TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

In a strange set of facts, the Tax Court reconsidered a prior decision because one of the IRS’ experts lied in his report and testimony, but the outcome remained the same. On November 19, 2015, the Tax Court issued a Memorandum Opinion in AD Inv. 2000 Fund LLC[1], in favor of the IRS, holding that a currency option transaction lacked economic substance.  The trial testimony consisted primarily of expert witnesses, two for the IRS, one for Petitioner.  In an unrelated subsequent Tax Court case[2] (Tucker v. CIR), it was discovered that one of the IRS’ witnesses in AD Inv. 2000lied in both his expert report and his trial testimony regarding his expert qualifications.  Voir dire in the Tucker case revealed that the expert failed to update his curriculum vitae with respect to certain aspects of his employment history and the trial in which he had testified in.  Under Tax Court Rule 143(g), experts are required to include in their report a list of all cases during the previous 4 years that they testified as an expert at trial or by deposition.

Petitioner in AD Inv. 2000 filed a motion to vacate, on the grounds the expert lied. Respondent, perhaps surprisingly, did not object.  In reconsidering its decision, and ignoring the expert’s report, the Court reentered decision for the IRS.[3]  In the first decision, the Court made 5 principal findings, two of which were made on the basis of expert testimony.[4]  The Court, however, determined that there was corroborating testimony from other experts, and therefore, the outcome does not change.

Although this case ultimately did not cost the IRS a favorable decision, practitioners should learn the lesson to thoroughly vet your expert and their report.  In the Tax Court, an expert’s direct testimony is his or her expert report.  Expert reports must include the following:

1. Complete statement of all opinions the witness expresses and the basis and reason for them;
2. The facts or data considered by the witness in forming them;
3. Any exhibits used to summarize or support them;
4. The witness’ qualification, including a list of all publications authored in the previous 10 years;
5. 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
6. A statement of the compensation to be paid for the study and testimony in the case.

Experts can make or break a case. Make sure your expert is qualified, and that his or her report follows the rules.  Just as important, make sure the IRS’ witness is qualified.

JONATHAN KALINSKI specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world. He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.

Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters.  Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters.  Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court in Washington, D.C.

[1] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.

[2] Tucker v. Commissioner, T.C. Dtk. No. 12307-04.

[3] AD Inv. 2000 Fund LLC, T.C. Memo. 2016-226.

[4] AD Inv. 2000 Fund LLC, T.C. Memo. 2015-223.