Tax Court Rejects Unusual Path to Admission of Expert Testimony (11/20/13)

In Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, here, the Tax Court excluded an expert witness report that the petitioner attempted to introduce as the expert's testimony by attaching the report to his petition, by a failed motion to admit the report, and an IRS stipulation that the petition was the petition but not for purposes of admission.  The Court said that "Petitioner's path for attempting to introduce the Tindall appraisal into evidence as expert testimony is, to say the least, unusual."

The Court immediately described the usual way:

Generally, a party obtains the testimony of an expert witness by calling that witness to testify. See Rule 143(g)(1). Pursuant to that Rule, the expert witness must prepare a written report, which is marked as an exhibit and, after having been identified by the witness and adopted by him, received into evidence as his direct testimony unless the Court determines that the witness is not qualified as an expert. The Rule further provides that, not less than 30 days before the call of the trial calendar on which a case appears, a party calling an expert witness shall serve on each other party and submit to the Court a copy of the expert's report. Finally, the Rule also provides that, generally, we will exclude an expert witness' testimony altogether for failure to comply with the Rule. Those requirements are echoed in our standing pretrial order, which was served on petitioner.

The Court inferred that the petitioner chose the unusual method because of a fee dispute with the appraiser.

The Court then rejected the attempt to back door the expert report into evidence, concluding:

Petitioner did not call Dr. Tindall as a witness but asks us to rely on her report (which, under our Rules, would serve as her direct testimony) as her expert opinion. Petitioner has neither qualified Dr. Tindall as an expert entitled pursuant to rule 702 of the Federal Rules of Evidence to give her opinion on technical matters nor has he satisfied our procedural rules for expert testimony, found in Rule 143(g) and in our standing pretrial order. In other words, petitioner has failed to satisfy the preconditions for our receiving Dr. Tindall's opinion into evidence. Because her report (i.e., the Tindall appraisal) is not in evidence, we may not consider her opinion.

The Court then accepted the IRS's valuation of $2,303,000.

What was the fight about?  The petitioner's excluded expert report valued the property interest (after discounts) at $1,037,796.  The IRS expert valued the property at $2,303,000, after discounts for 10% lack of control and 26% for lack of marketability.,  So the difference was about $1,265,204.  Say for purposes of analysis that, had the petitioner's expert report been entered on the merits of valuation along with testimony, and the Court decided to just split the difference, the value would have been $1,670,398, or $632,602 less than finally determined on the basis of the IRS expert report and testimony.  Say that amount is subject to the 35% rate, the resulting tax would savings would have been $220,410.  And, of course, interest will accrue from the due date of the return.  This hypothetical assumes, in rough strokes, that the two competing experts would have been roughly equally persuasive or dubious (at least on the proxy of a split between their valuations)

If the petitioner's expert had been more persuasive (or less dubious) than the IRS's expert, the savings would have been greater.

Of course, if the petitioner's expert had been more dubious (or less persuasive) than the IRS's expert, the valuation would have been higher than the mid-point, but given the nature of these things (not baseball arbitration), it is still quite possible that the Tax Court would not have accepted whole cloth the IRS's expert opinion and would have given the petitioner something.

So, why did not the petitioner do what was necessary to resolve the fee dispute with a lot of money riding on the expert's testimony?  I could speculate but it would be speculation and not valuable to anyone (even me).

I will say, however, that in a hypothetical case where the expert might be disqualified as an expert on voir dire or, if "qualified," his or her repute could not withstand cross-examination, perhaps it is better that that expert not testify at all and some back door approach be attempted for his or her opinions.  (I have no idea whether this concern was a contributing factor in this case, I am just saying that in some cases it might be.)

This is a good lesson of what not to do.