Opinion
11794-21
06-13-2024
RANCH SPRINGS, LLC, RANCH SPRINGS 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 special session of the Court beginning Monday, June 17, 2024, in Nashville, Tennessee. The case involves a charitable contribution deduction claimed by Ranch Springs, LLC (Ranch Springs), for a conservation easement over a 110-acre tract of land in Shelby County, Alabama. Ranch Springs is an Alabama limited liability company classified as a TEFRA partnership for its 2017 tax year. The Internal Revenue Service (IRS or respondent) issued Ranch Springs a notice of final partnership administrative adjustment (FPAA), disallowing the deduction and determining penalties. Currently before the Court are five Motions in Limine filed by respondent on May 24, 2024, at docket entries ##203-207. On June 11, 2024, petitioner timely responded to the Motions.
Before its repeal, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, §§ 401-407, 96 Stat. 324, 648-71, governed the tax treatment and audit procedures for many partnerships, including Ranch Springs.
I. Respondent's Motions in Limine to Exclude Proposed Expert Reports and Tes-timony
A. 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. FRE 702 provides that a witness qualified as an expert may testify only if four conditions are met: (1) the expert's specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) the testimony is based on sufficient facts or data; (3) the testimony is the product of reliable principles and methods; and (4) the expert's opinion reflects a reliable application of the principles and methods to the facts of the case.
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.
"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." Skolnick v. Commissioner, T.C. Memo. 2019-64, 117 T.C.M. (CCH) 1319, 1321 (citing Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597 (1993) and Kumho Tire Co. v. Carmi-chael, 526 U.S. 137, 149 (1999)). "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).
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.
B. Motion in Limine to Exclude the Proposed Expert Report of Thomas Lewis
Respondent filed, at docket entry #207, a Motion in Limine to Exclude from Evidence the Proposed Expert Report of Thomas Lewis. Respondent represents that Mr. Lewis was a member of Ranch Springs when it donated the conservation easement at issue in this case.
Mr. Lewis's Report, lodged at docket entry #113, consists of two pages of text and a one-page resume. The Report takes the form of a letter to petitioner's counsel in which Mr. Lewis says that he has "put this review together to look at the market for a [hypothetical] 700,000 ton quarry at Ranch Springs." He offers the "opinion that mining and sales of 60,000+ tons per month would be achievable." He offers no data to support this conclusion apart from high-level observations, e.g., about the importance of aggregates in roadbuilding and general market conditions in the State of Alabama. Only two sentences in his report reference a source citation, and neither of those supports his projected production and sales volumes.
Mr. Lewis's resume shows that he has mining experience. But while an expert can be qualified on the basis of his experience, he cannot cite his experience as the sole basis for estimating production and sales volumes from a hypothetical mine. He must show his work, i.e., the data he considered and the methodology he applied to produce his results. See Skolnick, 117 T.C.M. (CCH) at 1322; Feinberg v. Commissioner, T.C. Memo. 2017-211, 114 T.C.M. 471, 472-73 (excluding appraisal testimony where expert did not provide sufficient data to show that "the opinions expressed are based on anything other than his own conjecture"), aff'd, 916 F.3d 1330 (10th Cir. 2019); Giles v. Commissioner, T.C. Memo. 2006-15, 91 T.C.M. (CCH) 684, 692-93 (rejecting appraisal testimony where expert failed to explain the nature of her methodology and the reasons for her conclusions).
We conclude that Mr. Lewis's testimony, as embodied in his written report, does not "rest on a reliable foundation" because it does not set forth the facts or data on which he relied, the methodology he employed, or the manner in which he applied relevant principles to the facts of this case. His opinion that "mining and sales of 60,000+ tons per month would be achievable" is backed by no methodology or data and is little better than an ipse dixit. Because he offers no explanation or analysis to show how he derived this number, his testimony does not meet the requirements of FRE 702 or Rule 143. See Oddi v. Ford Motor Co., 234 F.3d 136, 158 (3d Cir. 2000) (noting that an expert's "ipse dixit does not withstand Daubert's scrutiny").
C. Motion in Limine to Exclude Report and Opinion Testimony of Jim Stroud
Respondent filed, at docket entry #205, a Motion in Limine to Exclude Report and Opinion Testimony of Jim Stroud. Mr. Stroud is a professional geologist licensed in Alabama. Petitioner indicates in its pretrial memorandum that Mr. Stroud was engaged to conduct geologic drilling at Ranch Springs' hypothetical mining site, to which petitioner refers as the "Quarry Property." According to petitioner, "Mr. Stroud is expected to testify as to all elements related to the drilling performed at the Quarry Property, including but not limited to the methods of drilling, the drilling results, the composition of the rock at the Quarry Property, the tests performed on the drill samples, and how his results compare to other drilling that occurred at the Quarry Property."
On May 17, 2024, petitioner provided to respondent-evidently for the first time-a document entitled "Mineral Resource Evaluation, Ranch Springs, LLC," that was purportedly prepared by Mr. Stroud (Stroud report). This document consists of two pages of text, captioned "Investigation and Results," and 130 pages of appendices. Mr. Stroud states that his company (SGR) "was contracted to evaluate the mineral resources on the Ranch Springs" property. He recites that "a mineral resource evaluation of the Property was previously completed by AquaFUSION," stating that SGR was retained "to confirm the aggregate resource quantity estimates and the rock quality" determined by AquaFUSION.
Mr. Stroud states that SGR reviewed "AquaFUSION's report dated November 9, 2017," which reported results from ten boreholes drilled on the Ranch Springs property. According to Mr. Stroud, SGR "performed additional exploration drilling" on the property; this work consisted of drilling five additional boreholes, supervising the drilling, "interpreting the drill data," and "review[ing] all drill logs and test results to map and evaluate the resource quantity and quality." Mr. Stroud opines that the Ranch Springs property contains 23.29 million tons of "measured aggregate stone resource[s]" with "647,674 cubic yards of overburden." The appendices include numerous photographs and graphs illustrating SGR's borehole drilling results.
It seems obvious from Mr. Stroud's description of his work that his testimony would consist of expert opinion testimony. Petitioner has lodged as an expert witness report a document prepared by Dr. David R. Buss from AquaFUSION that offers substantially similar expert testimony, i.e., a determination of "measured aggregate stone resources" based on the results of borehole drilling. This type of expert opinion testimony is routinely offered in conservation easement cases involving exploitation of mineral resources as the alleged "highest and best use." See, e.g., Excelsior Aggregates, LLC v. Commissioner, T.C. Memo. 2024-60, at *25, *28, *35, *39. Indeed, petitioner states in its pretrial memorandum that it will offer other witnesses to "testify as to the topics related to Mr. Stroud's opinions," including testimony about "the specific drilling performed, the number of drillholes performed, [and] the procedure and recordings related to the drillings."
This Court's Pretrial Scheduling Order set October 27, 2023, as the deadline to exchange and lodge with the Court opening expert witness reports. The parties filed dozens of expert reports on that date (docket entries ##89-113). Petitioner neither exchanged with respondent nor lodged with the Court by the October 27 deadline an expert witness report from Mr. Stroud. Indeed, Mr. Stroud's expert opinion is based on a drilling program conducted in April and May 2024, and his written report is dated May 17, 2024.
The Stroud report was not exchanged with respondent and lodged with the Court by the deadline established by the Pretrial Scheduling Order. The Court may exclude an expert report where the opposing party is denied a reasonable opportunity to tender its own expert report in response. See Rule 143(g)(2). Untimeliness apart, the Stroud report in several respects fails to comply with the requirements of Rule 143(g) governing expert witness reports. For both reasons we will exclude his testimony from the forthcoming trial.
Petitioner asserts that Mr. Stroud "is not seeking to offer expert opinion," but instead would be offering his opinions and testimony as a fact witness who "can draw on his professional experiences to convey to the Court what he saw and perceived at the Subject Property." Petitioner likens Mr. Stroud to several categories of lay witnesses, such as a "property owner" with firsthand knowledge of his own property. See Neff v. Kehoe, 708 F.2d 639, 644 (11th Cir. 1983) (finding "an owner of property is competent to testify regarding its value"). Without explicitly saying so, petitioner seems to analogize Mr. Stroud to a "percipient witness," a classification typically involving doctors and other healthcare providers who treat a patient or victim at the time of illness or injury. See Fed. R. Civ. P. 26(a)(2)(C), Advisory Comm. Note to 2010 amendment ("A witness who is not required to provide a report . . . may both testify as a fact witness and also provide expert testimony . . . . Frequent examples include physicians or other health professionals . . . ."); Parkway Gravel, Inc. v. Commissioner, T.C. Memo. 2024-59, at *10 ("Federal courts acknowledge differences between percipient witnesses who happen to be experts and those experts who, without prior knowledge of the facts giving rise to litigation, are recruited to provide expert opinion testimony.") (citing Downey v. Bob's Disc. Furniture Holdings, Inc., 633 F.3d 1, 6 (1st Cir. 2011)). But Mr. Stroud is not a "percipient witness." He was not "a key actor in the occurrences leading to" the transactions at issue, cf. Parkway Gravel, T.C. Memo. 2024-59, at *10, but was evidently recruited to provide an expert opinion that petitioner hoped would confirm the conclusions set forth in the AquaFUSION report. And far from supplying fact witness testimony about his contemporaneous observations in 2017, Mr. Stroud would be offering expert testimony about the results of drilling activities conducted in April and May 2024. In short, Mr. Stroud would be offering expert testimony precisely analogous to that offered by other experts in this case. Permitting him to testify would be an obvious end-run around the Pretrial Scheduling Order and the requirements of Rule 143(g).
D. Motion in Limine to Exclude the Proposed Expert Witness Report of Tim Finley
Respondent filed, at docket entry #203, a Motion in Limine to Exclude the Proposed Expert Witness Report of Tim Finley. The material in question, to which respondent refers as the "Finley Addendum," is contained within the expert witness report of Dr. David R. Buss (Buss report), referenced above, which petitioner timely lodged at docket entry #90. Respondent urges that the Finley Addendum should be excluded from evidence because it does not provide any expert opinion and does not meet the requirements of Rule 143(g) or FRE 702.
The Buss report-sometimes called the AquaFUSION report-contains (by respondent's count) 155 pages, consisting of 34 pages of text and numerous tables, figures, and appendices. Among the latter are Appendix D, "Detailed Financial Modeling Analysis Input and Results," and Appendix E, "Construction Aggregate Market Analysis in Central Alabama." The report is signed by Dr. Buss, Yvonne M. Sanders, and Eric Lee Reisinger. It is not signed by Mr. Finley.
The "Finley Addendum" appears in docket entry #90 immediately after the Buss report, at pages 156-314 of that docket entry. It begins with a cover letter from Mr. Finley to counsel for petitioner, stating: "This letter is written in response to your requests for information concerning my work for Mr. David Buss of AquaFUSION, Inc., relating to the Ranch Springs [site]." He explains that he did various types of financial modeling, apparently connected to a discounted-cash-flow analysis of hypothetical future mining revenues. He attaches to his letter, as Exhibit 1, "copies of worksheets I created to support the information I generated and employed in the model." He attaches as Appendix D "copies of the spreadsheets which summarize the results of the modeling work I did." He attaches as Appendix E "a copy of a portion of a report prepared by AquaFUSION, Inc.," indicating that "part of the information in this Appendix is consistent with the information I provided to Mr. David Buss and/or is otherwise within my personal knowledge."
Mr. Finley's Exhibit 1 consists of 100+ pages of "budget worksheet instructions," spreadsheets, tables, and miscellaneous data. It includes no text of any kind and offers no opinion of any sort. Some of the material appears unfinished, e.g., indicating data points where "<Input Needed Here" and referring to the assumed "average sales price of $XX.XX not sure what this means." Mr. Finley's Appendix D, "Detailed Financial Modeling Analysis Input and Results," and his Appendix E, "Construction Aggregate Market Analysis in Central Alabama," appear very similar to Appendices D and E included within the Buss report proper.
Rule 143(g)(1) provides that an expert witness report shall be "prepared and signed by the witness" and shall contain "a complete statement of all opinions the witness expresses and the basis and reasons for them." Exhibit 1, comprising the bulk of the Finley Addendum, contains no text or opinions of any kind. Mr. Finley's Appendices D and E appear to be earlier versions of, or are otherwise duplicative of, Appendices D and E of the Buss report. The work reflected in the Finley Addendum appears to have been performed for Dr. Buss in connection with Dr. Buss's preparation of his report. But Mr. Finley cannot be treated as a co-author of the Buss report because he did not sign it. See Rule 143(g).
Because the Finley Addendum offers no opinions and does not comply with our Rules, we will not treat it as an expert witness report. However, if Dr. Buss confirms that the material in the Finley Addendum was prepared at his request and was considered by him in preparing his own report, we will permit the Finley Addendum to remain attached to the Buss report as constituting data that Dr. Buss considered in reaching his conclusions.
E. Motion in Limine to Exclude the Proposed Rebuttal Report of Tim Finley
Respondent filed, at docket entry #204, a Motion in Limine to Exclude the Proposed Expert Rebuttal Report of Tim Finley. Petitioner lodged this report at docket entry #142 on December 1, 2023, the deadline set by our Pretrial Scheduling Order for submission of rebuttal expert reports. Mr. Finley states that he prepared this document "in support of portions" of Dr. Buss's report (referenced above) "and in rebuttal to portions" of the report prepared by respondent's expert, Dr. Neal Rigby. Respondent contends that this document is not a true rebuttal report, but is in substance an untimely opening expert report, and that it should be excluded from evidence as such.
Our Pretrial Scheduling Order, as modified September 12, 2023, set October 27, 2023, as the deadline for submission of opening expert reports. A court may enforce its pretrial order by excluding an untimely report. See, e.g., Glass Dimensions, Inc. ex rel. Glass Dimensions, Inc. Profit Sharing Plan & Tr. v. State St. Bank & Tr. Co., 290 F.R.D. 11, 16-17 (D. Mass. 2013). The standard sanction for untimely disclosure of an affirmative expert report is exclusion of the untimely evidence. Ibid.
A rebuttal expert may cite new evidence or data, but that material must be offered to directly contradict or rebut the opposing party's expert. A rebuttal expert "may not 'advance new arguments or new evidence' outside the scope of the opposing expert's testimony." Bentley v. Highlands Hosp. Corp., 2016 WL 5867496, at *5 (E.D. Ky. Oct. 6, 2016) (quoting Blake v. Securitas Sec. Servs., Inc., 292 F.R.D. 15, 17 (D.D.C. 2013). The test for whether a rebuttal report is true "rebuttal" is whether it is primarily aimed to critique an opposing expert's opening report rather than to support the proponent's case-in-chief. Morgan v. Comm. Union Assur. Cos., 606 F.2d 554, 555 (5th Cir. 1979) ("Rebuttal is a term of art, denoting evidence introduced by a [party] to meet new facts brought out in his opponent's case in chief."); Excelsior Aggregates, LLC v. Commissioner, T.C. Dkt. Nos. 20608-18 et al. (Order served Dec. 9, 2022) ("Rebuttal reports . . . cannot be used to advance new arguments or evidence ..... A report properly characterized as a 'rebuttal report' must devote essentially its entire analysis to dissection of an opposing expert's affirmative report.") (citing Blake v. Securitas Sec. Servs., Inc., 292 F.R.D. 15, 17-18 (D.D.C. 2013)).
If a "rebuttal" report is in substance an untimely affirmative report, a court may exclude the report "unless the untimeliness was substantially justified or harmless." Glass Dimensions, 290 F.R.D. at 18 (quoting Fed.R.Civ.P. 37(c)). Where portions of a report constitute appropriate rebuttal and other portions do not, the court may exclude the latter portions. See Home Design Servs., Inc. v. Hibiscus Homes of Fla., Inc., 2005 WL 2465020, *5 (M.D. Fla. Oct. 6, 2005).
Courts have broad discretion to determine whether a rebuttal report is confined to its proper scope. See Geders v. United States, 425 U.S. 80, 86 (1976) ("[T]he judge may control the scope of rebuttal testimony."); United States v. Umbach, 708 Fed.Appx. 533, 550 (11th Cir. 2017) (per curiam) ("[T]he decision to permit rebuttal testimony is one that resides in the sound discretion of the trial judge."). This Court has previously excluded expert witness reports that, while offered as "rebuttal reports," were in substance untimely affirmative expert reports. Excelsior Aggregates, T.C. Dkt. Nos. 20608-18 et al. (Order served Dec. 9, 2022) (striking putative rebuttal reports that were "in all substantive respects free-standing, from-the-ground-up, appraisals, not true rebuttals").
Respondent contends that Mr. Finley's report is in substance an untimely opening report because it was drafted primarily to support Dr. Buss's report, not in opposition to Dr. Rigby's report. As respondent notes, the table of contents for Mr. Finley's report appears to track the positions set forth in Dr. Buss's report. Numerous sections do not mention Dr. Rigby at all, and respondent alleges that a 277-page addendum consists entirely of new evidence.
The Court is currently inclined to strike some, but not all, of Mr. Finley's proposed rebuttal report as a disguised affirmative opening report that was untimely filed. We will hear argument at trial regarding the portions of his report that are properly regarded as providing true rebuttal, either at the start of trial or when Mr. Finley is called as a witness, as the parties prefer.
II. Respondent's Motion in Limine for Ruling that Certain Persons are Party Op-ponents
Respondent filed, at docket entry #206, a Motion in Limine for a Ruling that Certain Persons are Party Opponents Within the Meaning of Federal Rule of Evidence 801(d)(2). Hearsay is an out-of-court statement offered to prove the truth of the matter asserted therein. See FRE 801(c). Hearsay is generally inadmissible. See FRE 802. But FRE 801(d) provides that certain types of statements are not considered hearsay.
As relevant here, FRE 801(d)(2)(A) provides that a party's own statement (made in an individual or representative capacity) is not hearsay if offered against that person by the opposing party. Ranch Springs is the partnership that claimed the charitable contribution at issue. Respondent contends that all of the direct and indirect partners in Ranch Springs are parties to this action and thus are respondent's "opposing parties" within the meaning of FRE 801(d)(2). We agree.
In a TEFRA partnership action, each of the partners in the partnership during the tax period at issue is considered a party. § 6226(c)(1); Rule 247(a). Rule 240(b)(7) provides that a "partner" in a TEFRA case is a person who meets the definition of partner in section 6231(a)(2) at any time during the relevant year. During the 2017 taxable year for which Ranch Springs filed the return in question, section 6231(a)(2) defined "partner" to include direct partners in the partnership and "any other person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership." Therefore, both direct and indirect partners of the partnership are considered "parties" in a TEFRA case. See Oconee Landing Property, LLC v. Commissioner, T.C. Dkt No. 11814-19 (Order served Sept. 20, 2022) (finding indirect partners to be "partners" for purposes of section 6231(a)(2) and thus "opposing parties" within the meaning of FRE 801(d)(2)(A)).
Section 6231(a) was repealed by Pub. L. 114-74, 129 Stat. 584, 632, effective January 1, 2018. Because this case involves the taxable period covered by Ranch Springs's 2017 return, the original version of the statute applies.
Respondent represents that the following individuals and entities were direct or indirect partners in Ranch Springs during the tax period at issue: Robert A. Lewis; Thomas A. Lewis; Yellowhammer Developments, LLC (and its members Jason E. Rudakas and Brian A. Lewis); Strategic Securities Holdings II, LLC (and its members Swamp Mac, LLC, and What's The Good Word, LLC, and their members, James W. Freeman III, Ricky B. Novak, Jessica M. Freeman, and Lisa D. Novak); and Ranch Springs Investors, LLC (and its members as identified in Exhibit C attached to respondent's Motion). The Court is not yet in a position to confirm that each of these persons is "a person whose income tax liability . . . is determined in whole or in part by taking into account directly or indirectly partnership items" of Ranch Springs. See § 6231(a)(2). If respondent is correct in so representing, then that individual or entity will be treated as an "opposing party" for purposes of FRE 801(d)(2)(A). If petitioner believes that any of these individuals or entities does not meet this definition, petitioner may advance that contention at trial.
Petitioner urges that respondent's Motion should be denied because he does not identify the specific items he believes should be excluded from evidence. But respondent's Motion does not seek to exclude anything from evidence. He is seeking a ruling regarding the status of certain persons as "opposing parties" within the meaning of FRE 801(d)(2)(A). The evidentiary consequences of that ruling will be determined at trial.
Upon due consideration, it is
ORDERED that respondent's Motion in Limine to Exclude from Evidence the Proposed Expert Report of Thomas Lewis, filed May 24, 2024, at docket entry #207, is granted. It is further
ORDERED that respondent's Motion in Limine to Exclude Report and Opinion Testimony of Jim Stroud, filed May 24, 2024, at docket entry #205, is granted. It is further
ORDERED that respondent's Motion in Limine to Exclude the Proposed Expert Witness Report of Tim Finley, filed May 24, 2024, at docket entry #203, is granted to the extent set forth in this Order. It is further
ORDERED that respondent's Motion in Limine for a Ruling that Certain Persons are Party Opponents Within the Meaning of Federal Rule of Evidence 801(d)(2), filed May 24, 2024, at docket entry #206, is granted, subject to determining the universe of persons covered by this ruling. It is further
ORDERED that the parties shall be prepared to present argument at trial concerning the extent to which the Court should grant respondent's Motion in Limine to Exclude the Proposed Expert Rebuttal Report of Tim Finley, filed May 24, 2024, at docket entry #204.