Opinion
11814-19
11-15-2022
OCONEE LANDING PROPERTY, LLC, OCONEE LANDING INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This case is calendared for trial at a two-week special session in Atlanta, Georgia, beginning November 14, 2022. On September 30, 2022, petitioner lodged with the Court, at docket entries ##256 and 250, the reports of two expert witnesses, William Frazier and Belinda Sward. On October 31, 2022, the Internal Revenue Service (IRS or respondent) filed Motions in Limine to exclude these reports in whole or in part. Petitioner filed Responses to the Motions on November 10, 2022.
I. General Rules for Admitting Expert Testimony
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 based on sufficient facts or data"; (3) "the testimony is the product of reliable principles and methods"; and (4) the witness "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).
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.
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).
II. Analysis
A. Motion to Exclude Testimony of Belinda Sward
Ms. Sward is the founder of Strategic Solutions Alliance, an independent real estate consulting firm that petitioner engaged to provide a "market analysis" for the subject property near Lake Oconee. She describes her methodology as including "an interview process with the local and regional real estate professions," "confidential data and analysis from previous work . . . in the market that involved Lake Oconee communities," and "consumer research conducted in 2021 [involving] customers qualified and interested in buying a home at Lake Oconee and/or at a competitive a competitive community location." These consumers were asked questions "about their lifestyle, opinions of these communities, types of housing recently purchased," and the sorts of amenities they were seeking when considering the purchase of a second or retirement home. The thrust of her report is that the Lake Oconee area is a desirable destination and this desirability helps account for the increase in housing sales and prices for years through 2022.
Respondent seeks to exclude Ms. Sward's report in its entirety because: (1) substantial portions of the Report rely on data and information post-dating 2015, the tax year in issue; (2) Ms. Sward's opinions are not based on reliable principles and methods; and (3) Ms. Sward relied on confidential and unidentified sources in reaching her opinions. Putting aside questions about the reliability of her consumer data and her failure to include certain sources as required by Rule 143(g)(1), it appears that most or all of her consumer research was compiled after 2015, the tax year in issue, and therefore is irrelevant.
Although the conservation easement must be valued as of year-end 2015, Ms. Sward's report relies extensively on data and information from 2016-2022 in an effort to support her conclusions about the real estate market in 2015. The bulk of the consumer research appears to have been conducted in 2021, and much of the sales and housing data also post-dates 2015. All of this material is irrelevant: consumer attitudes and house prices in 2021 have no bearing on the valuation of land at the end of 2015 because none of this information was knowable or foreseeable by any market participant at that time. Only events that are reasonably foreseeable as of the valuation date can properly be taken into account when performing a valuation. See Estate of Jung v. Commissioner, 101 T.C. 412, 431 (1993); Estate of Morton v. Commissioner, T.C. Memo. 1997-166, 73 T.C.M. (CCH) 2520, 2521.
That said, there are portions of Ms. Sward's report that have arguable relevance. For example, pages 7-18 of her report present an overview of the subject property and its environs, apparently as of year-end 2015, and pages 19-22 provide a generic description of "village style communities." Many of her charts and tables cover multiple years (e.g., 2010-2022) and have identifiable sources. These portions of her report may provide some data relevant to valuation as of 2015.
For these reasons we will exclude all portions of Ms. Sward's report that discuss or rely on post-2015 consumer research and post-2015 market data. For this purpose we will treat all consumer polling and research material as being post-2015 unless it is clearly sourced to a year before 2016. If petitioner wishes, it may propose to respondent specified portions of her report that may be admissible under these guidelines. If the parties agree on what is admissible, the Court will rule accordingly. If they do not agree, they shall present their respective proposals to the Court at an appropriate time during the trial.
Petitioner brings to our attention a recent order denying an IRS motion to exclude Ms. Sward's expert testimony in a different case. See Buckelew Farm, LLC v. Commissioner, T.C. Dkt. No. 14273-17 (Order served Nov. 7, 2022). In her report in that case Ms. Sward offered testimony regarding property in Jones County, Georgia, north of Macon, which she viewed as potentially developable as a "sportsman resort." As noted in the text, we agree that portions of Ms. Sward's report may be admissible and will limit exclusion to those portions that rely on data and information that post-date the tax year in issue.
B. Motion to Exclude Testimony of William Frazier
Petitioner engaged Mr. Frazier to render an opinion regarding the value of the Class A units of Oconee Landing Investors, LLC, as of December 23, 2015. Respondent does not dispute Mr. Frazier's expertise but contends that portions of his report contain "impermissible legal analysis" and "an inappropriate discussion of another case pending before this Court." Respondent asks that the Court excise from his report certain phrases, sentences, and paragraphs, as shown in a redlined copy of pages 15-30 of his report reproduced as an Exhibit to respondent's Motion. Petitioner responds by arguing that Mr. Frazier presents a relevant opinion on valuation, not a legal opinion, and that his discussion of a pending Tax Court case is relevant.
We agree that Mr. Frazier's discussion of another pending Tax Court case, if not improper, is gratuitous and unnecessary to the analysis he seeks to present. See Fed. R. Evid. 401 and 402 (stating that evidence is irrelevant, and thereby inadmissible, if the evidence fails to have any tendency to make a relevant fact more or less probable). We also agree that a few sentences in his report are argumentative and essentially embrace petitioner's litigating position. See Sunoco, 118 T.C. at 183. On balance, however, we find that his discussion of legal matters is relevant to his valuation analysis and does not invade the province of the Court. We will therefore deny respondent's Motion, but we will ignore all of Mr. Frazier's references to another pending Tax Court case and those portions of his report that we regard as improperly argumentative.
Upon due consideration, it is
ORDERED that respondent's Motion in Limine to Exclude Testimony of Petitioner's Expert Witness Belinda Sward, filed October 31, 2022, at docket entry #312, is granted in part. Petitioner may propose to respondent specific portions of Ms. Sward's report that may be admissible under the guidelines of this Order. It is further
ORDERED that respondent's Motion in Limine to Exclude Certain Testimony of Petitioner's Expert Witness William Frazier, filed October 31, 2022, at docket entry #311, is denied to the extent set forth in this Order.