In re Rasbury, CV-91-H-2445-W.
| Decision Date | 03 March 1992 |
| Docket Number | No. CV-91-H-2445-W.,CV-91-H-2445-W. |
| Parties | In re Billie Vester RASBURY, Debtor. In re BILL'S FORESTRY SERVICE, INC., Debtor. UNITED STATES of America, Appellant, v. Billie Vester RASBURY and Bill's Forestry Service, Inc., Appellees. |
| Court | U.S. District Court — Northern District of Alabama |
Jack W. Selden, Richard E. O'Neal, U.S. Atty.'s Office, Birmingham, Ala., Scott Crosby, Neal I Fowler, U.S. Dept. of Justice, Tax Div., Washington, D.C., for appellant.
Marvin E. Franklin, Najjar Denaburg P.C., Birmingham, Ala., Bruce Peter Ely, Tanner & Guin, Tuscaloosa, Ala., for appellees.
The court has before it the above-referenced matter on appeal from the United States Bankruptcy Court for the Northern District of Alabama, Western Division 130 B.R. 990; jurisdiction exists pursuant to 28 U.S.C. § 158(a).
The proceeding below involved the debtors' objection to claims filed by the Internal Revenue Service (the "IRS"); the litigation that ensued was a core proceeding under 28 U.S.C. § 157(b)(2)(B). On appeal, the Bankruptcy Court's findings of fact are due to be affirmed unless clearly erroneous. Birmingham Trust National Bank v. Case, 755 F.2d 1474, 1476 (11th Cir.1985); In re Alchar Hardware Co., 764 F.2d 1530, 1532 (11th Cir.1985); Bankruptcy Rule 8013. The test to be applied to factual findings "is not whether a different conclusion from the evidence would be appropriate, but whether there is sufficient evidence in the record to prevent clear error in the trial judge's findings." In re Garfinkle, 672 F.2d 1340, 1344 (11th Cir.1982). Issues of law and the bankruptcy court's determination of the legal significance that it attaches to its factual findings, however, are to be reviewed de novo. Citicorp, Inc. v. Davidson Lumber Co., 718 F.2d 1030, 1032 (11th Cir.1983).
The record reflects that on September 5, 1991, the bankruptcy court entered an order sustaining the debtors' objections to claims filed by the IRS for withholding taxes (income, FICA and FUTA), interest and penalties allegedly owed by the debtors for the tax years 1986, 1987 and 1988. The bankruptcy court disallowed the IRS claims, finding that the government had failed to meet its burden of proof regarding liability and amount, and that the debtors had demonstrated that they were entitled to the Section 530 "safe harbor" provisions of 26 U.S.C. § 3401.
The memorandum of opinion entered in conjunction with the September 5, 1991 order indicates that the bankruptcy court made the following findings of fact. Beginning in 1976, debtor Billie Vester Rasbury of Winfield, Alabama worked for himself in the logging contracting business. In 1986 he incorporated his sole proprietorship under the name of Bill's Forestry Service, Inc. ("BFS") in Fayette, Alabama. Rasbury became the president of the corporation; he and his wife were and are the sole shareholders.
Rasbury and BFS contracted with forest product companies to supply logs, remove timber from the land of others and pay crews who cut, skidded, bunched and hauled logs. Rasbury provided heavy equipment such as skidders, hydroaxes, knuckleboom loaders and some of the trucks and fuel used to haul the cut timber. The men hired by Rasbury provided some of the trucks used for hauling, along with saws, hand tools, safety equipment and their skills.
At the hearing before the bankruptcy court, three BFS crew members testified that they were paid as independent subcontractors, a practice they claimed was consistent with widespread custom in the logging industry in West Alabama in the 1980s. Thomas F. Collins of Fayette, Alabama, a certified public accountant who handled the Rasbury and BFS accounts for the years at issue (1986, 1987 and 1988), testified that he advised Rasbury of the potential for problems with the IRS in classifying the crew members as independent contractors. Collins further testified, however, that he advised Rasbury that his crew members qualified as independent contractors under the "twenty factors" test (a reference to interpretations by the IRS and various courts of the "usual common law rules" referred to in 26 U.S.C. § 3121(d)(2)).
Rasbury's employees generally testified that they were paid by the ton of wood produced, that they had no "employment" benefits such as health insurance or pension rights other than workman's compensation insurance, and that crew members hired and fired their own coworkers and decided when to work.
Witnesses for the government included three former truck drivers for BFS, one of whom testified that he had worked for Rasbury for about seven months and that the signature on the independent contractor contract under his name was not his.1 Another former driver testified that he had worked for BFS in 1987-88; the third claimed to have worked for the debtor firm for six months. All three witnesses indicated that they were paid by the day rather than by tonnage. The debtor, however, introduced evidence that all three had signed 4669 Forms attesting that they had paid their own taxes on funds paid to them as independent contractors.
Expert witnesses for Rasbury2 testified that paying logging crew members as independent contractors was widespread industry custom in West Alabama in the 1980s. The government introduced as an expert witness Ken Rolston of Panama City Beach, Florida, a former executive with the American Pulpwood Association based in Washington, D.C.3 and former forester and wood procurement specialist with Kimberly-Clark Corporation in Childersburg, Alabama.4 Rolston testified that in his opinion crew members who brought "nothing but bare hands" to the job were employees rather than independent contractors. He admitted, however, that a worker who brought his own truck to the job "sounded like an independent contractor," and that the classification was debatable as to crew members who brought their own tools, supplied their own gasoline and hired their own coworkers.
Rasbury testified and government exhibits showed that Rasbury and BFS carried workmen's compensation insurance on crew members for the three years in question. According to Rasbury, the insurance was a requirement to do business with big firms like Weyerhaeuser, and he deducted the cost of the men's coverage from the per-ton rate paid to them, similar to a self-insurance program.
Rasbury and other witnesses for the debtors further testified that Rasbury filed IRS informational Forms 1099 on his men as independent contractors for most of the funds paid them by BFS. Smaller sums were paid to the men and listed on W-2 Forms; these sums were for hours at minimum wage paid for equipment maintenance on "rain days."5 Rasbury contended that the payment for maintenance was different because it was not the production work of cutting, skidding, bunching, loading and hauling logs, and that he preferred to base such work on tonnage because the incentive increased production.
Both sides agreed that workers for the debtors signed written contracts indicating that they understood that they were independent contractors and that Rasbury would not withhold income, FICA or FUTA taxes from the amounts they earned under their respective contracts. The evidence was inconclusive as to whether Rasbury filed 1099 Forms for the tax years prior to 1986, although Rasbury testified that he instructed his then-accountant, Joe White (a public accountant but not a C.P.A.), to file these forms once he learned in 1979 that they were required. White testified that he never received the information necessary to fill out the 1099 Forms; the IRS, however, presented no evidence showing that it had verified through its own records that the forms were not filed. Both sides agree that the debtors filed 1096 and 1099 Forms with the IRS and their workers for the years at issue.
Connie Brown, C.P.A. and revenue agent for the IRS, testified that BFS was picked at random for a "TCMP" (Taxpayer Compliance Measurement Program) audit for the 1987 tax year, thereby initiating the sequence of events that resulted in the tax proceeding before the bankruptcy court. According to Brown, related returns are requested as part of the "package audit" requirement, "to see if there is a potential payroll tax issue." Brown testified that in reviewing the returns she noticed that in some cases 1099 and W-2 Forms had been issued to the same persons and that the W-2 Forms were filled out in multiples of $134.00.6 After reviewing the debtors' records, Brown and the IRS concluded that the debtors' workers should have been classified as employees and that BFS should have been withholding federal income taxes and FICA and FUTA employment taxes.
Collins, however, testified that he and Rasbury were told that if they were able to contact all of the workers who had been paid as independent contractors and have them sign IRS 4669 Forms attesting that each worker had paid his own tax on the compensation reported on the 1099 Forms, the taxes actually paid by the workers would be deducted from any liability assessed against BFS and Rasbury.7 According to Collins, he and Rasbury were able to obtain the necessary signatures from 94% of the workers; they were unable to find the remaining 6%.
On April 14, 1989, Brown prepared an "unagreed report" alleging that Rasbury owed some $161,502.69 in taxes, interest and penalties. Negotiations between the debtors and the IRS continued into the summer of 1989 but broke down when Rasbury was unable to persuade other logging contractors to come forward with affidavits for the IRS admitting that they also paid their crews as independent contractors.
On June 22, 1989, the IRS issued a letter "proposing adjustments" of $161,502.69 to the debtors' tax obligations for the years 1986, 1987 and 1988. Brown's "unagreed report" was attached to the letter. Rasbury and Collins testified that the debtors began treating crew members as employees effective October 1, 1989, in...
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