Decisions — Disagreeing with an expert

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Even experts don’t always agree, and when you disagree with one, you might choose to look for another. Or, if you’re the IRS, you might try to get the expert’s report excluded from evidence—even if you do agree with the expert’s methodology.

In Docket Number 28140-14 (TGS-NOPEC Geophysical Company and Subsidiaries), the IRS asked the court to exclude from evidence the report of the taxpayer’s expert witness.

The taxpayer is an international business that provides geological data to help energy companies figure out where to drill wells. In 2008, the taxpayer took a section 199 manufacturing deduction based on the sale or licensing of seismic data. The dispute to be decided in the eventual court case is whether the seismic data qualifies for the deduction.

The taxpayer asked a partner in a large accounting firm prepare an expert witness report to document the methodology used to calculate the deduction. The report detailed the methods for calculating the deduction under section 199 of the internal revenue code. The report contained the calculations, the basis and reasons for those calculations, the facts and data on which the expert witness relied, and exhibits supporting the calculations. The report also included the amount of compensation paid for the report, the expert witness’s resume and the facts that the witness neither authored any published works during the previous ten years, nor testified as an expert witness at any trials or depositions during the previous four years.

The IRS asked the court to exclude the report from evidence and offered five arguments for the request.

Argument 1 – The report does not meet tax court rules for expert witness reports.

From tax court rule 143(g)(1): States that an expert witness report shall contain:

(A) a complete statement of all opinions the witness expresses and the basis and reasons for them;
 
(B) the facts or data considered by the witness in forming them;
 
(C) any exhibits used to summarize or support them;
 
(D) the witness’ qualifications, including a list of all publications authored in the previous 10 years;
 
(E) a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
 
(F) a statement of the compensation to be paid for the study and testimony in the case.

 

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Argument 2 – The report contains legal analysis and conclusions.

The IRS says that “whether the domestic production gross receipts is calculated correctly is a legal issue before this court.”

The taxpayer says that while the report does cite internal revenue code section 199 and other regulations for what is and is not included when calculating the manufacturing deduction, following tax code requirements for calculating the deduction does not amount to legal analysis or a legal conclusion.
 

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Argument 3 – The report is based on facts and documents that the expert assumes without independent verification to be accurate, true, and authentic.

The IRS said the expert witness relied upon documents and figures provided to him by the taxpayer, his client.
 

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Argument 4 – The report expressly states that the court is not allowed to use the report.

The IRS says that the report expressly prohibits the court from relying on it by quoting sentences from the “Written Advice Caveats & Limitations” page of the report:
 
“[t]his document has been prepared pursuant to an engagement between this accounting firm and its client and is intended solely for the use and benefit of such client and not for reliance by any other person. This document may not be relied upon by any person in any other matter or transaction.”
 
The second sentence after the material quoted by the IRS states:
 
“[t]he contents of this document are not binding upon any taxing authority or the courts” (emphasis added).
 

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Argument 5 – The testimony of the expert witness is unnecessary as the IRS is willing to stipulate, with some reservations, to the methodology behind the calculations.

The IRS argues that the report should be excluded because the IRS is willing to stipulate, with some reservations, that the expert witness’s methodology is correct.
 

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.
This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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Right answer!
Sorry, wrong answer :(

For the taxpayer.

The IRS points to no specific criterion that the report is lacking. The report details the methods for calculating the deduction under section 199 for 2008. It contains the calculations, the basis and reasons for those calculations, the facts and data on which the expert witness relied, and exhibits supporting the calculations. The report includes the expert witness’s resume and the facts that he has neither authored any published works during the previous 10 years, nor testified as an expert witness at any trials or depositions during the previous 4 years. It also includes the amount of compensation paid for the report.

The court finds there are no deficiencies in the report with regard to the Rule 143(g)(1) requirements.

Right answer!
Sorry, wrong answer :(

For the taxpayer.

The IRS’s only assertion is that “whether the DPGR [domestic production gross receipts] is calculated correctly is a legal issue before this court.”

The report does cite to section 199 and other regulations for what is and is not included when calculating DPAD, DPGR, and qualified production activities income (QPAI). Following the regulations requirements for calculating DPAD, DPGR, and QPAI does not amount to legal analysis or a legal conclusion.

The IRS will have the opportunity, if it so chooses, to question the expert witness who wrote the report to determine if he is indeed qualified to make such calculations and to arrive at such conclusions.

Right answer!
Sorry, wrong answer :(

For the taxpayer.

If the expert witness were not to rely on the figures provided him by his client, the expert would have been required to conduct an independent audit of the taxpayer to determine the figures necessary to calculate the deduction.

The expert was hired to calculate the taxpayer’s consolidated return deduction–not to audit its books and records. Expert witnesses generally rely on information provided by their clients.

Right answer!
Sorry, wrong answer :(

For the taxpayer.

The material the IRS quoted simply states that the material contained in the document is for the use of the accounting firm’s client for a specific transaction and no one else’s. The report does not limit a court’s reliance on the document but does inform the client—the taxpayer—that no court is required to follow the report’s analysis, findings, or conclusions.

The court notes that the language the IRS argues prohibits the court from relying on the report appears to be boilerplate.

Right answer!
Sorry, wrong answer :(

For the taxpayer.

The fact that the IRS is willing to stipulate to the methodology used in the report is not a compelling reason to exclude the report from evidence.

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