Smith v. United States, IRS (In re Smith)

Opinion

 [*227] OPINION

HAGAN, Bankruptcy Judge:

Robert Allen Smith, ("Appellant") appeals an order of the bankruptcy court denying his motion for a trial by jury in an adversary proceeding he instituted against the Internal Revenue Service of the United States ("IRS") ¹. We conclude the Appellant has no right to a trial by jury in this instance and AFFIRM.

 [**2]  FACTS

In 1987, the Appellant, an attorney, restructured his business from a sole proprietorship with various employees to a law corporation functioning with independent contractors. The new corporation ("RASCORP") hired the former employees, now incorporated with the Appellant's tutelage, as independent contractors. In addition, the  [*228]  Appellant no longer drew a salary from the law practice, but the corporation advanced him money characterized as loans. This incorporation purportedly relieved the Appellant of his employment tax obligation.

During an employment tax audit of RASCORP, the IRS determined that the independent contractors were employees, and characterized the loans to the Appellant as salary. As such, the IRS determined RASCORP should have been withholding taxes from the employees' wages, creating a "trust fund" for the government, as well as paying the employer's share of the taxes. The IRS determined that RASCORP was liable for both the employer and employees' portion of the taxes. The IRS then assessed the Appellant, not RASCORP, for monies not withheld as the responsible officer of RASCORP under 26 U.S.C. § 6672.

The Appellant filed a petition for reorganization under [**3]  chapter 11, title 11, United States Code. ² [**4]  On January 27, 1995, the IRS filed a proof of claim for $ 118,314.80. On May 8, 1995, the Appellant filed an adversary proceeding to contest the amount or legality of the taxes owed and requesting a jury trial. The complaint alleges (i) the IRS improperly reclassified the independent contractors as employees; (ii) improperly reclassified loans to the Appellant; (iii) made those reclassifications in violation of the Congressional mandate of Internal Revenue Code 530 ("IRC") which provides a "safe haven" prohibiting these reclassifications under certain circumstances, at least one of which occurs here; (iv) failed to recompute these classifications at the lesser tax rates of IRC section 3509. The Appellant requested relief and asked the court to cancel any alleged tax indebtedness to the IRS for years in question; adjudicate and declare that the taxes are not owed; alternatively, adjudicate and declare that the taxes must be recomputed at the lower rate. ³ On June 14, 1995, the IRS, filed an answer.

The motion for jury trial was denied November 8, 1995, following hearing on October 20, 1995. In denying the motion for jury trial, the court determined that the tax matter was solely a claims objection procedure in the form of an adversary proceeding.

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