Opinion
14941-18
06-05-2024
CRAIG K. POTTS & KRISTEN H. POTTS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Cary Douglas, Pugh Judge
We tried this case at a special trial session in Phoenix, Arizona, from November 6 through November 8, 2023. Currently pending before the Court are:
1. Respondent's Motion in Limine to Exclude from Evidence the Testimony and Report of Petitioner's Proposed Expert Witness Peter Karam, filed September 8, 2023. Petitioners filed an Opposition to this Motion on October 16, 2023;
2. Petitioners' Motion Pursuant to Rule 804 of the Federal Rules of Evidence to Allow Testimony as to Hearsay Statements Made by Jack Tatum, filed October 18, 2023. Respondent filed an Objection to this Motion on October 26, 2023;
3. Petitioners' Motion in Limine to Exclude the Introduction of Certain Evidence Pursuant to Rules 401, 402 and 403 and Rule 804 of the Federal Rules of Evidence, filed October 29, 2023. We did not order a response from respondent, reserving this Motion for decision at trial; and
4. Petitioners' Motion to Seal, filed November 15, 2023. Respondent filed an Objection to this Motion on December 11, 2023.
Some evidentiary issues were resolved at trial or are moot because the evidence in question was never introduced. At the parties' request, we ordered memorandum briefs on the remaining evidentiary issues. Petitioners and respondent filed briefs on these issues on February 16 and 20, 2024, respectively, and responses on March 7 and 8, 2024, respectively.
I. Respondent's Motion in Limine to Exclude from Evidence the Testimony and Report of Petitioner's Proposed Expert Witness Peter Karam
Respondent seeks to exclude the expert testimony and report of Peter Karam, arguing that Mr. Karam's report does not comply with Rule 143(g) and Rule 702 of the Federal Rules of Evidence (FRE). He renewed his arguments at trial and on brief.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times and Rule references are to the Tax Court Rules of Practice and Procedure.
Proceedings in this Court are conducted in accordance with the FRE. See § 7453; Rule 143(a). Expert testimony is admissible under FRE 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. FRE 104; Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 334-36 (2011). Regardless of the type of expert testimony, we must exclude evidence that is unreliable or irrelevant. See Kumho Tire Co. v. Carmichael, 526 U.S. 137, 149 (1999); Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 592-93 (1993).
Rule 143(g)(1) requires expert reports to be prepared and signed by the witness and to contain, among other things, "a complete statement of all opinions the witness expresses and the basis and reasons for them," and "the facts or data considered by the witness in forming them." The report also must contain "a statement of the compensation to be paid for the study and testimony in the case." Rule 143(g)(1)(F). Failure to follow these requirements will result in the exclusion of the testimony "unless the failure is shown to be due to good cause and unless the failure does not unduly prejudice the opposing party." Rule 143(g)(2).
In his report, Mr. Karam concludes that there was "an illegal misappropriation of monies based upon dishonesty in violation of the Turks and Caicos Islands Criminal Statutes." The report does not state the facts on which he bases his opinion, does not explain how he arrived at his conclusion, and does not cite the particular statutes he believes were violated. It also does not state how much he was paid for his report and expert testimony. The report therefore does not comply with Rule 143(g) and petitioners have not established good cause for the report's deficiencies. Further, the report's conclusory, summary statements without factual support or legal analysis do not assist the Court in understanding Turks & Caicos Islands law.
Accordingly, we will grant respondent's Motion in Limine and exclude Mr. Karam's expert report (Exhibit 2021-P) and related expert testimony from evidence under Rule 143(g) and FRE 702.
Mr. Karam also testified as a fact witness. That testimony is admissible unless another objection is sustained, which we address below.
II. Petitioners' Motion Pursuant to Rule 804 of the Federal Rules of Evidence to Allow Testimony as to Hearsay Statements Made by Jack Tatum
Petitioners ask the Court to allow nine witnesses to testify as to what Jack Tatum told them at certain points in time. At trial, petitioners called three of the nine witnesses: Mr. Karam, Craig Potts, and Hayden Boyce.
Petitioners' Memorandum Regarding Certain Evidentiary Issues primarily consists of screenshots of the trial transcript without much explanation. As best we can discern, petitioners are arguing that hearsay statements in the screenshots are admissible as statements against interest under FRE 804(b)(3). In civil cases, FRE 804(b)(3) provides an exception to the rule against hearsay where (1) the declarant is unavailable and (2) the statement is one that "a reasonable person in the declarant's position would have made only if the person believed it to be true because, when made, it was so contrary to the declarant's proprietary or pecuniary interest or had so great a tendency . . . to expose the declarant to civil or criminal liability." The parties agree that Mr. Tatum is unavailable as a witness.
We will allow Mr. Karam's testimony recounting what Mr. Tatum told him about misappropriating the $2.5 million given to Mr. Tatum by Mr. Potts, see Trial Tr. vol. 1, 105:10-107:12, to come in as a statement against interest because it is inculpatory and not something a reasonable person would say unless it was true. See United States v. Magana-Olvera, 917 F.2d 401, 407 (9th Cir. 1990) (explaining that "each statement must (1) 'solidly inculpat[e]' the declarant and (2) 'be one that a reasonable person in the declarant's position would not have made unless it were true.'" (quoting United States v. Monaco, 735 F.2d 1173, 1176 (9th Cir. 1984) (alteration in original))). All other hearsay statements by Messrs. Karam, Potts, and Boyce are hearsay unless we admitted the statement at trial because it is not hearsay or falls under another exception, as stated on the record at trial.
We note that just because we admit the hearsay statements under an exception does not mean we have concluded that Mr. Karam was credible. We reserve the issue of his credibility to the opinion.
Some of the objections in the screenshots were addressed at trial. We assume they were included because petitioners wish to renew their Motion.
We therefore will grant petitioners' Motion insofar as it relates to the portion of Mr. Karam's testimony discussed above and deny it in all other respects.
III. Petitioners' Motion in Limine to Exclude the Introduction of Certain Evidence Pursuant to Rules 401, 402 and 403 and Rule 804 of the Federal Rules of Evidence
Petitioners ask the Court to exclude from evidence a number of respondent's exhibits. Some of the exhibits listed in the Motion either were not introduced into evidence or were stipulated, and some objections were resolved at trial. The following exhibits remain at issue: email exchanges (Exhibits 1048-R and 86-J) and respondent's bank deposit analyses (Exhibits 1005-R, 1009-R, 1012-R, 1017-R, 1018-R, 1023-R, 1024-R, 1031-R, 1032-R, and 1038-R).
Petitioners' Memorandum Regarding Certain Evidentiary Issues contains arguments about Exhibits 99-J, 101-J, 103-J, 105-J, 111-J, and 112-J. Petitioners objected to these exhibits on hearsay grounds. Exhibits 99-J, 101-J, 103-J, and 105-J are not at issue because we admitted them not for the truth of the matter asserted therein and respondent has not asked us to reconsider. See FRE 801(c)(2) (stating that hearsay is a statement "a party offers in evidence to prove the truth of the matter asserted."). Exhibits 111-J and 112-J are not at issue because we sustained petitioners' hearsay objections and respondent did not attempt to reintroduce the exhibits. These arguments are therefore moot.
Exhibit 1048-R is an email exchange among Victoria Spencer, Gary Mead, and Chris Domijan, on which petitioners were copied. Ms. Spencer is a senior tax manager at McGladrey LLP, an accounting firm retained by petitioners to prepare their tax returns, and Mr. Mead is the general manager of Elite Gaming, a Turks & Caicos Islands entity owned by petitioners. In the exchange, Ms. Spencer asks Mr. Mead for information about petitioners' Turks & Caicos Islands entities and Mr. Mead directs her to Mr. Domijan, the chief financial officer of Elite Gaming. Exhibit 86-R is an email exchange between Ms. Spencer and Mr. Domijan, on which petitioners also were copied, in which the two discuss the financials of petitioners' Turks & Caicos Islands entities.
Petitioners object to both exhibits on hearsay grounds. Respondent counters that the statements in both exhibits fall under FRE 801(d)(2)(D), which excludes from the definition of hearsay statements offered against an opposing party that were made by "the party's agent or employee on a matter within the scope of that relationship and while it existed."
The parties dispute whether there was an agency or employee relationship between petitioners and the other email participants. To resolve this dispute, "we must undertake a fact-based inquiry applying common law principles of agency." NLRB v. Friendly Cab Co., 512 F.3d 1090, 1096 (9th Cir. 2008). Making those findings is not appropriate at this juncture because we do not know how respondent plans to use those emails (for instance, the emails might not be cited for the truth of the matters in them). We therefore will defer ruling on the admissibility of Exhibits 1048-R and 86-R until we understand their context from the parties' briefs and invite the parties to address whether there was an agency or employee relationship in their posttrial briefs.
Regarding respondent's bank deposit analyses, at trial, we admitted the analyses and the underlying bank statements into evidence. Petitioners did not object to either admission, other than reserving the right to object if they found a discrepancy between the analyses and the bank statements. On brief, petitioners argue that the analyses should be excluded on relevance grounds and because the analyses are more prejudicial than probative, assume facts not in evidence, misstate the evidence, are speculative, and are beyond the scope of the issues. We will not allow petitioners on brief to make objections they should have made at trial. Further, even if we allowed the untimely objections, they would fail: The analyses are relevant because they make "more or less probable" the amount of petitioners' theft loss and whether there was a reasonable prospect of recovery, both issues central to this case. See FRE 401 (providing the test for relevant evidence); Vennes v. Commissioner, T.C. Memo. 2021-93, at *28-30 (describing the requirements for a theft loss deduction). We reject the other objections because petitioners do not explain how they apply. Moreover, bank deposit analyses are the sort of evidence commonly admitted and we identify no prejudice to petitioners from their admission (beyond the natural prejudice that might arise from facts unfavorable to a party-a question we would not decide without the posttrial briefs).
Petitioners still have the right to object in their posttrial briefs if they find a discrepancy between the analyses and the underlying bank statements, but those exhibits remain in evidence.
IV. Petitioners' Motion to Seal
Lastly, petitioners ask the Court to seal four exhibits:
Exhibit
Description
109-J
Petitioners' financial statement as of June 16, 2009
110-J
Petitioners' financial statement as of November 1, 2010
111-J
Bank Stock Loan Presentation, dated February 2, 2012, by United Bankers' Bank
112-R
Bank Stock Loan Presentation, dated January 24, 2013, by United Bankers' Bank
We have broad discretion to seal, if necessary, records in our possession. See Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 918 (1985); see also § 7461(b)(1); Rule 103(a). In determining whether sealing is justified, we weigh the presumption in favor of public access to judicial records against the interests advanced by the parties against disclosure. See Anonymous v. Commissioner, 127 T.C. 89, 91 (2006). The party seeking the protective order bears the burden of establishing that the harm from disclosure outweighs the public's interest in access. Id.; Willie Nelson, 85 T.C. at 919.
Petitioners contend that the four exhibits should be protected because they "include proprietary and confidential information that will cause financial harm to Petitioners if disclosed to the public." Exhibits 109-J and 110-J contain references to fees petitioners received from third parties for use of their software. Exhibits 111-J and 112-R contain the same information and, according to petitioners, "a significant amount of additional confidential and proprietary information that could be used by competitors of Petitioners to unfairly try to solicit their customers and set price points just below Petitioners['] businesses." Respondent counters that the information contained in those exhibits is over a decade old and is therefore unlikely to cause petitioners financial harm or be of much use to their competitors.
We agree with respondent. Petitioners do not support, through testimony or facts in their Motion, their claim that the release of information that is over a decade old will cause them financial harm, much less explain how that harm outweighs the public's interest in access. See Anonymous, 127 T.C. at 91; Willie Nelson, 85 T.C. at 920. This Motion therefore will be denied.
V. Conclusion
To reflect the foregoing, it is
ORDERED that respondent's Motion in Limine to Exclude from Evidence the Testimony and Report of Petitioner's Proposed Expert Witness Peter Karam, filed September 8, 2023, is granted, and Exhibit 2021-P and related expert testimony is excluded from evidence. It is further
ORDERED that petitioners' Motion Pursuant to Rule 804 of the Federal Rules of Evidence to Allow Testimony as to Hearsay Statements Made by Jack Tatum, filed October 18, 2023, is granted in part as stated in section II, supra, and denied in all other respects. It is further
ORDERED that petitioners' Motion in Limine to Exclude the Introduction of Certain Evidence Pursuant to Rules 401, 402 and 403 and Rule 804 of the Federal Rules of Evidence, filed October 29, 2023, is denied. It is further
ORDERED that petitioners' Motion to Seal, filed November 15, 2023, is denied. It is further
ORDERED that, on or before July 15, 2024, the parties shall file simultaneous opening briefs, and on or before August 29, 2024, the parties shall file simultaneous answering briefs.