Hi Scott,
WOW! You like doing things the hard way, don't you?
To answer your questions, "Will it work" Yes, it would work.
Two: "Has anybody ever done anything like this before?" Yes, but only once for each person who tried it.
Why dig holes in the ground? After digging the hole, you have to dig out the ashes after each use. The fire pit must have air coming into the bottom of the fire.
First you need to decide what kind of smoking that you intend to do. Click into "According to Smoky" and read the "Glossary" for starters. Then you might read "Burning Wood & Blowing Smoke."
For real smoking, the simplest way is to build an above ground structure (I converted an upright freezer) and a fire box can be built in a shallow pit (1' deep) and piped to the bottom of the smoker structure, or a small charcoal/wood fire can be built in the floor of the smoker or an electric hot plate can be used.
Click into the FAQs and read around through the smoke house FAQs.
Have fun,
Smoky