Focus on pre-trial preparation can make the difference between winning and

Transcription

1 Doing Your Homework: Witnesses in the U.S. Tax Court By Denise Mudigere and Jeffrey M. Glassman * Denise Mudigere and Jeffrey M. Glassman examine best practices with respect to witnesses in the U.S. Tax Court. Focus on pre-trial preparation can make the difference between winning and losing in the U.S. Tax Court. This article addresses best practices with respect to witnesses from a practical perspective. Witnesses are arguably the most critical element of a tax controversy. When it comes to witnesses, doing your homework requires a good attorney to figure out not only who is qualified to tell the story but who best presents the story. This process includes identifying individuals who can provide helpful insight into how the facts developed at the time, as well as identifying topics that would more appropriately be covered by expert witnesses. It also includes consideration of additional individuals opposing counsel might call as witnesses. I. Fact Witnesses Potential fact witnesses are often identified by taxpayers early in the examination and through informal discovery. For example, fact witnesses can be identified through preparing IDR responses. As a practical matter, taxpayer s counsel can meet informally with the taxpayer and other potential witnesses well in advance of any formal questioning. Taxpayers attorneys may want to discuss the facts with these individuals and identify any other potential witnesses that should be consulted as early as practical. It is not uncommon that the taxpayer and other witnesses need time to refresh their recollection or to identify what individuals within an organization were involved at the time. Preparing well in advance will allow for this. DENISE MUDIGERE and JEFFREY M. GLASSMAN are Associates in the tax controversy practice at McDermott, Will & Emery LLP. A. Attorney Preparation Once potential fact witnesses are identified, there are a number of steps an attorney on either side of a tax controversy can take to better prepare witnesses AUGUST SEPTEMBER D. MUDIGERE AND J.M. GLASSMAN 35

2 DOING YOUR HOMEWORK: WITNESSES IN THE U.S. TAX COURT for deposition or trial testimony. Although discovery depositions are traditionally limited in Tax Court, 1 many reasons exist for conducting a deposition prior to trial. For example, a deposition can assist with assessing the credibility of a witness. In addition, where a witness is in ill health, his or her testimony should be preserved by deposition. This discussion will focus on preparing witnesses for both trial and deposition testimony. Witnesses are arguably the most critical element of a tax controversy. When it comes to witnesses, doing your homework requires a good attorney to figure out not only who is qualified to tell the story but who best presents the story. First and foremost, preparation starts internally with the attorney. Before meeting with fact witnesses, the attorney should be knowledgeable of the applicable documented facts of the case. When possible, the attorney should organize a data set of the relevant documents related to each potential fact witness. Depending on the size of that subset, the attorney may want to narrow those down to a summary list, from which to create an exhibit file for each witness. In most tax cases, the tax year at issue and the underlying facts took place many years ago. Witnesses recollections will need to be refreshed by these summary documents. It is unfair and unrealistic to expect a witness to remember elaborate details without providing the witness comprehensive background documentation. That same subset of documents can also serve as starting ground for developing a list of questions (Q & As) for each potential witness. Start with what facts are needed to understand the documents, the underlying transactions, and the parties positions. Consider any gaps in the understanding of the facts. Include additional relevant topics and those elements that make the case. Develop a list of questions and follow-up questions that might help to uncover those facts. Preparing Q & As is an important preparatory task, yet it is equally important to remain flexible and allow a list of Q & As to serve as a guide rather than a script. B. Witness Preparation The attorney should also consider taking measures to help prepare witnesses for deposition or trial testimony. One of the most imperative ways to prepare a witness is to inform the witness of the applicable protocol and expectations of the forum. Many fact witnesses may be testifying for the first time. Whether in deposition or in trial, the attorney should explain the setting and expectations to the witness. For example, when being deposed, many witnesses do not know that they can take countless breaks and are in control of the pace of the deposition. Witnesses that understand this tend to be more relaxed and effective. A witness should also know that they can pause before answering questions and not to be afraid of silence. A short pause before an answer ensures that the entire question has been asked, allows the witness to provide a thoughtful response, and provides the attorney the opportunity to object as needed. However, many witnesses are not aware of these basic guidelines until they are corrected during the deposition. Similarly, witnesses are frequently unfamiliar with procedural rules related to objections and unclear about whether and when they should respond if an objection is raised. The attorney can explain to the witness ahead of time the reason objections may be made (for the record), and the need to respond if the objection is not one with respect to a privilege or protection from disclosure. Similarly, for trial testimony, a witness is able to focus more on the content of their testimony if they are familiar with courtroom protocol. Perhaps most importantly, fact witnesses should be advised to remain calm and collected. A hot-headed or argumentative response generally does not reflect well on a witness or the substantive facts. Attorneys should remind witnesses of the scope of their role in the trial. That is, the attorney will argue the outcome and application of the law the fact witness should focus on providing clear and accurate facts. Engaging opposing counsel in argument and defensiveness will not serve the client or the witness well. Instead, witnesses can be advised to address difficult questions with a deep breath and pause, followed by a collected and direct response. Along those lines, attorneys should be careful to not overstep by trying to intervene when a witness is worked up. This could easily come across on the record as an improper attempt to coach a witness. II. Expert Witnesses Experts are commonly used in tax cases as testifying witnesses. Some elements of a tax case can be more appropriately addressed by an expert witness. Whether it is valuation, accounting, or industry expertise, counsel must identify what elements of the case are more appropriately addressed by an expert versus a fact witness. An expert can also be used to assist with the cross-examination and rebuttal of the opposing counsel s expert witnesses, including 36 JOURNAL OF TAX PRACTICE & PROCEDURE AUGUST SEPTEMBER 2017

3 attacking the reliability and credibility of and potentially disqualifying an opposing expert. An expert witness that is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if 2 : (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 those principles and methods to the facts of the case. A. Timing and Scope of Engagement Many attorneys do not think about expert witnesses until after the Tax Court petition has been filed. But expert witnesses can be incredibly helpful in formulating a protest, drafting the petition, preparing for IRS Appeals, and/or settlement discussions with IRS counsel. As a practical point, counsel may consider very early on in a tax dispute whether an expert could help counsel understand the issues or bolster the arguments. When parties expect to present expert testimony, they will likely need a customized pre-trial order allowing for depositions and rebuttals, where appropriate. In Tax Court, a pre-trial order typically establishes the judge s expectations with respect to discovery deadlines and other pre-trial matters. The scope of an expert s testimony must be clearly considered and adhered to. A good expert will draw clear boundaries based on the topics they are qualified (and have been engaged) to opine on. As with fact witnesses, the lawyer should remind expert witnesses of the scope of their role in the trial. That is, the attorney will execute the arguments, and the trier of fact will analyze the law. The expert s job generally is to provide expert opinion and not to analyze the law. (Of course, legal experts may be engaged to testify on topics that would aid the court s understanding of the case for example, in areas of foreign law when this testimony meets Daubert standards.) In a recent order on a motion in limine, the court struck certain instances within a report where an expert analyzed the law because the expert venture[d] beyond an objective statement of industry practice or its application. 3 The attorney should be involved in ensuring that the expert s opinions and testimony remain within appropriate boundaries. B. Selecting a Testifying Expert There are many elements to consider when selecting a testifying expert. Because every case is unique, so is the need for expert testimony. A one-size-fits-all approach can be a great disservice to your client and the case. The most rudimentary consideration would be whether the expert opinions can withstand a Daubert challenge from the opposing party. 4 The following considerations are all driven by that underlying concern and will help with the selection of the best expert for the unique case. 1. Conflicts As with any professional assisting in a controversy matter, the first consideration must be conflicts. An expert should have no stake in the outcome of the case and no personal investment in any underlying asset. Similarly, the expert must ensure he or she has no current or past client conflicts. In addition to direct conflicts, the hiring attorney should also consider what other opinions the expert has previously provided. This is something the attorney should independently research but also seek from the potential experts since some information may not be publicly available. Aspects to consider include whether this case and/or argument is consistent with opinions the expert has made in the past, and how this case compares and contrasts to any cases where the expert has been on the other side of the argument, if any. 2. Expertise Selecting a testifying expert inevitably involves assessing the unique expertise. The best experts typically have a narrow, highly technical, and valuable knowledge and expertise. Some considerations include whether the expert has directly relevant real-world experience. Similarly, consider what certifications the expert may have or may be expected to maintain. This is more important in some industries. 3. Solicit Referrals and Interview Likely the best referral resources for experts are colleagues and trusted peers. Solicit their recommendations. Find out who they have engaged in the past and who they might recommend. Interview more than one expert. Collect a list of recommended experts who are qualified to opine on the issue. Consider how they compare and contrast. Consider their cases and who opposing counsel has retained in prior cases. 4. Research Most experts can make readily available a standard CV, list of their qualifications, experience, and publications. This information can be very helpful but should only serve as a starting point. Before hiring an expert witness to testify, it is important to know every case in which they have AUGUST SEPTEMBER

4 DOING YOUR HOMEWORK: WITNESSES IN THE U.S. TAX COURT testified, the result, and what impression the expert left on the court or jury, if available. Along the same lines, it is important to evaluate the potential expert witness track record. Consider whether his or her opinions have been accepted by a judge or jury. Has this witness been able to withstand challenges? Some of this information may not be publicly available but can be made available on request (for example, if the expert testified in a private arbitration). The overriding theme of this article is preparation. Selecting appropriate witnesses and preparing them accordingly very early in the Tax Court process can pay big dividends for taxpayers and their counsel. Most experts are happy to provide a list of references and contacts that can provide details about their past work. This can be some of the most useful information when determining whether to hire an expert for a particular case. Some questions to ask those references include how the expert performed on cross-examination, whether the finder of fact (judge or jury) found the expert credible, what were some challenges the attorney had working with the expert, and what does the attorney wish he or she knew about the expert at the outset, i.e., that could have made the relationship easier and/or more efficient. Another element of research should include the expert s testifying experience. Consider how long he or she has been an expert. Has he or she been in front of a judge, jury, or arbitrator? Has he or she been questioned before Congress or some other experience that would suggest he or she can handle the hot seat of cross-examination? Although more is not always better, the amount of prior experience can be a significant factor in evaluating an expert s suitability. 5. Narrow Candidates When selecting an expert, consider meeting the expert in person before making the final decision. Narrow the list of potential experts and then try to conduct a final interview in person. Depending on client resources, many attorneys hire an expert without meeting them. Before hiring an expert, it is important to determine whether a reasonable judge may find the expert reliable and credible. That is difficult to do without an in-person meeting. C. The Expert s Written Report Any testifying expert must prepare a written report to be submitted to the Tax Court prior to trial. 5 The attorney cannot prepare any part of that report. However, the attorney has a critical though limited role in helping the expert prepare their reports The Attorney s Role Experts have an obligation to the court to remain unbiased and reliable. A good expert will not allow an attorney to manipulate their opinions. That said, there are many tasks a lawyer can do to assist their experts and make sure the experts opinions are fully developed and relevant. An expert will need direction, and there are several natural crossroads where the attorney should meet the expert and provide guidance. First, the attorney must do a good job providing the experts with the information they need to understand the facts and conduct an initial review of the case. One mistake lawyers make is dumping the entire work file on the expert only to wait for the expert to draw their conclusions. This approach can be costly and inefficient. Instead, attorneys can identify the key documents, both good and bad, and provide them to the experts in an organized fashion. For an initial review, summary documents that contain the taxpayer s and the IRS s position can be helpful (e.g., any pleadings, IRS notices, etc.). That said, the breadth of information should be mastered with the scope of the expert engagement. For example, if the expert is merely valuing a specific property interest, he or she may need only a limited scope of information. The attorney will continue to serve a fact-finding role as the expert develops his or her opinions and reports. This includes determining what information the expert should have and what will be key for reliance. Second, it is key to set clear expectations with experts early and often. This includes reasonable deadlines, including any known or projected court deadlines. Also provide a reasonable deadline for a first draft report. These deadlines should include adequate time for attorney and client review. As a best practice, an attorney can provide the expert with the applicable Tax Court rules and procedural requirements for the report. The attorney is responsible for making sure the expert s report complies with the court s standards and is admissible evidence. It will save everyone time and effort if these guidelines are set forth from the beginning. Likewise, to ensure that all projects are on target, the attorney can schedule working meetings to discuss the status of the expert s opinions and reports. These sessions permit the experts the opportunity to ask questions and request additional documentation. 38 JOURNAL OF TAX PRACTICE & PROCEDURE AUGUST SEPTEMBER 2017

5 A draft report should be prepared by the expert well in advance of any deadline. The attorney must set these deadlines. The attorney should review and comment on a draft report as soon as possible. Although an attorney or client cannot change an expert s opinion, this is the time for the attorney and client to correct any inaccurate facts or assumptions. The attorney should also ensure that all relevant facts and assumptions have been considered. A draft opinion allows the attorney the opportunity to review for any incorrect assumptions that may be forming the opinion. The attorney should discuss this with the expert during the drafting process. Likewise, this is the right time to explain, if different, the attorney s understanding of the facts and any incorrect assumptions. Be sure to provide the expert with any supporting documentation. 2. Maintaining Privilege Discovery is generally broadly construed to permit the production of any non-privileged matter. However, communications between a party s counsel and any witness required to provide a report are generally protected under Tax Court Rule 70(c)(3). 7 Expert witness reports prepared in anticipation of litigation are also generally protected under the work-product privilege. When working with an expert witness, the attorney must take certain necessary steps to ensure that all potentially privileged information remains privileged and protected. Best practices for maintaining privilege include: a. Attorney Engagement. The attorney, rather than the client, should always engage the expert. If the expert has been engaged by the client in the past, the attorney can set out a new engagement, and clarify the scope of the current engagement, distinguishing it from any past engagements. b. Draft Reports and Communications. Communications between attorneys and experts are generally privileged from disclosure, regardless of the form. 8 However, three exceptions apply, and the following communications are discoverable: (1) communications that relate to compensation for the expert; (2) communications that identify facts or data that the party s attorney provided and the expert considered in forming its opinions; or (3) communications that identify assumptions that the party s attorney provided and the expert relied on in forming the opinion. To avoid any inadvertent disclosure, all communications should be between the experts and the attorneys. Direct communications from client to experts (and vice versa) should be avoided, when possible. The attorney should discuss with the expert the protocols for communications and preferred forms at the onset of the engagement. As a best practice, the attorney should maintain a good record of communications with the expert that identify facts or data and assumptions that the expert relied on in forming an expert opinion. c. Working with More Than One Expert. The prospect of using more than one expert necessarily entails certain costs and may not be appropriate for many cases. Where, however, there are multiple complex issues, different experts may be needed to assist with different issues. Using multiple experts can allow an attorney to get a sense for how different people view their case. To ensure all privileged communications and work-product remain protected, counsel should be sure to keep the multiple experts workstreams separate. D. Additional Expert Testimony In Tax Court, the expert s written report is treated as direct testimony of the expert. Thus, additional expert testimony offering the report is often not necessary or even permitted. However, whenever possible, an attorney should seek to have his or her expert give introductory direct testimony to introduce the report and offer it, so that the judge may weigh the witness credibility and not solely hear from the witness during cross-examination, when the expert is on the defensive. Below are some practical pointers on preparing for direct expert examination. 1. Direct Examination As a first matter, an attorney will need to qualify the expert and demonstrate that the expert s testimony is relevant and reliable. Be sure to introduce the expert along with their qualifications and expertise. The attorney is responsible for demonstrating the reliability of the witness as an expert. State the subject matter for which you are offering the witness as an expert. Expect voir dire from opposing counsel. This is opposing counsel s opportunity to question your expert if a Daubert challenge is to be made. Preparing for direct examination of an expert means first of all, knowing your audience. Because Tax Court cases are bench trials, this means knowing your judge and their preferences. Long before trial, the attorney should review some of the most recent and relevant cases the judge has been involved with. Similarly, review any publications authored by the judge or about his or her cases. When comparing notes with colleagues about the judge, be sure to ask about experts and whether the judge had any specific preferences. An attorney can similarly request whether the expert was well received and whether any challenges were considered and/or upheld. A specific preference that may require additional preparation is how the judge approaches expert witness testimony. Some judges will talk directly with experts while AUGUST SEPTEMBER

6 DOING YOUR HOMEWORK: WITNESSES IN THE U.S. TAX COURT others will allow the attorneys to proceed with direct questioning, and some judges take a combined approach. An expert witness would want to be prepared for any method of examination, particularly if they have never experienced it and the particular judge has used the method in the past. Recently, some Tax Court judges have begun to use the concurrent witness method for experts referred to as hot tubbing. 9 This approach involves the experts all testifying concurrently and essentially discussing the area of expertise with the judge, without any direct or cross-examination. In addition, an expert can be more effective if the attorney is aware of the judge s familiarity with the issue and area of expertise. As a general rule, if the judge has heard several cases with similar issues and witnesses with similar expertise, the expert will not need to provide as much fundamental detail. Whereas, a judge with less experience with a particular issue may expect the experts to explain every detail. Either way, an expert should be clear and thorough. The direct examination of the expert should be very easy to follow. A good attorney can help an expert explain the most complicated and technical issues in simple terms. The expert s presentation should not be too technical or contain too many legal or technical terms. Complex terminology can quickly cloud important data and conclusions. As a last practical point, most Tax Court Judges encourage the use of demonstratives. This is a great tool many lawyers and experts forfeit. A demonstrative allows the fact-finder to revisit data you have already explained because it is available for viewing. It is also helpful to the presenter. As with the rest of the expert s presentation, demonstratives should present the data in a clear and concise manner. 2. Cross-Examination When it comes to cross-examination, preparation prior to trial is key. If your expert has had little experience at trial, you may need to remind him or her of common protocol and best practices for cross-examination. Many experts can become defensive of their work. Although this is normal, and in limited circumstances might work well, experts should generally try to keep any defensiveness under control. On cross, opposing counsel may attempt to attack an expert s experience or bias. Part of preparing for cross-examination is preparing the expert for rehabilitation on redirect. III. Conclusion The overriding theme of this article is preparation. Selecting appropriate witnesses and preparing them accordingly very early in the Tax Court process can pay big dividends for taxpayers and their counsel. Knowing the Tax Court s unique procedures, and using them to maximum advantage, can make all the difference in a difficult case. ENDNOTES * The authors can be reached at dmudigere@ mwe.com and jglassman@mwe.com. 1 See Tax Ct. R Fed. R. Evid See Guidant LLC, 146 TC No. 5, Dec. 60,536 (July 13, 2016). 4 See Daubert v. Merrell Dow Pharm., Inc., SCt, 509 US 579 (1993). 5 See Tax Ct. R. 143(g). 6 See generally Fed. R. Civ. Proc. 26(a)(2)(B) advisory committee s note. ( Rule 26(a)(2)(B) does not preclude counsel from providing assistance to experts in preparing the reports, and indeed,... this assistance may be needed. Nevertheless, the report which is intended to set forth the substance of the direct examination, should be written in a manner that reflects the testimony to be given by the witness and it must be signed by the witness. ) 7 See also Fed. R. Civ. Proc. 26(b)(4). 8 See Tax Ct. R. 70(c)(3). 9 See, e.g., Rovakat, LLC, 102 TCM 264, Dec. 58,761(M), TC Memo (describing the concurrent witness method). This article is reprinted with the publisher s permission from the Journal of Tax Practice & Procedure, a bi-monthly journal published by Wolters Kluwer. Copying or distribution without the publisher s permission is prohibited. To subscribe to the Journal of Tax Practice & Procedure or other Wolters Kluwer Journals please call or visit CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of Wolters Kluwer or any other person. 40 JOURNAL OF TAX PRACTICE & PROCEDURE AUGUST SEPTEMBER 2017