Unpublished Disposition, 869 F.2d 1496 (9th Cir. 1989)

MEMORANDUM^** 

The tax court determined that there were deficiencies in taxpayers Armstrong's and Crosby's income tax, invalidating the deductions taken for investments in a gold mining scheme. The tax court found the gold mining program to be a fraudulent factual sham. Taxpayers appeal on the grounds that (1) the tax court exhibited prejudice; (2) the tax court erred in excluding certain evidence; and (3) the tax court erred in refusing to apply collateral estoppel. We reject these contentions and affirm.

FACTS AND PRIOR PROCEEDINGS

The IRS disallowed deductions claimed by Mr. and Mrs. Armstrong and Mr. and Mrs. Crosby (taxpayers) relating to investments in a gold mining program, Gold for Tax Dollars (GFTD). GFTD investors leased gold claims using their own money, plus the proceeds of non-recourse notes (1978) or option sales (1979 and 1980). Taxpayers would then deduct as mining development expenses both their own investment and the amount of the non-recourse loan or option.

The tax court found the GFTD promotion was a fraudulent factual sham. The court found that the tax shelters involved in the instant case were identical to those presented in Saviano v. Commissioner, 80 T.C. 955 (1983), aff'd, 765 F.2d 643 (7th Cir. 1985) and Smith v. Commissioner, T.C.M. 1986-101, and concluded that the deductions relating to nonrecourse loans in 1978 and option sales in 1979 and 1980 would be disallowed. The court also concluded that the transactions were entered into primarily for tax benefits, and were therefore nondeductible.

ANALYSIS

Taxpayers challenge the fairness and impartiality of the tax court judge. We construe this claim as an argument that the judge should have disqualified himself pursuant to 28 U.S.C. § 455, and as a due process claim.

Although the question of whether taxpayers may properly raise the issue of judicial bias under section 455 for the first time on appeal appears to be unsettled in this circuit, Compare Noli v. Commissioner, 860 F.2d 1521, 1527 (9th Cir. 1988) with Palila v. Hawaii Dept. of Land & Natural Resources, 852 F.2d 1106, 1110 n. 7 (9th Cir. 1988), we assume arguendo that taxpayers could properly raise this issue for the first time on appeal.

Where, as here, no motion is made to the trial court judge, a party will bear a greater burden on appeal to demonstrate that the judge erred in failing to recuse himself under section 455. United States v. Sibla, 624 F.2d 864, 868 (9th Cir. 1980); Noli, 860 F.2d at 1527. Taxpayers fail to carry this greater burden.

Taxpayers assert that the judge's prejudice was indicated by comments prior to the beginning of testimony and during the trial expressing doubts about the taxpayers contentions, his determinations allegedly based on insufficient evidence, his refusal to admit certain testimony and his failure to adopt the factual findings of a prior case.

These contentions do not support a finding of prejudice such that the judge erred in failing to recuse himself. A judge is not delinquent for expressing doubts about the merit of a particular case. Noli, 860 F.2d at 1527; United States v. Frias-Ramirez, 670 F.2d 849, 853 n. 6 (9th Cir.), cert. denied, 459 U.S. 842 (1982). Nor are adverse rulings on disputed legal issues evidence of bias. In addition, parties cannot attack a judge's impartiality on the basis of information and beliefs acquired by the judge while acting in his or her judicial capacity; to be disqualifying the alleged bias must stem from an extrajudicial source. Frias, 670 F.2d 849 n. 6; United States v. Grinnell Corp., 384 U.S. 563, 583 (1966). In the instant case, the judge explicitly stated on several occasions that his doubts about the validity of the transactions were based on evidence before the court.

Allegations of bias will rise to the level of a due process violation only in the most extreme instances. Aetna Life Ins. v. Lavoie, 475 U.S. 813, 821 (1986). The behavior cited in the instant case does not reach this rigorous standard.

Appellants also assign as error the court's decision to exclude the testimony of William Hoffius, testimony which would have allegedly shown that the mining operation was not a sham.

Rule 402 of the Federal Rules of Evidence states that evidence that is not relevant is not admissible. Fed.R.Evid. 402. On appeal to this court, the trial court's decision to admit or exclude evidence based on the issue of relevancy is reviewed for an abuse of discretion. Sochin v. Commissioner, 843 F.2d 351, 355 (9th Cir. 1988).

Here, the court excluded the testimony because it found that the witness lacked personal information pertaining to the tax years in question and because he was not an expert as to the value of the property or its prospects. Under these circumstances, the decision of the tax court judge that this evidence did not possess sufficient probative value to justify receiving it into evidence was not an abuse of discretion.

Taxpayers make two further arguments. First, taxpayers suggest that the tax court's procedural disposition of the case was prejudicial. Second, taxpayers allege that the tax court erred in not allowing them to present evidence that the United States government interfered with their property and contract rights. We reject both arguments as without merit.

Taxpayers allege that collateral estoppel prevents the relitigation of issues of fact relating to the practicality of the mining operations that had been determined in SEC v. Rogers. No. 80-4841, slip op. at 43-52 (C.D. Cal. 1985). The availability of collateral estoppel is subject to de novo review. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1519 (9th Cir. 1985).

In Rogers, the SEC brought suit against participants in GFTD's programs, alleging securities laws violation due to false or misleading statements made in connection with the venture and failure to disclose material information to investors. The district court held that defendants did not violate the relevant securities laws provisions and this finding was upheld by this court on appeal. SEC v. Rogers, 790 F.2d 1450, 1459-60 (9th Cir. 1986).

The district court in Rogers also specifically found that the statements in the GFTD offering materials were not false or misleading concerning potential economic benefits and risks to investors and that the mining operation was professional. These findings might suggest that the GFTD promotion and the transactions related to it were not fraudulent factual shams, contrary to the factual finding of the tax court.

However, the doctrine of collateral estoppel does not require that the tax court adopt these findings. Even if an issue has been fully litigated in a previous proceeding, it may not be given collateral estoppel effect unless its determination in the prior lawsuit was necessary or essential to the judgment. See Block v. Commissioners, 99 U.S. (9 Otto) 686, 693 (1878); J. Friedenthal, M. Kane & A. Miller, Civil Procedure 675 (1985). " [T]he court in [Rogers ] was not concerned with the financial structure of the taxpayers' investments." Saviano, 765 F.2d 643, 654 n. 12 (7th Cir. 1985). The Rogers court held that statements by various promoters of GFTD did not constitute fraud under the securities act. It was not necessary to this decision that the court determine either the tax consequences of the investments or the feasibility of each individual investor being able to exploit his or her mining plot. Thus, any determinations made in the previous case that did not relate to the issue of whether there was fraud under the securities act were not necessary to the judgment and have no collateral estoppel effect.

AFFIRMED.