The Hon. Peter J. Panuthos, Chief Special Trial Judge for the U.S. Tax Court, still recalls his first experience with expert witnesses and valuation. It was 1978, he told attendees at the 2011 fall meeting of the ABA Section of Taxation and Section of Real Property, Trust & Estate Law in Denver last week. He was a supervising trial attorney for the IRS Office of Chief Counsel. The case was Koffler v. Commissioner (T.C. Memo 1978-159), and the issue: the fair market value of transferred common stock in the privately held American Tourister luggage company.
“There were experts on both sides,” Judge Panuthos recalled, with “all the bells and whistles you’d expect,” including detailed market analyses and suggested discounts. But when a taxpayer’s expert took the stand, he looked around the courtroom and began his testimony with this question: “When you go to the airport baggage carousel to look for your luggage, what do you see?”
The presiding judge “was surprised,” Panuthos said, but he let the witness answer, to the effect that all you’d see back then was soft, inexpensive, imported luggage. American Tourister was still making hard-sided suitcases, and the image—along with its implied assumptions regarding value—“was difficult to refute,” Panuthos said. After all the experts had testified, their numbers and analysis “faded to a fog,” he said, and though the court made sure to lay its factual foundation for rejecting the “unrealistic” value conclusions by the IRS expert, the lesson has endured all these years. “Make sure your expert witness presents understandable, realistic” conclusions regarding value, Judge Panuthos told ABA attendees. “Take a step back—and then take another step back,” because the moment the expert appears to be an advocate in the courtroom, “the judge will become wary.” Rule 702 FRE permits assistance from the expert, not advocacy—and maybe once in a while a surprising but effective turn of testimony.