the partial interest actually liable
for the delinquent taxes.” Id. at 710. “Second, a court should consider whether the
third party with a non-liable separate interest in the property would, in the normal
course of events (leaving aside § 7403 and eminent domain proceedings, of
course), have a legally recognized expectation that that separate property would
not be subject to forced sale by the delinquent taxpayer or his or her creditors.” Id.
at 710-11. “Third, a court should consider the likely prejudice to the third party,
both in personal dislocation costs and in . . . practical undercompensation . . . .” Id.
at 711. “Fourth, a court should consider the relative character and value of the
non-liable and liable interests held in the property . . . .” Id.
The United States contends that the Rodgers considerations apply only to
homestead properties and not to commercial properties owned as tenants by the
entirety. The Supreme Court’s reasoning in Rodgers does not support such a
limitation, and this court has not located any binding precedent holding that
Rodgers is limited to residential properties. I will therefore consider the Rodgers
factors.
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Virginia law recognizes the form of joint ownership called tenancy by the
entirety, which “is a legal fiction based upon the same four unities that support
joint tenancies plus a fifth unity of marriage.” Evans v. Evans, 772 S.E.2d 576,
580 (Va. 2015) (internal quotation marks, alterations, and citations omitted).
Ownership as tenants by the entirety comes with certain restrictions:
First, during the marriage, neither spouse may make an absolute
disposition of property held as tenants by the entirety by his or her
sole act. Second, consistent with this restriction on alienability, no
creditor of only one spouse can attach property held by both spouses
as tenants by the entirety. Finally, so long as the property remains
held by them as tenants by the entirety, upon the death of one spouse,
ownership of the property will pass to the other in fee simple outside
the estate of the deceased spouse.
Id. at 580 (internal quotation marks, and citations omitted.) Under Virginia law,
Betty Watson has an expectation that her husband’s creditors cannot force a sale of
the Properties. Thus, the second Rogers factor weighs in her favor. Other factors,
however, support the entry of judgment for the United States.
The Watsons do not reside in the Properties, so a sale of the Properties will
not require them to relocate, nor will it cause a loss of sentimental value akin to the
sale of a house where they raised their children. The Properties appear to generate
little rental income beyond expenses. The United States notes that on an IRS form
submitted under penalty of perjury, the Watsons did not identify any income from
the Properties. Though Betty Watson has now declared that the properties produce
income, she does not specify any amount. Nevertheless, the only example of rental
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proceeds she provides is the purchase of a car in 2003, approximately fourteen
years ago. At least one of the Properties is leased month-to-month, meaning there
would be no guarantee of future rental income even if the Properties were not sold.
If the court orders a sale of the property, “following the sale, the proceeds of
the sale must be distributed according to the interests of the parties.” United States
v. Thornton, No. 87-2171, 1988 WL 97278, at *4 (4th Cir. Sept. 14, 1988)
(unpublished). Betty Watson, to account for her one-half interest, will receive one
half of the sale proceeds after costs. Based on the record evidence, using the
conservative estimates proffered by Long, Mrs. Watson’s portion of the proceeds
will likely amount to at least $175,000 to $200,000, which she can then choose to
re-invest or use to pay for home repairs, a replacement car, and other expenses.
The undisputed facts do not show that a sale of the property will unduly harm
Betty Watson.
The Watsons contend that the United States’ long delay in enforcing its
collection rights warrants denial of the Motion for Summary Judgment. The tax
liabilities at issue were incurred in 2001 and assessed in 2003. The statute of
limitations for collection actions is ten years.

26 U.S.C. § 6502(a).

As the

defendants concede, the statute of limitations is tolled while an offer in
compromise is pending. See United States v. Donovan, 348 F.3d 509, 511 (6th Cir.
2003). The Watsons concede that, accounting for the tolled period during which
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an offer in compromise and appeal of its rejection were pending, the United States
commenced this action within the statute of limitations.
“It is well settled that the United States is not . . . subject to the defense of
laches in enforcing its rights.” United States v. Summerlin, 310 U.S. 414, 416
(1940); but see Cayuga Indian Nation of N.Y. v. Pataki, 413 F.3d 266, 278 (2d Cir.
2005) (recognizing that although laches traditionally does not apply to the United
States, “this does not seem to be a per se rule”). Even if the laches defense were
available to the defendants, I would not find its application appropriate here. The
United States complied with the statute of limitations.

According to the

defendants’ evidence, the Bristol, Virginia, real estate market has been suboptimal
since 2008 and has improved somewhat, albeit slowly, in recent years. In other
words, a sale of the Properties today would likely garner a greater sum than a sale
of the property at some other point over the past eight years. From the time of the
tax assessment in 2003 until today, more than thirteen years later, the defendants
have had the benefit of continued ownership of the Properties and receipt of rental
income while Joe Watson has owed large sums of money to the United States. The
evidence does not support a conclusion that any delay in the commencement of this
action has prejudiced the defendants.
The Rodgers decision makes clear that a decision not to order foreclosure is
the exception rather than the rule, and the court’s discretion is limited. Rodgers,
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461 U.S. at 709-10. The circumstances present here do not warrant the exercise of
that limited discretion. The undisputed facts in this case demonstrate that the
United States is entitled to enforce its judgment against Joe Watson by selling the
Properties and remitting to Betty Watson one half of the sale proceeds after
payment of costs.
III.
For the foregoing reasons, the United States’ Motion for Summary Judgment
as to Count II (ECF No. 36) is GRANTED.
It is so ORDERED.
ENTER: January 27, 2017
/s/ James P. Jones
United States District Judge

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