Rasbury, In re

• Decision Date: 29 June 1994
• Docket Number: No. 93-6425,93-6425
• Citation: 24 F.3d 159
• Parties: -5210, 94-2 USTC P 50,319, 31 Collier Bankr.Cas.2d 823, Bankr. L. Rep. P 75,982 In re Billie Vester RASBURY, Debtor. Billie Vester RASBURY; Bill's Forestry Service, Inc., Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 159

24 F.3d 159

74 A.F.T.R.2d 94-5210, 94-2 USTC P 50,319,

31 Collier Bankr.Cas.2d 823,

Bankr. L. Rep. P 75,982

In re Billie Vester RASBURY, Debtor Billie Vester RASBURY; Bill's Forestry Service, Inc. Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE, Defendant-Appellee.

No. 93-6425.

United States Court of Appeals Eleventh Circuit.

June 29, 1994.

Marvin E. Franklin, Birmingham, AL, Bruce P. Ely, Allyson L. Edwards, Tuscaloosa, AL, for appellant(s).

Jack W. Selden, U.S. Atty., Sharon D. Simmons, Richard E. O'Neal, Birmingham, AL, Scott J. Crosby, U.S. Dept. of Justice Tax Div., Washington, DC, John B. Harper, IRS, Birmingham, AL, Gary R. Allen, Tax Div., Dept. of Justice, William J. Patton, Stanley F. Krysa, Michael L. Paup, William S. Estabrook, Jonathan A. Wasserman, Washington, DC, for appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before KRAVITCH and CARNES, Circuit Judges, and HAND ^*, Senior District Judge.

CARNES, Circuit Judge:

Billie Vester Rasbury and Bill's Forestry Service, Inc. ("Bill's Forestry"), appeal from the district court's denial of their motion under 26 U.S.C.A. Sec. 7430 (1989) for recovery of costs and attorneys' fees incurred in their successful defense of an Internal Revenue Service claim for federal withholding taxes, interest, and penalties in a bankruptcy proceeding. We hold that the applicable standard of review is abuse of discretion, and because the district court did not abuse its discretion by denying the section 7430 motion, we affirm.

I. BACKGROUND

At all times relevant to this appeal, Bill's Forestry was a logging contractor in Fayette, Alabama. Rasbury and his wife were its sole shareholders, and Rasbury was its president. Bill's Forestry contracted with forest product companies to supply logs, remove timber, and pay crews who cut, skidded, bunched, and hauled the logs. From its incorporation in 1986 until October 1989, Bill's Forestry paid crew members as if they were independent contractors rather than employees. Accordingly, it did not withhold federal income taxes, Federal Insurance Contribution Act (FICA) taxes, or Federal Unemployment Tax Act (FUTA) taxes from the crew members' pay, which it would have been required to withhold and remit to the IRS had they been employees.

In January 1989, the IRS randomly selected Bill's Forestry to audit for the 1987 tax year. IRS Agent Connie Brown conducted the audit and concluded that the crew members hired by Bill's Forestry were actually its employees, not independent contractors. She reached that conclusion after applying a twenty-factor test for classifying workers as independent contractors or employees. These factors are a product of common law, beginning with United States v. Silk, 331 U.S. 704, 716, 67 S.Ct. 1463, 1469-70, 91 L.Ed. 1757 (1947), and are discussed in Rev.Rul. 87-41, 1987-1 C.B. 296. See In re Rasbury, 141 B.R. 752, 759 n. 14 (N.D.Ala.1992) (providing a brief list of the factors and stating that the IRS's list is not exhaustive). As a result of deciding that the crew members were employees, Agent Brown concluded that Bill's Forestry owed the United States $161,502.69 in income, FICA, and FUTA withholding taxes, interest, and penalties for the years 1986, 1987, and 1988. In response, Bill's Forestry entered into negotiations with the IRS, which told Bill's Forestry that it could abate its tax liability by obtaining crew members' signatures on IRS 4669 Forms, attesting that they had paid their own employment taxes. ¹

In April 1989, IRS Agent Brown prepared a report stating that Bill's Forestry owed the IRS $161,502.69. By May 1989, Bill's Forestry had collected approximately 94% of the crew members' signatures on 4669 Forms, and it filed those with the IRS. Thereafter, negotiations between Bill's Forestry and the IRS broke down. Relying on Agent Brown's report and before reviewing the 4669 Forms, the IRS issued a letter to Bill's Forestry "proposing adjustments" (an increase) in the amount of $161,502.69 to Bill's Forestry's taxes. Bill's Forestry appealed.

Bill's Forestry, through counsel, notified IRS Appeals Officer Steve Cantrell that it considered the IRS's position to be contrary to Grady Felder Trucking Co. v. United States, 218 Ct.Cl. 645 (1978), and Jones v. United States, 79-1 U.S. Tax Cases (CCH) p 9,120, 1978 WL 1245 (E.D.Tex.1978) (holding that a tree cutter was an independent contractor, not an employee, for purposes of the taxpayer's withholding of income, FICA, and FUTA taxes, but denying the taxpayer attorney's fees incurred in litigating the action), rev'd in part, 613 F.2d 1311 (5th Cir.1980) (reversing only the district court's ruling that the taxpayer could not recover attorney's fees), on remand, 505 F.Supp. 781 (E.D.Tex.1980) (awarding the taxpayer attorney's fees). Later, Bill's Forestry again notified the IRS, by letter, that its position was contrary to the Grady Felder and Jones decisions and it attached a letter from the attorney who had litigated the independent-contractor-or-employee issue in Jones, stating that any differences between the facts of Jones and of this case were negligible. Bill's Forestry also informed the IRS of its belief that it would be entitled to an award under 26 U.S.C.A. Sec. 7430 (1989) if the IRS pursued the claim. During the IRS appeal process, Bill's Forestry offered the IRS $7500 to settle the case, and the IRS rejected the offer.

Thereafter, while the IRS appeal was still pending, Rasbury and Bill's Forestry both filed Chapter 11 bankruptcy petitions. The IRS had not yet "assessed the taxes allegedly owed by the debtors or perfected a tax lien on the debtors' property." In re Rasbury, 141 B.R. 752, 756 (N.D.Ala.1992). On July 20 and August 31, 1990, the IRS filed proofs of claim against Rasbury (as a responsible officer of Bill's Forestry) and Bill's Forestry, respectively, alleging that both were liable for Bill's Forestry's tax debt of $161,502.69. Thereafter, the IRS amended its claim to allege that $211,776.02 in withholding taxes, interest, and penalties was owed. Rasbury and Bill's Forestry objected to the proofs of claim, and in April 1991, they again offered to settle the case, this time for $12,000. Pursuant to this offer, the IRS, for the first time, reviewed the 4669 Forms filed by Bill's Forestry.

To determine whether the 4669 Forms were truthful, IRS Agent Brown compared them to transcripts indicating whether the crew members had filed federal income tax returns in 1986, 1987, and 1988. The IRS admits that the fact that an individual has not filed a federal income return is not necessarily indicative of whether he has paid income, FICA, or FUTA taxes. Nonetheless, based on Agent Brown's review, the IRS concluded that several of the crew members' 4669 Forms were not truthful and rejected the settlement offer.

Following a two-day trial in May 1991 on the issue of Bill's Forestry's classification of crew members, the bankruptcy court issued an opinion disallowing the IRS's claim. See In re Rasbury, 130 B.R. 990 (Bankr.N.D.Ala.1991). It held that in bankruptcy proceedings, unlike other proceedings, the IRS "has the ultimate burden of proving both the debtors' liability to [the] IRS and the specific amount due." Id. at 1001; compare Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 291, 79 L.Ed. 623 (1935) (holding that, in a proceeding to recover taxes from a non-bankrupt taxpayer, the taxpayer has the burden of proving that his taxes complied with the Internal Revenue Code). The court found that the IRS had not proven that the crew members hired by Bill's Forestry were employees rather than independent contractors. Rasbury, 130 B.R. at 1007. The court also held that, even if the IRS had proven that the crew members were employees, it could not have recovered, because it had not proven that the crew members had failed to pay their own income, FICA, and FUTA taxes. Id. at 1008. Finally, the court concluded that, even if the IRS had successfully proven liability and amount owed, it still could not have recovered because Rasbury and Bill's Forestry had established that they were protected by the safe harbor of section 530 of the Revenue Act of 1978. Id. at 1013. In short, the IRS lost about every way it could lose.

The IRS appealed the bankruptcy court's judgment to the federal district court for the Northern District of Alabama. Shortly thereafter, Rasbury and Bill's Forestry filed a motion in the bankruptcy court seeking a recommendation for the award of administrative and litigation costs, including reasonable attorneys' fees, under 26 U.S.C.A. Sec. 7430 (1989). ² The IRS filed a motion to stay consideration of the section 7430 motion until the outcome of the appeal, and the bankruptcy court granted the stay. On March 3, 1992, the district court affirmed the bankruptcy court's judgment for Rasbury and Bill's Forestry. See In re Rasbury, 141 B.R. 752, 757 (N.D.Ala.1992). The IRS appealed, but later voluntarily dismissed its appeal.

The bankruptcy court then scheduled an evidentiary hearing on the section 7430 motion. Because bankruptcy courts are not Article III courts, they generally do not have jurisdiction to award costs under section 7430. See, e.g., In re Brickell Inv. Corp., 922 F.2d 696, 701 (11th Cir.1991). If, however, all of the parties to the proceeding give their express consent, the bankruptcy court can award costs under section 7430. Id. No such consent was given in this case. Absent express consent, the bankruptcy court's jurisdiction over a section 7430 motion is limited to:

hear[ing] the proceeding and submit[ting] proposed findings of fact and conclusions of law to the district court, with the final judgment to be rendered by the district court after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.

Id. That is what the...