Noli v. C.I.R.

• Decision Date: 14 November 1988
• Docket Number: No. 87-7466,87-7466
• Citation: 860 F.2d 1521
• Parties: -375, 88-2 USTC P 9595, Bankr. L. Rep. P 72,546 Robert P. NOLI and Delora J. Noli, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1521

860 F.2d 1521

63 A.F.T.R.2d 89-375, 88-2 USTC P 9595,

Bankr. L. Rep. P 72,546

Robert P. NOLI and Delora J. Noli, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 87-7466.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Sept. 12, 1988.

Decided Nov. 14, 1988.

Terrence F. Pyle, Cicero & Pyle, Tampa, Fla., for petitioners-appellants.

William S. Rose, Jr., U.S. Dept. of Justice, Washington, D.C., for respondent-appellee.

Appeal from a Decision of the Tax Court of the United States.

Before KOELSCH, CANBY and TROTT, Circuit Judges.

TROTT, Circuit Judge:

Robert P. and Delora J. Noli appeal from a decision of the United States Tax Court dismissing their petition for redetermination of deficiencies in their income tax for the tax years 1974 through 1978. Petitioners raise a number of issues, both procedural and substantive in nature. We affirm.

I.

In the mid-1960's, petitioner Robert Noli established a chiropractic practice in Merced, California. With the assistance of his wife, the practice was operated as a sole proprietorship until late 1973. In September or October of 1973, Robert Noli, aided by a tax return preparer, formed two wholly-owned Nevada corporations, Robco and Deeco. Mr. Noli's chiropractic practice and its good will were transferred to Robco, Inc. in exchange for 100 percent of its stock. Mr. and Mrs. Noli's personal residence, real property, automobiles, and office equipment related to the chiropractic practice were transferred to Deeco, Inc. in exchange for 100 percent of its stock. In the taxable years 1974, 1975, 1976, 1977 and 1978, the Nolis and the two corporations received gross income of approximately $1,117,740.00. In the five tax years in question, Mr. and Mrs. Noli reported on their joint federal tax returns a total of only $85,679.00 as income derived from the chiropractic business and other investments.

An audit of the Nolis' and the corporations' returns for the years 1974 through 1978 indicated that certain nondeductible family expenses, including swimming pool maintenance, residential lawn work and utilities, travel and entertainment, and automobile repair and maintenance, were claimed as deductible corporate expenses. The audit similarly indicated that the Nolis' income from the salaries they received as compensation under their agreement with Robco, Inc. for their work in the chiropractic business was merely nominal. Accordingly, the Commissioner reallocated the corporate income and allowable deductions to the Nolis. The Commissioner disallowed other deductions, determining that they were nondeductible personal expenses, or were inadequately substantiated. As a result, statutory notices of deficiency were issued.

II.

On April 5, 1982, the Nolis, represented by Michael R. Pinatelli of San Francisco, filed petitions in the United States Tax Court, disputing the entire amount determined as deficiencies by the Commissioner. They maintained principally that their dealings with Robco and Deeco were conducted at arms length, and that the Commissioner's reallocation of income and deductions was erroneous. They requested and were granted a trial on their petition. The Commissioner timely filed his answer denying the material allegations of the petition.

On August 18, 1983, George Balyea of Fresno, California, entered his appearance as counsel for petitioners. Shortly thereafter, on August 22, 1983, Mr. Pinatelli withdrew his appearance. On November 19, 1984, the Tax Court set the case for trial in San Francisco on February 11, 1985. Approximately one month later, Mr. Balyea moved to withdraw his appearance, which motion was granted on January 3, 1985. Curtis Berner and E. Rick Buell II of San Francisco then entered their appearances for the petitioners.

On January 3, 1985, the parties filed a joint motion to continue the trial on the basis that a report from a re-audit requested by petitioners' prior counsel was not yet complete, and that new counsel required additional time, in any event, to prepare the case. The motion was denied. At a subsequent hearing before the Tax Court to explore settlement and other pretrial issues, petitioners' counsel renewed the motion for a continuance. The court ordered the case continued pending further direction of the court, denying petitioners' motion as moot. The court further ordered the parties to file a status report with the court no later than May 13, 1985.

On May 14, 1985, petitioners' counsel, Mr. Berner, filed a status report indicating that "[t]he possibilities of settlement appears [sic] to be very strong," and requesting that the court postpone docketing the case for trial and schedule the filing of another status report within 60 days.

On September 24, 1986, the Tax Court restored the case to the general docket for trial "in due course." On October 23, 1986, Mr. Berner moved to withdraw his appearance, and on the same day, John Yohanan of San Jose, California, entered his appearance for the petitioners. On November 20, 1986, the Tax Court ordered the case set for trial on April 20, 1987 in San Francisco.

On the date set for trial, stipulations were filed and petitioners' counsel agreed to recommend settlement on the basis of figures prepared on re-audit of their returns. Petitioners declined to settle. On April 23, 1987, the parties again appeared in Tax Court, where further discussion was had with an eye towards settlement. When petitioners remained opposed to settlement, the Tax Court judge agreed to return to San Francisco from Washington, D.C., on May 7, 1987 to try the case.

On May 7, 1987, at 9:30 a.m., the Tax Court was reconvened for trial. Neither the petitioners nor their counsel were present. At approximately 10:00 a.m., John Cicero, then of the firm of Lund and Cicero of Tampa, Florida, entered his appearance for the petitioners. He was accompanied by Walter Copeland, a certified public accountant. Mr. Cicero informed the court that bankruptcy petitions had been filed that morning on behalf of the Nolis. He stated that he expected to receive confirmation of the filings shortly and argued that the Tax Court proceedings were thereby stayed. The court, however, instructed Mr. Cicero to proceed with trial, whereupon he moved for a continuance to await confirmation of the bankruptcy filings. Mr. Cicero also requested a continuance in any event due to the asserted unavailability of petitioners' expert, CPA John Priest, by reason of Priest's post-surgical ill health. Mr. Cicero also asserted that a continuance was justified in that petitioners would be greatly prejudiced due to Cicero's unfamiliarity with the case.

The Tax Court denied the motions and instructed counsel to put on his first witness. Mr. Cicero requested a delay of the trial so that he might telephone petitioners and have them come to the courthouse. The court declined, noting that not only did the petitioners receive an order to appear at 9:30 a.m., but they had also called the judge's secretary in order to confirm the trial time. In response to the court's inquiries, Mr. Cicero admitted that he himself had advised petitioners to remain at the hotel instead of appearing for trial at the time set by the order.

With his motions denied and with the court instructing him to proceed, Mr. Cicero presented the testimony of Mr. Copeland. On questioning from the court, Mr. Copeland stated that, apart from seeing documents such as tax returns and statutory notices of deficiency, he had not reviewed any of the petitioners' actual business records until the day before, upon his arrival in San Francisco. This prompted government counsel to move for dismissal of the petition for failure properly to prosecute pursuant to Rule 123 of the Tax Court Rules of Practice and Procedure.

The court took the motion under advisement, and again instructed Mr. Cicero to continue. At that point, Mr. Cicero renewed his motion for a continuance on the ground that Mr. Priest, the CPA previously retained as petitioners' expert, was unable to appear for health reasons. By leave of the court, Mr. Cicero left the courtroom to telephone petitioners and to instruct them to appear.

During the already tortured course of the one-day trial, Mr. Cicero ultimately presented the testimony of Mr. Noli, who testified about his creation of the business structure and the operation of the chiropractic business during the tax years in question.

After a lunch break, Mr. Priest, apparently having resurrected sufficient vigor to appear in court, testified as to the difficulties he had in deciphering depreciation tables while working on a possible settlement of the case and in obtaining business records of the Nolis from a prior accountant retained by them. In response to the court's inquiries concerning the purpose of Mr. Priest's testimony, counsel explained that he wished to illustrate the need for continuance. Mr. Noli then returned to the stand for more direct examination.

During the government's cross-examination of Mr. Noli, petitioners' counsel objected to any further proceedings, announcing that bankruptcy petitions had been filed, triggering the automatic stay of the Tax Court trial pursuant to 11 U.S.C. Sec. 362(a)(8). A recess was ordered during which government counsel moved the bankruptcy court for relief from the automatic stay so that the Tax Court proceedings could continue. The bankruptcy court determined that the bankruptcy petitions were filed as an indirect method of avoiding a decision in the Tax Court and orally granted the government's request to lift the stay, deeming it "appropriate ... to allow those Tax Court proceedings to conclude."

With the stay lifted, the parties returned to the Tax Court. At the conclusion of the taxpayers' case, the Tax Court rendered a bench opinion granting the Commissioner's motions to dismiss and assessing stipulated deficiencies against petitioners.

III.

On appeal, petitioners...