In re Olshan

• Decision Date: 28 January 2004
• Docket Number: No. 02-56792.,02-56792.
• Citation: 356 F.3d 1078
• Parties: In re Noel OLSHAN, Debtor. R. Todd Neilson, Chapter 7 Trustee for the Estate of Noel Olshan, Appellant, v. United States of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

356 F.3d 1078

In re Noel OLSHAN, Debtor R. Todd Neilson, Chapter 7 Trustee for the Estate of Noel Olshan, Appellant, v. United States of America, Appellee.

No. 02-56792.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 1, 2003.

Filed January 28, 2004.

COPYRIGHT MATERIAL OMITTED

Kenneth Gordon and Terry A. Ickowicz, Laski & Gordon, LLP, Los Angeles, CA, for the appellant.

Eileen J. O'Connor, Assistant Attorney General, Samuel A. Lambert and Annette M. Wietecha, Attorneys, Tax Division, Department of Justice, Washington, D.C., for the appellee.

Appeal from the United States District Court for the Central District of California; Gary Allen Feess, District Judge, Presiding. D.C. No. CV-01-06787-GAF.

Before BEEZER and KOZINSKI, Circuit Judges, and SCHWARZER,^* Senior District Judge.

SCHWARZER, Senior District Judge:

This case involves the disposition of a claim by the Internal Revenue Service ("IRS") against Noel Olshan, the debtor in bankruptcy, for unpaid taxes. The bankruptcy court rejected the claim, but the district court reversed and remanded for further proceedings, ruling that the bankruptcy court had erred in applying the burden-shifting rubric for resolving tax claims. The bankruptcy trustee, R. Todd Neilson, appeals the district court's order.

The threshold issue is whether we have jurisdiction to hear this appeal, given that the district court remanded the case for further proceedings rather than entering a final judgment. Because we find that our resolution of the central question on appeal will materially aid the bankruptcy court in reaching its disposition on remand and serve the interest of judicial efficiency, we will reach the merits of the appeal. On the merits, we agree with the district court that the bankruptcy court erred in rejecting the IRS's claims for unreported nonbusiness income and overstated business deductions after finding that the IRS's method of computing Olshan's unreported business income was flawed. We also agree that the bankruptcy court erred in rejecting the IRS's claim for unreported business income in its entirety after finding that Olshan had rebutted the presumption of correctness that attached to the IRS's Proof of Claim ("POC"). Finally, we find that the undisputed evidence in the record will enable the bankruptcy court to compute the amounts of unreported business income, over-stated business deductions and unreported nonbusiness income, and we therefore remand the case to the bankruptcy court to determine the extent of Olshan's liability for taxes, penalties, and interest.

I. FACTUAL AND PROCEDURAL HISTORY

Olshan was convicted of insurance fraud in 1996. The conviction attracted the attention of the IRS which conducted an audit of Olshan's tax returns. During the audit, Olshan refused to provide testimony, information, or records for the relevant tax periods, thus forcing the IRS to employ an "indirect" method of computing his business income in those years. The IRS used bank statements to compute the total deposits into Olshan's client trust accounts, determined an average contingency fee percentage for each client, and applied that average to Olshan's contingency fee contracts during the tax years in question. It determined that Olshan had seriously understated his business income for the tax years 1991 and 1992. It also found, using more orthodox methodology, that Olshan had overstated business deductions and underreported nonbusiness income in those years. In August 1996 the IRS issued a jeopardy assessment and recorded a notice of federal tax lien against Olshan's property.

In 1997 Olshan filed a petition for bankruptcy in Chapter 11, later converted to Chapter 7. R. Todd Neilson was appointed trustee. The IRS filed a POC to collect deficiencies remaining after the tax lien. Neilson then brought this adversary proceeding for a judicial determination of Olshan's tax liabilities for the 1991 and 1992 tax years.¹ He alleged that the IRS's claims were overstated, that the allowed priority tax claim had been paid in full through the seizure of Olshan's assets, and that the lien was invalid.

Prior to trial in the bankruptcy court, Neilson and the IRS signed a joint pre-trial order, stipulating that:

• The liabilities for taxes, penalties and interest set forth in the POC for the 1991 and 1992 tax years were overstated.

• The jeopardy assessment was overstated.

• Olshan's claimed business expense deductions for 1991 and 1992 exceeded the amounts substantiated by $131,593.03.

• Olshan received unreported nonbusiness income during 1991 and 1992 of $160,635.

• Olshan deposited in excess of $12 million in client trust accounts controlled by him during 1991 and 1992.

Prior to trial, the bankruptcy court ruled that the trustee had successfully rebutted the presumption of correctness that attached to the POC and that the IRS had the burden of proving the correctness of the claim in all respects. Following trial, the court entered oral findings of fact and conclusions of law. It first adopted the parties' stipulations in the joint pretrial order. After review of the trial evidence it found that the IRS's methodology for determining business income was deeply flawed. In particular, the court found that the IRS had failed to review certain accounts under Olshan's control that would have provided more information, and that the IRS had improperly construed all deposits into other accounts as business income without regard to the deposits' source or disposition. Based on these findings, the court disallowed the entire POC for 1991 and 1992 to the extent it claimed a tax liability greater than that shown on Olshan's tax returns.

The IRS appealed to the district court. That court held that even if the bankruptcy court correctly shifted the burden of proof to the IRS and correctly found that the IRS had "botched" its investigation of Olshan's tax liability,² it erred in not giving effect to the trustee's pretrial stipulation and trial evidence. Case law, the court held, directs the court to consider all evidence presented in determining the extent to which a claim should be allowed and does not sanction the bankruptcy court's "all or nothing" approach. Because the record established that Olshan had grossly underreported his taxes, it provided a basis for an adjustment, even if not in the amount sought by the IRS. Accordingly, the court remanded the case with directions to recompute Olshan's tax liability consistent with its decision and to determine penalties and interest.

The trustee now appeals.

II. JURISDICTION

At the threshold we must decide whether we have jurisdiction. "We have jurisdiction to review final orders of a district court acting in its bankruptcy appellate capacity under either 28 U.S.C. § 158(d) or 28 U.S.C. § 1291." Lundell v. Anchor Constr. Specialists, Inc. (In re Lundell), 223 F.3d 1035, 1038 (9th Cir. 2000); see also Stanley v. Crossland, Crossland, Chambers, MacArthur & Lastreto (In re Lakeshore Vill. Resort, Ltd.), 81 F.3d 103, 106 (9th Cir.1996). "However, a district court's order is ordinarily not final `when the district court remands for further factual findings related to a central issue raised on appeal.'" Lundell, 223 F.3d at 1038 (quoting Bonner Mall P'ship v. U.S. Bancorp Mortgage Co. (In re Bonner Mall P'ship), 2 F.3d 899, 904 (9th Cir. 1993)). "Nevertheless, we have taken a pragmatic approach in determining finality in light of the unique nature of bankruptcy proceedings where a district court reverses a bankruptcy court decision and remands for further proceedings." Id. (internal quotation marks omitted). In certain instances, we will deem such orders final.

In Stanley, we drew on prior case law to identify four factors relevant in determining whether a district court's decision remanding a case to the bankruptcy court is a final decision under § 158(d):

(1) the need to avoid piecemeal litigation; (2) judicial efficiency; (3) the systemic interest in preserving the bankruptcy court's role as the finder of fact; and (4) whether delaying review would cause either party irreparable harm.

81 F.3d at 106 (citing Vylene Enters., Inc. v. Naugles, Inc. (In re Vylene Enters., Inc.), 968 F.2d 887, 895-96 (9th Cir.1992)).

In recent cases we have employed a more liberal approach to determining finality. In North Slope Borough v. Barstow (In re Bankr. Estate of Markair, Inc.), 308 F.3d 1057, 1059-60 (9th Cir.2002), and Lundell, 223 F.3d at 1038, we applied the two-factor test set forth in Bonner Mall. The test asks whether the central issue raised on appeal "is legal in nature and its resolution either (1) could dispose of the case or proceedings and obviate the need for factfinding; or (2) would materially aid the bankruptcy court in reaching its disposition on remand." Lundell, 223 F.3d at 1038 (citing Bonner Mall, 2 F.3d at 904); see also Saxman v. Educ. Credit Mgmt. Corp. (In re Saxman), 325 F.3d 1168, 1171-72 (9th Cir.2003) (applying the Vylene four-factor test and the Bonner Mall two-factor test interchangeably); Alexander v. Compton (In re Bonham), 229 F.3d 750, 763 (9th Cir.2000) ("We have applied two related balancing tests in determining finality, both in conjunction and separately.").

We accept jurisdiction here. The appeal concerns primarily a question of law: Whether the bankruptcy court properly applied the burden-of-proof rubric governing tax claims. Resolution of that question will materially aid the bankruptcy court's determination of the extent to which the IRS's claim should be allowed. Although the remand to the bankruptcy court involves factual matters, we have accepted appellate jurisdiction in such cases where, as here, they are not disputed. See Lundell, 223 F.3d at 1038-39 (accepting jurisdiction where remand to correct bankruptcy court's wrong allocation of burden of proof); DeMarah v. United States (In re DeMarah), 62 F.3d 1248, 1250 (9th Cir. 1995) (accepting...