Boltar illustrates the dangers of expert advocacy

In litigation, it's critical for valuators and other expert witnesses to be objective, unbiased and reasonable. Experts who act as advocates for a party - and attorneys who urge them to do so - are asking for trouble.

Boltar, LLC v. Commissioner illustrates the danger. In this case, the U.S. Tax Court excluded an expert report as unreliable and irrelevant under Federal Rule of Evidence 702 and theDaubert standard.

A $3 million gap
The dangers of expert advocacy are especially great when there's a large difference between the parties' respective valuation positions. In this case, Boltar granted a conservation easement on a portion of undeveloped land it owned. It valued the easement at $3.27 million and claimed a charitable deduction of $3,245,000 on its next tax return (reducing the value by $25,000 to reflect a claimed enhancement in the value of adjacent parcels that Boltar owned).

Of the claimed $3,245,000 deduction, the IRS allowed only $42,400, taking issue with Boltar's valuation methods.

Boltar's experts determined that the "highest and best use" of the subject property was development of 174 condominiums pursuant to a Planned Unit Development (PUD). They determined the value of the easement as the difference between the claimed forgone development opportunity ($3.34 million) and the value of the "raw, vacant and developable" land ($68,000).

The IRS moved to exclude Boltar's expert's report as unreliable and irrelevant because the report:

1. Failed to value the easement using the traditional "before and after" method, which examines the land's fair market value immediately before and after the easement is granted,
2. Failed to consider the easement's impact on the value of Boltar's contiguous parcels, and
3. Relied on a highest and best use of the property that was not physically possible because the land was too small for the planned development and wasn't zoned as a PUD. The IRS's expert valued the easement at $31,280 - a before-easement property value of $100,600 less an after-easement value of $69,320. In reaching this conclusion, the expert found that the land's highest and best use was for development of detached, single-family homes, but not until the surrounding properties were developed, because the subject property was landlocked.

An unreasonable position
The Tax Court acknowledged that the experts in this case were qualified. But it frowned upon "their willingness to use their resumes and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, contrary to their professional obligations."

In excluding the taxpayer's experts' report, the court rejected Boltar's argument that Daubertapplies only in jury trials. Although, in a bench trial, a court can simply receive evidence and give it no weight, the Tax Court said there were benefits to excluding expert testimony, including increasing the efficiency of trials and discouraging the "cottage industry of experts who function primarily in the market for tax benefits...."

Boltar's experts' report was "so far beyond the realm of usefulness that admission is inappropriate and exclusion serves salutary purposes." Among other things, the experts:

• Departed from the before-and-after approach without offering persuasive reason for doing so,
• Failed to address the errors and unsupportable assumptions raised by the IRS expert, maintaining their appraisal was "supportable and appropriate,"
• Failed to determine the highest and best use of the property after the easement was granted, even though development for single-family residential use remained feasible, and
• Failed to evaluate prospects for rezoning to allow the condominium development to go forward.

The court was troubled that Boltar's experts didn't offer to adjust or correct their calculations, instead persisting in asserting an "unreasonable position." This was fatal to their case, because the court was "not inclined to guess at how their valuation should be reduced by reason of their erroneous factual assumptions."

The court noted that comparable land in the area was selling for around $12,000 per acre. Boltar's experts assigned a value of around $400,000 per acre, a position, the court said, that "defies reason and common sense."

The court accepted the IRS expert's valuation, observing that "an expert loses usefulness to the court and loses credibility when giving testimony tainted by overzealous advocacy." (See the sidebar "Object lessons" for tips on maintaining expert objectivity.)

Be reasonable
As Boltar demonstrates, you have little to gain and a lot to lose by failing to ensure that your experts remain objective - and reasonable. The best way to ensure reasonableness is to work with experienced, reputable professionals and to encourage them to provide unbiased opinions.