In LISI Estate Planning Newsletter #1804, Paul Hood provided members with his thoughts on Boltar, LLC v. Commissioner. Now, Chuck Rubin has the last word on what is a most important valuation case.

Charles (Chuck) Rubin, a board certified tax attorney, is managing partner of Gutter Chaves Josepher Rubin Forman Fleisher PA, a tax, trusts and estates boutique law firm situated in Boca Raton, Florida (www.floridatax.com). He is a former adjunct professor at the University of Miami School of Law. Chuck has published numerous treatises, manuals, and articles, including two BNA Tax Management portfolios, and articles in Journal of Taxation, Estate Planning, Tax Management Estates, Gifts and Trusts Journal, and Tax Notes. He also authorizes a popular tax blog at www.RubinonTax.blogspot.com, and speaks regularly at professional meetings and conferences.

Before we get to Chuck’s commentary, members should note that LISI recently posted a podcast by Bob Keebler and Barry Picker titled: IRAs, Bankruptcy and Prohibited Transactions. In their podcast, Bob and Barry discuss the recent 11^th Circuit case of Willis v. Menotte, in which the 11^th Circuit upheld a finding that the plaintiff’s retirement assets were not exempt because the plaintiff engaged in several prohibited transactions that caused these assets to lose their protected status.

Now, here is Chuck’s commentary:

EXECUTIVE SUMMARY:

Numerous tax consequences flow from the value of an item of property. Principal examples include charitable contribution deductions, estate taxes, and gift taxes. Absent a contemporaneous sale of the subject property to unrelated persons, an appraisal will usually be needed to compute the relevant tax (or may be required by law). If the IRS disputes the value and the matter ends up in court, an expert will be needed to sustain the taxpayer’s valuation.

The government will often offer up its own competing appraisal and expert, although it may instead be content with only attacking the taxpayer’s expert and report. In Boltar LLC et al v. Comm., the Tax Court found an expert’s analysis to be so unreliable that it excluded the testimony and left the taxpayer’s case devoid of evidence of value to support its filing position.

FACTS:

In Boltar, the issue before the court was the value of a conservation easement for charitable deduction purposes. During trial, a host of problems with the valuation opinion of the taxpayer’s expert arose. The government moved to exclude the expert’s report and testimony as neither reliable nor relevant, under the authority of the Federal Rules of Evidence and Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).

Rule 702 of the Federal Rules of Evidence allow expert testimony on a fact issue if it will help the court and if: “(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.” The U.S. Supreme Court stressed the trial court’s “gatekeeper” function in excluding evidence that is not reliable.

A key problem with the expert’s report was factual errors, such as ignoring a utility easement on the property, and erroneously identifying its location and zoning. The expert continued to assert that the appraised value was correct, even after admitting the factual errors. The court expressed that it was not inclined to guess at how the valuation should be adjusted for the factual errors, and found the report as a whole to be too speculative and unreliable to be useful.

The expert’s report and opinion was so problematic that the Court granted the motion. This left the taxpayer’s case without evidence of value. Without credible evidence of value to support its position, the burden of proof on value did not shift to the government under Code §7491(a). Even though the taxpayer did challenge the government’s experts, it did not present other admissible evidence of value  - the court found that there was no evidence that justified a value for contributed property higher than the amount determined by the IRS in its notice of deficiency.

The taxpayer argued that the Daubert analysis should only apply in a jury trial (Boltar involved a non-jury trial). The Tax Court did not buy into that, holding that a Daubert-type exclusion can apply in a bench trial.

COMMENT:

Such a total bar of evidence presented by an expert is unusual. However, the success of the government in this case may spur more active exclusion motions in other cases.

The effect of such an exclusion can be crippling. If the excluded report and expert are the key evidence for the taxpayer’s case, a total loss on the value issue is likely. Thus, relying on an overly aggressive valuation during litigation enhances the risk of total loss by giving more justification to the court to totally exclude such evidence of value. The case also demonstrates the importance of properly vetting the expert and his appraisal to determine its credibility and correctness.

The case also suggests that using more than one expert or report may be an appropriate litigation strategy in the proper circumstances (although having differing values under those reports may create other litigation issues, and will also include increased litigation costs). By having more than one expert, if only one expert is excluded there will be other evidence of value in the record to prevent a total collapse of the taxpayer’s case.

The case also provides cautionary guidance for expert appraisers. Some appraisers may stand by their original value out of mere stubbornness or due to the natural difficulty in admitting an error, even though factual or other problems are legitimately raised. Such a course of action opens the door to the court rejecting the valuation in its entirety, as occurred in Boltar. Based on the tenor of the court’s opinion, a tactical retreat by the appraiser may have better served the taxpayer. That is, if the expert had acknowledged that the factual errors did affect value, and then offered an adjusted value in light of those errors that the court could work with, the taxpayer may have been able to salvage some benefit from its expert instead of suffering a total exclusion of his opinion.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!   

Chuck Rubin

CITE AS: 

LISI Estate Planning Newsletter #1807 (May 3, 2011) at http://www.leimbergservices.com   Copyright 2011 Leimberg Information Services, Inc. (LISI).  Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITES:

Boltar, L.L.C. v. Comm.,  136 TC No. 14 (4/5/2011); Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993)