June 2nd, 2011 by Rebekah Smith
Rule 702 of the Federal Rules of Evidence and the Daubert standard has been long used in the courts for excluding or including an expert’s testimony in civil cases but rarely, if ever, has been used in a tax court case. However, with a newly published case, Boltar LLC v Commissioner (2011 WL 1314445 (U.S. Tax Ct.), that may have changed.
In Boltar, the Daubert standard was applied to an appraisal in the U.S. Tax Court. The case dealt with the appraisal of the fair market value of a charitable easement, but the decision contains some language which might carryover when considering appraisals for gift or estate purposes.
The appraisal was required because the taxpayer granted a conservation an easement of some property in Indiana. The taxpayer claimed a charitable deduction of over $3 million related to the donation on their tax return, based on the fair market value appraisal prepared by a national firm based on the highest and best use of the property. The appraisal said the highest and best use was as a residential condominium unit. After the IRS reviewed the appraisal, the IRS determined that the fair market value of the easement was $31,280 based on the change in value of the property before and after the easement was granted. Clearly, a significant difference existed between the two positions.
Prior to trial, the IRS moved to exclude the tax payer’s appraisal as unreliable under Rule 702 and the Daubert Standard. The IRS claimed the appraisal did not follow the before and after method as required by law and the taxpayer’s appraisal used a hypothetical development. The IRS disputed the appraiser’s assertion that the condominium development was feasible. Interestingly, the taxpayer argued that Daubert did not apply in a bench trial and the method that the appraiser used was commonly accepted.
The Tax Court found that Daubert did apply in bench trials and agreed with the IRS that the taxpayer’s appraisal did not value the property after the easement. The Tax Court also disagreed that the highest and best use was as a condominium development and sided with the IRS that the best use was as a residential property. As a result, the Court rejected the appraiser’s report under Rule 702 and Daubert because it was not the product of reliable methods.
The Court noted that because it was a bench trial, rather than exclude the report, in its discretion, it could have allowed the report but then adjusted or rejected the value. However, the Court’s function as gatekeeper then would not have been fulfilled. The court concluded “we need not blindly admit absurd expert opinions.”