Opinion
5310-22
10-30-2024
CARL. B. BARNEY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
CHRISTIAN N. WEILER JUDGE
This case is calendared for trial at a special session of the Court, commencing on November 4, 2024, in Los Angeles, California.
On October 4, 2024, respondent filed a Motion in Limine to Exclude the Testimony In this first Motion in Limine (Index No. 202), respondent moves pursuant to Rules 50 and 143(g), and Rule 702 of the Federal Rules of Evidence (Fed. R. Evid.) that the Court enter an Order excluding the appraisal submitted by petitioner as the expert witness report of Matt H. Connors (RMA Appraisal) and exclude any testimony of Mr. Connors as an expert witness at trial. Respondent's Motion in Limine contends the RMA Appraisal is in contravention of Rule 143(g)(1) since it does not include Mr. Connors' current qualifications, a list of all publications he has authored in the previous ten years, or a list of all other cases in which he has testified.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C), in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26, in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
On October 4, 2024, respondent filed a Motion in Limine to Exclude the Testimony of Richard Pollak to the Extent it is Proffered as "Expert Testimony." In this second Motion in Limine (Index No. 203), respondent moves pursuant to Rules 50 and 143(g), and Fed.R.Evid. 702 that the Court enter an Order excluding the appraisal submitted by petitioner as the expert witness report of Richard Pollak (Barrington Appraisal). Respondent also asks the Court to exclude any testimony of Mr. Pollak as an expert witness on the same grounds as the first Motion in Limine. Respondent contends the Barrington Appraisal does not include Mr. Pollak's current qualifications, a list of all publications authored by him in the previous ten years, or a list of all other cases in which he has testified, each in contravention of Rule 143(g)(1).
On October 4, 2024, also respondent filed a Motion in Limine to Exclude the Testimony of Charles A. Wilhoite to the Extent it is Proffered as "Expert Testimony." In this third Motion in Limine (Index No. 204), respondent again moves pursuant to Rules 50 and 143(g), and Fed.R.Evid. 702 that the Court enter an Order excluding the appraisal submitted by petitioner as the expert witness report of Charles A. Wilhoite (Willamette Appraisal). Respondent asks the Court to exclude any testimony offered by Mr. Wilhoite as an expert report on the same grounds as the first and second Motions in Limine.
On October 27, 2024, petitioner filed Responses to each of the three Motions in Limine opposing the relief sought therein and indicating that each of the expert witnesses are percipient expert witnesses. Petitioner asserts their appraisal reports were involved in the events giving rise to this case and, therefore, are not subject to the requirements of Rule 143(g)(1).
Having reviewed the various motions and responses by the parties, we are now prepared to rule.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding respondent's motions and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Carl B. Barney, through the Carl Barney Living Trust (CBLT), owned 100 percent of the stock of four S corporations which operated for-profit career colleges: Stevens-Henager College, Inc. (SHCI), CollegeAmerica Denver, Inc. (CADI), CollegeAmerica Arizona, Inc. (CAAI), and California College, Inc. (CCI). Petitioner owned a fifth S corporation, CollegeAmerica Services, Inc. (CASI), that provided management services for the colleges (collectively, S Corporations). On December 22, 2006, the Center for Excellence in Higher Education (CEHE) was formed as an Indiana public benefit corporation to promote excellence in higher education through philanthropy, and it was recognized by the Internal Revenue Service (IRS) as a charitable and educational organization under section 501(c)(3) on September 4, 2007.
On August 29, 2011, CEHE's Board of Directors discussed the "proposed merger between CEHE and a group of for-profit colleges and related entities owned by petitioner. In response to potential merger discussions, petitioner engaged Mr. Pollak to value the S Corporations through an executed letter dated August 8, 2012. Mr. Pollak issued the Barrington Appraisal for all of the S Corporations dated December 10, 2012, and he issued individual valuation reports for each S Corporation dated December 14, 2012.
During the first week of December 2012, the Boards of Directors of each of the S Corporations, by unanimous written consent, approved the merger of the S Corporations with CEHE. On or about December 28, 2012, Mr. Barney, on behalf of CBLT, consented to the merger of the S Corporations with CEHE. On December 27, 2012, the Directors of CEHE unanimously voted to approve the mergers of the S Corporations with CEHE; moreover, on or about December 27, 2012, the merger documents (collectively, Merger Agreements) were executed. The Merger Agreements for SHCI, CAAI, and CASI contained the consideration for the merger, and the Merger Agreements for CADI and CCI stated there was no consideration. In sum, CADI and CCI were gratuitously transferred to CEHE as charitable contributions,and SHCI, CAAI, and CASI were sold to CEHE (the Transaction).
The gain recognized by petitioner for CSD and CCI was computed as a deemed sale under Treasury Regulation § 1.337(d)-4(a).
The gain recognized by petitioner for SHCI, CASI and CASI, was computed as a deemed sale under Rev. Rul. § 69-6. Each of the three corporation's values exceeded their respective sales price and so each were treated as bargain sales (and reported as such on their Forms 8283, Noncash Charitable Contributions).
As part of the merger, CEHE issued two promissory notes, Term Note A in the principal amount of $200 million and Term Note B in the principal amount of $231 million (collectively, Notes), in favor of CBLT. On December 31, 2012, CEHE and CBLT executed a Note Purchase Agreement. Also on December 31, 2012, SHCI, CAAI, CADI, CCI, and CASI were completely liquidated, and all assets and liabilities were transferred and assumed by CEHE under the merger.
In the Barrington Appraisal, Mr. Pollak valued the assets of the five S Corporations as having a total fair market value of $621 million. The parties have stipulated to all of the reports comprising the Barrington Appraisal as joint exhibits in this case.
Mr. Pollak valued each entity separately. The collective fair market value of assets transferred was $660 million including certain accounts receivable. This $660 million is the amount reported as gain by petitioner.
The five S Corporations timely filed their 2012 Forms 1120-S, U.S. Income Tax Return for an S Corporation, checking the "final return" box, along with Form 966, Corporate Dissolution or Liquidation. CADI and CCI reported charitable contributions on their Forms 1120-S for 2012 on the basis of the fair market values determined by Mr. Pollak. On their Forms 1120S for 2012 SHCI, CAAI, and CASI each reported charitable contributions on the basis of the fair market values determined by Mr. Pollak in excess of the Notes received.
Petitioner also retained Mr. Connors to value the S Corporations and another firm called Strategic Directions, LLC. In the RMA Appraisal, dated September 12, 2013, Mr. Connors valued a "controlling, non-marketable interest in the combined operations" of the S Corporations as of November 30, 2012. Petitioner did not use the RMA Appraisal to support his donation claim on his original 2012 tax return. The parties, however, exchanged the RMA Appraisal during the Branerton informal discovery process and have stipulated to the RMA Appraisal as a joint exhibit in the First Stipulation of Fact filed on November 21, 2023.
During the IRS examination petitioner retained Mr. Wilhoite to perform "certain financial, economic, and valuation analysis and related consulting services" regarding the Transaction. On September 30, 2016, Mr. Wilhoite provided petitioner with the Willamette Appraisal. The Willamette Appraisal valued the Notes. On the basis of the Willamette Appraisal the S Corporations filed amended returns, and on or about September 30, 2017, petitioner amended his 2012 tax return claiming a refund was due. Respondent has been in possession of the Willamette Appraisal since 2016 as it was submitted with petitioner's amended 2012 tax return.
Discussion
I. Legal Background
Tax Court proceedings are conducted in accordance with the Federal Rules of Evidence. See I.R.C. § 7453; Rule 143(a). Expert testimony is admissible under Fed.R.Evid. 702 if it assists the Court in understanding the evidence or determining a fact in issue. See, e.g., Sunoco, Inc. & Subs. v. Commissioner, 118 T.C. 181, 183 (2002). The admissibility of expert witness testimony is within the discretion of the trial judge. Boltar, LLC v. Commissioner, 136 T.C. 326 (2011); Fed.R.Evid. 104. In Daubert v. Merrell Dow Pharms., Inc., the Supreme Court stressed the trial court's role as "gatekeeper" in excluding, at the outset, evidence that is unreliable or irrelevant. 509 U.S. 579, 592-93 (1993). The reliability and relevance standards are embodied in Federal Rule of Evidence 702, and they apply equally to expert testimony that is not "scientific." Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148 (1999). Fed.R.Evid. 702 states:
A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.
The party who calls an expert witness shall cause that witness to prepare a written report which must be served on the opposing party and lodged with the Court before trial. See Rule 143(g)(1). Rule 143(g)(1) provides that an expert report shall contain, among other things, a complete statement of all opinions the witness expresses and the basis and reasons for them, the facts or data considered by the witness in forming them, and any exhibits used to summarize or support them. Rule 143(g)(2) provides that an expert witness's testimony will be excluded altogether for failure to comply with these provisions, unless the failure is shown to be due to good cause and unless the failure does not unduly prejudice the opposing party, such as by significantly impairing the opposing party's ability to cross-examine the expert or by denying the opposing part the reasonable opportunity to obtain evidence in rebuttal to the expert witness's testimony.
Rule 143(g)(1) is modeled after and contains identical language to that found in Federal Rule of Civil Procedure (Fed. R. Civ. P.) 26(a)(2)(B). Furthermore, Rule 1 notes we are to give weight to the Federal Rules of Civil Procedure in instances where there is no applicable rule of procedure. If a party fails to properly disclose an expert witness under Fed.R.Civ.P. 26(a), the party may not use the witness "unless the failure was substantially justified or is harmless." Fed.R.Civ.P. 37(c)(1).Furthermore, Fed.R.Civ.P. 37 affords trial courts discretion to decide how best to respond to a litigant's failure to make a required disclosure under Fed.R.Civ.P. 26. See Fed. R. Civ. P. 37(c)(1); Taylor v. Mentor Worldwide LLC, 940 F.3d 582, 593 (11th Cir. 2019).
The U.S. Court of Appeals for the Ninth Circuit, to which this case is presumably appealable, has determined factors relevant to the determination of whether exclusion of an expert witness is warranted to include the party's explanation for the failure to disclose the witness, the importance of the testimony, and whether the witness is a percipient expert witness. Cf. U.S. v. Anchrum, 590 F.3d 795 (9th Cir. 2009); Goodman v. Staples Office Superstore, LLC, 644 F.3d 817 (9th Cir. 2011); Oakberg v. Zimmer, Inc., 211 Fed.Appx. 578 (9th Cir. 2006).
In evaluating the admissibility requirements of Fed.R.Evid. 702, the Supreme Court has held that an expert's opinion must be relevant and reliable, rather than based on subjective belief or unsupported speculation. Daubert., 509 U.S. at 590; see also Kumho Tire Co., 526 U.S. at 141. Although the factual basis of an expert opinion generally goes to the credibility of the testimony and not its admissibility, an expert's opinion must be sufficiently supported, relevant, reliable, and more than "wholly speculative opinion," "patent speculation," "pure conjecture," or "vague theorizing based upon general principles" to be admitted. Klingenberg v. Vulcan Ladder USA, LLC, 936 F.3d 824, 829-30 (8th Cir. 2019) (internal citations omitted).
Moreover, federal courts are to acknowledge the differences between percipient witnesses who happen to be experts from those experts who, without prior knowledge of the facts giving rise to litigation, are recruited to provide expert opinion testimony. See Downey v. Bob's Disc. Furniture Holdings, Inc., 633 F.3d 1, 6 (1st Cir. 2011) (interpreting Fed.R.Civ.P. 26(a)(2)(B)); see also, Parkway Gravel, Inc. v. Commissioner, T.C. Memo. 2024-59, at*6 (discussing percipient expert witnesses and the scope of Rule 143(g)).
II. Analysis
We were not inclined to exclude the appraisal reports nor limit the opinion testimony of Mr. Pollak, Mr. Connors, or Mr. Wilhoite prior to trial.
It should be noted that respondent had been in possession of Mr. Pollak's appraisal since petitioner filed his original 2012 tax return and Mr. Wilhoite's appraisal since 2016 (when petitioner amended his return). Additionally, all of the appraisals were referenced and/or included in the parties' First Stipulation of Facts filed on November 21, 2023. Moreover, these appraisals are fundamentally important to petitioner's case since they relate to the claimed fair market value of the part-sale, part-charitable-contribution at issue.
We equally fail to see how respondent would be prejudiced by allowing opinion testimony and admission of these appraisals since we do not find that such actions would significantly impair respondent's ability to cross-examine these three witnesses. Nor does our ruling deny respondent a reasonable opportunity to obtain evidence in rebuttal to these expert witnesses' testimonies. Further, with respect to the issue of rebuttal, respondent has already lodged expert witness reports from Carl 5.Saba, Stuart C. Gilson, and Stephanie R. Cellini rebutting these appraisals offered by petitioner.
Beginning on page 184 the Saba report opines on the Willamette Appraisal prepared by Mr. Wilhoite.
Mr. Pollak, Mr. Connors, and Mr. Wilhoite were not retained or specifically employed for the purpose of offering expert opinion testimony. Downey, 633 F.3d at 6. Rather, they were actors within the occurrences of petitioner's position taken on his tax return giving rise to the litigation. Put another way, their opinions do not arise from enlistment as an expert, but rather, from their ground level involvement in the events giving rise to the instant case. As well stated by the U.S. Court of Appeals for the First Circuit, the witness is an "actor with regard to the occurrences from which the tapestry of the lawsuit was woven." Downey, 633 F.3d at 6.
Since we find that Mr. Pollak, Mr. Connors, and Mr. Wilhoite were not retained or specifically employed to provide expert witness testimony, they were not required to provide a written report meeting the requirements of Rule 143(g)(1). Additionally, the disclosures by petitioner must simply state the subject matter of their expected testimony and a summary of the facts and opinions to which they are expected to testify. See Fed. R. Civ. P. 26(a)(2)(C). Petitioner satisfied this requirement by listing Mr. Pollak, Mr. Connors, and Mr. Wilhoite in his pretrial memorandum filed on October 5, 2024, as a "will call witness" and by noting that their testimony will pertain to the "valuations [they] performed."
Additionally, respondent's reliance on Purple Heart Patient Ctr., Inc. v. Commissioner, T.C. Memo. 2021-38, and Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, is misplaced. These cases are distinguishable since neither dealt with the issue of a percipient witness nor the offering of appraisals attached to a petitioner's originally filed tax return. As with any expert witness, the Court will limit the expert witness testimonies to the opinion(s) found in their written appraisals and to other percipient witness testimony. Rule 143(g)(2). Moreover, we remind the parties that this Court "may accept or reject the findings and conclusions of these experts, according to our own judgement." Gerdau Macsteel, Inc. v. Commissioner, 139 T.C. 67, 158 (2012). And "we may be selective in deciding what part (if any) of their opinions to accept." Id.
Considering the foregoing, it is
ORDERED that respondent's three Motions in Limine (Index Nos. 202, 203, and 204) filed on October 4, 2024, are denied.