Unpublished Disposition, 917 F.2d 566 (9th Cir. 1990)
Annotate this CaseJohn R. FORD; Ida W. Ford, Plaintiffs-Appellants,v.UNITED STATES of America; Commissioner Internal RevenueService, Defendants-Appellees.
No. 89-55381.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted May 11, 1990.Decided Oct. 26, 1990.
Before REINHARDT and LEAVY, Circuit Judges, and THOMPSON* , District Judge.
MEMORANDUM**
The appellants, John R. and Ida W. Ford, appeal the ruling of the district court that evidence regarding the settlement of their earlier tax court case was inadmissible to prove the Fords were not liable for taxes in the present case. Despite the ruling, on cross-examination the court allowed the government to elicit testimony from Dr. Ford about those earlier tax years. The Fords claim they were prejudiced by the testimony because the jury could infer culpable conduct from it, which they were unable to rebut.
The Fords also contend there was no evidence to support the jury's general verdict that they were liable for income taxes in 1978 as a result of their constructive receipt of $380,000, pledged to secure a loan from Dr. Ford's deferred compensation account. The Fords seek a new trial.
We reverse and remand.
DISCUSSION
Whether the District Court Abused Its Discretion in Refusing to Admit Evidence That Transactions Instigated by the Fords' Financial Advisor Were Shams
The trial court's evidentiary rulings are reviewed for an abuse of discretion and will not be reversed absent prejudice. Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir. 1989).
The Fords sought to introduce evidence that a tax case involving the tax years from 1965 to 1975 was settled because their financial advisor, attorney Harry Margolis, instigated a multitude of transactions that were found to be shams to be disregarded for tax purposes. As a result, the tax liability of the Fords for 1965 through 1975 was greatly reduced. Plaintiffs' Memorandum of Contentions of Fact and Law, District Court Record, Docket Entry 9, at 6. Margolis also instigated the transaction at issue here. Therefore, the Fords wished to show at trial that this transaction was also a sham to be disregarded for tax purposes.
Federal Rule of Evidence 408 provides:
Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or statements made in compromise negotiations is likewise not admissible.... This rule also does not require exclusion when the evidence is offered for another purpose, such as proving bias or prejudice of a witness, negativing a contention of undue delay, or proving an effort to obstruct a criminal investigation or prosecution.
In short, Rule 408 prohibits the admission of settlement evidence where it is used to prove or disprove either liability or the amount of the claim. United States v. Contra Costa County Water Dist., 678 F.2d 90, 92 (9th Cir. 1982).
The Fords state that if the 1978 tax year had been included in the prior tax case, "the 1978 [tax liability] would have been reduced to zero." Plaintiffs' Memorandum of Contentions of Fact and Law, at 7. The stated purpose for which the Fords seek to introduce the terms of the previous settlement is to disprove their liability for any amounts allegedly due in taxes for 1978 as a result of a Margolis-initiated transaction. Therefore, the district court was correct to exclude this evidence. The government would have been reluctant to settle the previous tax case had it known its concession with respect to Margolis could be used to disprove liability in future tax cases. Admitting this evidence would not promote the public policy favoring the compromise and settlement of disputes because it would hinder full and open discussion. See Contra Costa County, 678 F.2d at 92.1
Whether the District Court Abused Its Discretion by Allowing the Government's Offensive Use of the Settlement Agreement on Cross-Examination
The Fords assert they were prejudiced because the court allowed government counsel to cross-examine Dr. Ford about certain facts relating to the previously settled tax case. They claim they were treated unfairly because a jury could infer culpable conduct from the questioning, while they were prohibited from discussing the previous tax years.
The testimony elicited by Mr. Ross, the government's counsel, was as follows:
Mr. Ross: First of all, Dr. Ford, you've testified that in your opinion you've reported all your income for 1977 and '78; is that right?
A. That is correct, sir.
Q. Now for the years 1965 through 1975, you signed tax returns that said that you'd had reported all your income, didn't you?
Mr. Farris [for the appellants]: Your Honor, that's really--we're in 1977, '78 tax year.
The Court: I know. I think his testimony was with relation to '77 and '78, was it not?
Dr. Ford: Yes. He was asking about another year.
Mr. Ross: I asked whether or not he had made the same kind of representations about prior years, and I will connect that up.
The Court: All right.
Dr. Ford: To my knowledge, I did.
Mr. Ross: Of course, it turned out that you actually owed hundreds of thousands of dollars for back taxes from the years 1965 through '75, didn't you?
Mr. Farris: Your Honor, we had this before, and you told us we couldn't talk about those years.
The Court: Objection is overruled.
Mr. Farris: I'll be happy to talk about those cases.
The Court: No. Objection is overruled. He can answer the question.
Mr. Ross: You still owe the government hundreds of thousands of dollars of taxes for those years, don't you, sir?
Dr. Ford: Because of Harry Margolis' planning.
Mr. Ross: Will you answer the question, please.
Dr. Ford: Yes.
Given the court's previous ruling that evidence of the tax years 1965 through 1975 was inadmissible, it was an abuse of the court's discretion to allow the government to introduce evidence before the jury that the Fords "still owe [d] the government hundreds of thousands of dollars of taxes for [the 1965-75 tax] years" with no chance of rebuttal. The admission was not harmless; the jury could infer culpable conduct from the testimony. We also find the prejudice was not overcome by the court's subsequent ruling during the government's closing argument that it would sustain an objection to any mention of the prior tax years, and the court's statement that "I prefer you not mention prior taxes." These inconsistent rulings probably confused the jury.
Because the error was not harmless, we must remand this case for a new trial. With this disposition, we need not decide whether the evidence in this case was sufficient to support the verdict.
REVERSED AND REMANDED.
BRUCE R. THOMPSON, District Judge, dissenting:
I respectfully dissent. This dissent is a work of supererogation, accomplishing nothing. It will be short and to the point, and is written only because I believe that this kind of reversal and remand for a new trial on insubstantial grounds is a disservice to the administration of justice and an added burden to an already overburdened district court.
Our panel of judges unanimously agreed that the ruling in limine rejecting evidence of the tax court settlement for prior years was correct, that there was constructive receipt of income by appellant, that there was an economic benefit conferred on appellant, and that there was substantial evidence to support the verdict. We differ only on whether the trial judge's unfortunate ruling on cross-examination was reversible error. The majority believes:
Given the court's previous ruling that evidence of the tax years 1965 through 1975 was inadmissible, it was an abuse of the court's discretion to allow the government to introduce evidence before the jury that the Fords 'still owe [d] the government hundreds of thousands of dollars of taxes for [the 1965-75 tax] years' with no chance of rebuttal. The admission was not harmless; the jury could infer culpable conduct from the testimony.
"Culpable conduct," if inferable, is not an issue in the case. This is a civil, tax-refund action. The only issue was whether the taxpayers had engaged in transactions which generated taxable income under the Internal Revenue Code. The defendants proved they had and no refund was due. The taxpayers' state of mind is irrelevant. Whether the taxpayers relied on good advice or bad advice is irrelevant. There is no good faith or criminal intent at issue.
I dissent.
Honorable Bruce R. Thompson, Senior United States District Judge for the District of Nevada, sitting by designation
This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3
We also reject the Fords' assertions regarding the collateral estoppel effect of the settlement. A judgment based on the stipulations of the parties, such as a settlement, is not entitled to collateral estoppel effect in a later action. See United States v. California Portland Cement Co., 413 F.2d 161, 163 (9th Cir. 1969)
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