Opinion
19714-16
09-21-2023
CLAIR R. COUTURIER, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge.
This case involving petitioner's 2004-2014 tax years is calendared for the first phase of trial beginning September 25, 2023, in Washington, D.C. The case principally concerns whether (and in what amount) petitioner is liable for excise taxes for excess contributions to his individual retirement account (IRA). See § 4973(a).[ On August 18, 2023, respondent filed a Motion in Limine to exclude the report and testimony of petitioner's proposed expert witness, Scott J. Stitt. We will grant the Motion.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the tax Court Rules of Practice and Procedure.
A central question in this case concerns the value, as of July 20, 2004, of 4,586 shares of stock of The Employee Ownership Holding Company, Inc. (TEOHC). Those 4,586 shares were distributed from an Employee Stock Ownership Plan (ESOP) to petitioner's IRA on that date. Petitioner caused the shares to be sold back to TEOHC, and he concurrently surrendered his rights under 4 other agreements he had executed with TEOHC. Those agreements were captioned an Executive Employment Agreement, a Value Enhancement Incentive Plan, an Incentive Stock Option Agreement, and a Supplemental Executive Retirement Plan (the 4 agreements). The 4 agreements provided various forms of compensation for petitioner, including compensation keyed to increases in the value of TEOHC's stock. In exchange for the stock and petitioner's surrender of his rights under the 4 agreements, TEOCH paid $26 million-$12 million in cash and a $14 million promissory note.
All $26 million of this consideration was received by petitioner's IRA. But only the consideration paid for the TEOCH stock qualified for a tax-free "rollover" from the ESOP to the IRA; the consideration paid for petitioner's relinquishment of his rights under the 4 agreements did not. One issue the Court must decide is the proper allocation of the $26 million between the stock (the value of which can be rolled over) and the 4 agreements (the value of which cannot).
Mr. Stitt offers two opinions in his proposed expert report. First, he opines that the 4 agreements violated ERISA, and hence that zero value should be allocated to them. Second, assuming arguendo that some value should be allocated to the 4 agreements, he opines that their value should be capped at 15% of "the total equity value of the company [i.e., TEOHC]." He bases this opinion on a "rule of thumb that many ESOP trustees use when negotiating executive compensation agreements that dilute the ownership rights of the ESOP." This supposed "rule of thumb" is that "no more than 15% of the equity value can be used for executive compensation." His report supplies no facts or data to support this statement; it is simply an assertion discussed in a single paragraph on page 14 of his report. He acknowledges that his supposed rule of thumb "is not a hard rule" and that he has "seen ESOP-owned companies with more . . . equity compensation to management than 15%."
Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence (FRE). See § 7453; Rule 143. Testimony by expert witnesses is governed by FRE 702 and 703. FRE 702 provides that a witness who is "qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion" if (1) he has "scientific, technical, or other specialized knowledge" that will help the trier of fact; (2) "the testimony is based on sufficient facts or data"; (3) "the testimony is the product of reliable principles and methods"; and (4) he "has reliably applied the principles and methods to the facts of the case." Expert testimony is admissible under FRE 702 if it assists the Court to understand the evidence or to determine a fact in issue. See e.g., Sunoco Inc. v. Commissioner, 118 T.C. 181, 183 (2002).
In the Tax Court, a party who calls an expert witness must cause that witness to prepare a written report, which is served on the opposing party and lodged with the Court before trial. See Rule 143(g)(1). Because the written report serves as the direct testimony of the expert witness, the report must comply with the requirements for expert testimony set forth in FRE 702. See Purple Heart Patient Ctr., Inc. v. Commissioner, T.C. Memo. 2021-38, 121 T.C.M. (CCH) 1260, 1264; Estate of Tanenblatt v. Commissioner, T.C. Memo. 2013-263, 106 T.C.M. (CCH) 579, 581-82. Rule 143(g)(1) accordingly requires that an expert witness report "shall contain" (among other things) the following: (1) a complete statement of all opinions the witness expresses and the basis and reasons for them, (2) the facts or data considered by the witness in forming his or her opinions, and (3) any exhibits used to summarize or support his or her opinions. Rule 143(g)(2) provides that the Court will exclude a witness's testimony altogether if the report fails to comply with the Rule.
Testimony based on scientific, technical, or other specialized knowledge is subject to the Court's gatekeeping function, which forecloses expert testimony that does not "rest[] on a reliable foundation" or is not "relevant to the task at hand." Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993); see Kumho Tire Co. v. Carmichael, 526 U.S. 137, 149 (1999) (extending the principles of Daubert to all expert testimony. "In exercising this function, trial judges have 'considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable.'" Santa Monica Pictures, LLC v. Commissioner, T.C. Memo. 2005-104, 89 T.C.M. (CCH) 1157, 1237 (quoting Kumho Tire Co., 526 U.S. at 152); see Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 85 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002).
Under these rules, Mr. Stitt's first opinion must be excluded because he purports to opine on a legal question-the validity or illegality of the 4 agreements under ERISA. Legal questions are the province of the Court, and Mr. Stitt's views on this point will not be helpful. See, e.g., Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21, 59 (1997) ("Testimony that expresses a legal conclusion and does not assist the trier of fact is not admissible."). His first opinion also seems irrelevant. Whatever one might think about the propriety of the 4 agreements in 2023, the parties to the agreements-petitioner and TEOHC-presumably did not think the agreements were invalid in July 2004. The question before the Court concerns the value that the parties placed on those agreements in July 2004 when TEOCH purchased petitioner's rights thereunder.
Mr. Stitt's second opinion must be excluded because he supplies absolutely no facts or data to support his 15% number, but only his bare assertion that this is a "rule of thumb that many ESOP trustees use." In Skolnick v. Commissioner, T.C. Memo. 2019-64, 117 T.C.M. (CCH) 1319, 1322, we rejected expert testimony from an appraiser for similar reasons, ruling that an expert must "explain how he got to his results, which requires that he show the data he considered, the methodology he applied, and the manner in which he applied his methodology." "Without that information," we noted, "the Court has no means of examining whether the report 'rests on a reliable foundation and is relevant to the task at hand.'" Id. (quoting Daubert, 509 U.S. at 597).
Mr. Stitt's second opinion also seems irrelevant. The question before the Court is not what a hypothetical ESOP trustee might have thought appropriate, but what the parties to these 4 agreements in fact agreed to, and the value they believed they were conferring on petitioner thereby. That is the relevant number in determining what percentage of the $26 million was paid for relinquishment of petitioner's rights under the 4 agreements.
In consideration of the foregoing, it is ORDERED that respondent's Motion in Limine, filed August 18, 2023, is granted.