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December 21, 1994


The opinion of the court was delivered by: Mihm, Chief Judge.


This matter is before the Court for decision following evidentiary hearings on the United States' Motion to Dismiss and for Default. For the reasons set forth below, the United States' Motion is GRANTED. Pursuant to Rule 52 of the Federal Rules of Civil Procedure, the Court's findings of fact and conclusions of law are set forth below. These findings are intended to supplement the oral findings made by the Court on September 9, 1994.


Thomas Brady filed this lawsuit on October 20, 1992, seeking a refund of tax paid to the United States. Mr. Brady maintains that the Internal Revenue Service (IRS) improperly assessed and collected employment taxes from him. Specifically, Mr. Brady argues that his construction business used independent contractors and not employees, and, therefore, he was not an employer within the meaning of the Internal Revenue Code.

On or about March 22, 1993, the United States amended its answer to add a counterclaim seeking to reduce to judgment its tax assessment against Mr. Brady. The United States' counterclaim includes all of the employment taxes and penalties allegedly owed by Mr. Brady for the years 1983 through 1988, inclusive.

On December 16, 1993, the United States filed its Motion to Dismiss and for Default, arguing that Mr. Brady had destroyed and manufactured evidence and that he had testified in a misleading and inaccurate fashion in response to the Government's interrogatories and requests for production. The Government also claimed that Mr. Brady's deposition testimony was false and misleading.


1. Mr. Brady began his business as a sole proprietor doing general home repair contracting during the 1970s. (Vol. II, p. 130).

2. Between 1983 and 1988, the years at issue, Mr. Brady was so employed. His projects included a variety of commercial and residential construction, including aluminum residing, window replacement, pool installation, building garages and porches and roof replacement.

3. From 1983 through 1985, Mr. Brady conducted his business from his home located at 145 Stonegate Drive in Canton, Illinois. (Vol. II, p. 137) After acquiring a lumberyard known as Linn Street Lumber in January, 1986, Mr. Brady headquartered his business therein. Id.

4. The Court rejects Mr. Brady's testimony that he never paid his workers an hourly wage. The evidence demonstrates that Mr. Brady not only paid his workers an hourly wage, but that he once had records reflecting that practice.

5. Gerald Nelson, who was employed by Mr. Brady from the end of 1983 through November of 1986 (Vol. I, p. 60), testified that he started working for Mr. Brady at a rate of $5.00 per hour and was thereafter given raises. By the time he left Mr. Brady's employ, he was making $9.25 per hour. (Vol. I, pp. 61-62) The only time Mr. Brady paid Mr. Nelson in some manner other than an hourly rate was for a brief period in late 1983 or in early 1984 when Mr. Brady paid him based on the number of feet of siding Mr. Nelson had installed. (Vol. 1, pp. 72-76, 84, 97-98)

6. At the start of his employment with Brady Construction, Mr. Nelson reported to Mr. Brady the numbers of hours he had worked and the projects associated with those hours on random pieces of paper. (Vol. I, pp. 61-62) Mr. Nelson turned those pieces of paper over to Mr. Brady and, in turn, received a paycheck. (Vol. I, p. 62) Toward the end of 1985 or early 1986, Mr. Brady had Mr. Nelson complete prepared "time sheets". Id. The "time sheets" required Mr. Nelson to record the name of the job he was working on, the number of hours expended on the job, and the days of the week associated with those hours. Id. The time slips and sheets generally were turned in to Mr. Brady or his secretaries on Thursday, and Mr. Nelson received his paycheck on Friday. (Vol. I, p. 63)

7. Rick Sheets began working for Mr. Brady as a carpenter/laborer in 1979. (Vol. I, p. 187) He terminated his employment with Mr. Brady around the end of 1987. Id. During his employment with Mr. Brady, Mr. Sheets earned between $4.50 and $8.00 per hour. (Vol. I, p. 189) Mr. Sheets also testified to submitting "time sheets" to Mr. Brady prior to his receipt of his weekly paycheck. The time sheets reflected the hours and days of the week which Mr. Sheets worked and specified the jobs upon which he expended his time. (Vol. I, p. 191) For the majority of his employment with Mr. Brady, Mr. Sheets completed and turned in his time sheets on Friday and received his paycheck on Friday. (Vol. I, p. 191) At some point, however, this practice changed, and Mr. Brady decided to stagger his workers' pay day because "it looked too obvious that [his workers] were being paid always on Friday and being claimed as subcontractors." (Vol. I, p. 192)

8. Both Daniel York and Mark Steven Smith similarly testified that Mr. Brady paid them an hourly wage during their employment with Mr. Brady. (Vol. I, pp. 143, 145, 149; Vol. II, pp. 276, 280-281, 287, 290) They too testified about the written reports they submitted to Mr. Brady on a weekly basis which itemized the number of hours they worked during the preceding week. (Vol. I, pp. 146, 148; Vol. II, pp. 287-288) The Court notes in evaluating the credibility of their testimony that Mr. York still considers himself to be Mr. Brady's friend (Vol. I, p. 160) and, as Mr. Brady pointed out, Mr. Smith is not a part of the prevailing wage actions against Mr. Brady. (Vol. II, p. 286)

9. Mr. Brady's former staff members corroborated the workers' testimony that they were paid on an hourly basis and submitted supporting written reports. Carolyn Apt recalled specifically the manner in which Mr. Brady's workers' wages were calculated. She testified that:

  "When Mr. Brady's guys would come in at the end of
  the week and turn in their time sheets, occasionally
  [Mr. Brady] would hand [the time sheets] to me or
  Christine Banks, who was working for him at the time.
  We would figure up the hourly wage and how many hours
  the guys worked on these sheets, and then I would
  draw up the paychecks for those."

(Vol. I, p. 21) Ms. Apt's description of the content of the time sheets was similar to the description given by the above-referenced workers. (Vol. I, p. 22)

10. Linda Hefflin, another of Mr. Brady's office staff, also testified that Mr. Brady paid his workers an hourly wage and that the workers recorded their time on written time slips submitted weekly to Mr. Brady. (Vol. II, pp. 46-48) Ms. Hefflin described the time slips submitted by Mr. Brady's workers to Mr. Brady as reflecting the number of hours each worker spent on Mr. Brady's various projects, associated with the days of the week during which that work was performed. (Vol. II, pp. 46, 84)

11. The time records for Brady Construction for the years prior to 1986 were retained by Mr. Brady in one or more shoe boxes stored in a filing cabinet in his office. (Vol. I, pp. 23-24, 27, 40, 41; Vol. II, pp. 47-50) During several months during the middle part of 1986, Lynn and Tom Brady instructed Ms. Apt to transfer the information from the time slips in the shoe boxes to a spreadsheet. (Vol. I, pp. 23-24) Ms. Apt created a chart reflecting the information included on the time slips: workers' names, the job name, the hours and associated days of the week, hourly wage and total pay for a job. (Vol. II, p. 51; Gov't Exhibit 24) The time slips were thereafter destroyed. (Vol. II, pp. 51-52)

12. Mr. Brady failed to disclose the existence of the time slips or to explain their destruction in response to specific attempts by the Government to determine that information.

13. At the hearing on this matter, Mr. Brady denied paying his workers by the hour. (Vol. II, p. 242) He also testified that any records he might have reflecting hours worked were submitted merely for the convenience of those working for him. (Vol. II, p. 222) Mr. Brady further denied any knowledge of the time slips that each of his employees testified they submitted and that Ms. Hefflin and Ms. Apt recalled having seen stored in shoe boxes in Mr. Brady's office. (Vol. II, pp. 227, 248) Incredibly, he also disavowed any knowledge about the few time slips that remain in his files, time slips that he offered into evidence. (Vol. II, pp. 219-221)

14. Mr. Brady willfully destroyed both the time slips and the sheets that summarized those time slips. Mr. Sheets testified about the destruction of some time records during his direct examination:

  Q. What did Mr. Brady tell you regarding the
    destruction of documents?
  A. He told me that he had been asked to produce the
    time sheets for the man and that he couldn't
    produce those ...

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