Civil Case No. 08-cv LTB-KLM (Consolidated w/08-cv ltb-klm; 08-cv LTB-KLM; and 08-cv LTB-KLM)

Transcription

1 Civil Case No. 08-cv LTB-KLM (Consolidated w/08-cv ltb-klm; 08-cv LTB-KLM; and 08-cv LTB-KLM) RCL PROPERTIES, INC., KOZAD PROPERTIES, LTD., GLENHILLS RANCH, LTD., AMY HILL KOZELSKY, BOBBY F. HILL, and DOROTHY A. HILL, vs. Plaintiffs, UNITED STATES OF AMERICA, Defendant. PLAINTIFFS MOTION TO EXCLUDE TESTIMONY OF TIMOTHY WALTERS, DEFENDANT S EXPERT ON EASEMENT VALUATION (SUBMITTED IN CONNECTION WITH SUMMARY JUDGMENT MOTION) I. INTRODUCTION Plaintiffs, having deposited an amount sufficient to pay tax deficiencies asserted by the Internal Revenue Service, then filed this action seeking a redetermination of the proposed deficiencies pursuant to 28 U.S.C (judicial review of final partnership administrative adjustments). The deficiencies were based on Defendant s contention that Plaintiffs over-valued certain conservation easements and thereby claimed an improperly large tax deduction for having made a charitable contribution of those easements. Plaintiffs now move this Court to exclude the expert testimony of Timothy Walters, Defendant s witness concerning valuation of the conservation easements in question. As developed more fully below, the proposed testimony of Mr. Walters should be excluded under Rule 702 of the Federal Rules of Evidence because his methodology of valuation

2 wholly ignores the mandatory valuation methodology specified by the applicable treasury regulation. ISSUE PRESENTED AND SUMMARY OF ARGUMENT The issue presented by this motion is whether the testimony of Timothy Walters, Defendant s expert concerning valuation of the conservation easements in question, is admissible. Treas. Reg A-14(h)(3) mandates that the valuation of a conservation easement be based on the sales price of comparable easements if there is a substantial record of such sales. Only if there is no substantial record of such sales may an appraiser resort to any alternate approach to valuation. Timothy Walters is a real estate appraiser whom Defendant seeks to qualify as an expert. Because he failed to follow the methodology mandated by Treas. Reg A- 14(h)(3) or to justify his deviation from that methodology, however, the proffered opinion from Mr. Walters does not meet the standards of admissibility for expert testimony and should be excluded. of Evidence: II. LEGAL STANDARDS The admissibility of expert testimony is controlled by Rule 702 of the Federal Rules If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case. 2

3 Fed. R. Evid. 702 (2003). Consistent with prior Supreme Court authority, Rule 702 imposes on the District Court a gatekeeper obligation to ensure that any and all scientific testimony or evidence admitted is not only relevant, but reliable. Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 589, 113 S.Ct. 2786, 125 L. Ed. 2d 469 (1993). Fulfilling the gatekeeper duty requires the judge to assess the reasoning and methodology underlying the expert s opinion and determine whether it is both scientifically valid and applicable to a particular set of facts. Id. at , 113 S.Ct The Supreme Court in Kumho Tire Co. v. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 143 L. Ed. 2d 238 (1999) extended application of the rule to other fields of testimony, in addition to scientific matters. See Kumho Tire Co., 526 U.S. 137, 150. In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717, 745 (3d Cir. 1994). The reach of Daubert to appraisal practice and methodology is confirmed in Cook v. Rockwell International Corp. and Dow Chemical Co., 580 F. Supp. 2d 1071; 2006 U.S. Dist. LEXIS (D. Colo.). Applying Daubert in Goebel v. Denver and Rio Grande W. R.R. Co., 345 F.3d 987 (10th Cir. 2000), the Tenth Circuit stressed the importance of both methodology and the logical relation between that methodology and the expert s conclusion: Generally, the district court should focus on an expert s methodology rather than the conclusions it generates. Daubert, 509 U.S. at 595, 113 S.Ct However, an expert s conclusions are not immune from scrutiny: A court may conclude that there is simply too great an analytical gap between the data and the opinion proffered. Joiner, 522 U.S. at 146, 118 S.Ct. 512 ( [N]othing in either Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence that is connected to existing data only by the ipse dixit of the expert ). 3

4 346 F.3d at 992. Under Daubert, any step that renders the analysis unreliable... renders the expert s testimony inadmissible. This is true whether the step completely changes a reliable methodology or merely misapplies that methodology. Mitchell v. Gencorp., Inc., 165 F.3d 778, 782 (quoting In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717, 745 (3d Cir. 1994). III. ARGUMENT THE PROPOSED TESTIMONY OF DEFENDANT S EXPERT ON VALUATION OF THE CONSERVATION EASEMENTS MUST BE EXCLUDED BECAUSE THE EXPERT (A) DID NOT USE THE METHODOLOGY MANDATED IN THESE CIRCUMSTANCES BY THE APPLICABLE IRS REGULATION AND (B) DID NOT PROVIDE A BASIS FOR DEVIATING FROM THAT METHODOLOGY. A. The Applicable IRS Regulation Mandates That Valuation of Conservation Easements Be Based on the Sales Price of Comparable Easements, if There is a Substantial Record of Such Sales. Methodology for the valuation of conservation easements for federal income tax purposes is established under Treas. Reg A-14(h)(3). This treasury regulation prescribes mandatory procedures in valuing a contribution under IRC 170(h) of a charitable contribution of a perpetual conservation easement. There is no controversy as to methodology as it is precisely set forth in this straightforward rule. The treasury regulation provides in part: (3) Perpetual conservation restriction (i) In general. The value of the contribution under section 170 in the case of a charitable contribution of a perpetual conservation restriction is the fair market value of the perpetual conservation restriction at the time of the contribution. If there is a substantial record of sales of easements comparable to the donated easement (such as purchases pursuant to a governmental program), the fair market 4

5 value of the donated easement is based on the sales prices of such comparable easements. If no substantial record of marketplace sales is available to use as a meaningful or valid comparison, as a general rule (but not necessarily in all cases) the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction. Treas. Reg A-14(h)(3) (emphasis supplied). The treasury regulation has thus adopted alternate methods for valuation, one of which must be used [i]f there is a substantial record of sales of easements comparable to the donated easement, and the second of which can be resorted to only if there is no such record. The first step in valuing conservation easements pursuant to the treasury regulation is to review whether there is a substantial record of sales of comparable conservation easements. In the event that there is such a record, the inquiry ends and the valuation must be based upon such sales. Only if no substantial record of marketplace sales is available to use as a meaningful or valid comparison may an appraiser use the alternative described in the last quoted paragraph (hereinafter called, for convenience, the before and after test). The regulation is unambiguous, and is afforded Chevron deference. See Chevron U.S.A., Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L. Ed. 2d. 694 (1984). B. There is in This Case a Substantial Record of Sales of Easements Comparable to the Donated Easement. As required by Fed. R. Civ. P. R. 26(a)(2), Plaintiffs disclosed the expert appraisal testimony of Mark Weston in connection with the valuation of the real property interest in 5

6 this action (sometimes referred to as the Rincon Creek Ranch or Hill Ranch ). Filed with this motion as Exhibit A is an affidavit by Mr. Weston containing pertinent excerpts of his opinion, in which he establishes a foundation for the presence of a substantial record of sales of easements comparable to the donated easement. He states as follows: Our first line of inquiry, as required by these regulations, is whether there is a substantial record of sales of easements comparable to the donated easement (such as purchases pursuant to a governmental program). Conservation easement sales are distinguished from sales of properties already encumbered with conservation easements. We have considered six specific sales of easements (see Sales Considered After Conveyance of the Conservation Easement chart, following at pp , Sales 17-22), meeting this regulatory requirement, along with substantial additional easement sale data from throughout the state and region. These data demonstrate clearly that in Colorado there is a substantial record of sales of easements comparable, in this case, to the donated easement. The longstanding public commitment that Colorado s government, its voters, and other governmental entities operating have to protect the state s land and water from inappropriate development using conservation easements is huge. The governmental programs, both national, local or regional, and statewide, have created a substantial record of easement sales. According to the Great Outdoors Colorado ( GOCO ) web site, since GOCO s inception, over $9 million has been awarded to projects in Las Animas County alone. Of this amount, $2.3 million has been granted for open space protection projects, one of these being the Bosque del Oso, adjacent to the Hill Ranch. Perhaps even more compelling is the fact that statewide, between January 1, 2000 and July 17, 2007 (see Addendum C), GOCO granted $161,728,778 to Colorado land trusts and units of government for conservation easement acquisition projects. The fair market value of the conservation easements acquired in part with these funds was $264,694,924, encumbering 6

7 Exhibit A at ,343 acres. This equates to a mean easement value of $1,229 per acre. The Affidavit of Lise Aangeenbrug (Exhibit B), Executive Director for Great Outdoors Colorado ( GOCO ), a governmental agency of the State of Colorado, also supports the finding that there is a substantial record of sales of conservation easements in Colorado. In her affidavit Ms. Aangeenbrug details the purposes, powers and activities of GOCO which is a recipient of lottery funding and has dedicated such funds to a number of programs, including purchases of conservation easements. Ms. Aangeenbrug s exhibit describes the competitive nature of award grants for open space projects, as well as the scrutiny applied by GOCO in properly valuing the fair market value of conservation easements that GOCO funds. GOCO is not the only governmental agency within the State of Colorado funding open space protection projects. Other governmental agencies, including the federal government, Douglas County, Larimer County, Jefferson County, and the City of Boulder and the County of Boulder have 1 established programs designed to protect open space. The activities of Boulder and other governmental agencies and charitable organizations have also contributed to creating a record of sales of conservation easements. See Exhibit A, 7. 1 The City of Boulder has a long history of protecting open space, and both the City of Boulder and the County of Boulder actively protect open space. Attached to the affidavit of Mr. Weston is an excerpt from the City of Boulder s web site, Boulder s Open Space and Mountain Parks: A History. This website recites a long history in Boulder protecting open space. Boulder County has over 36,000 acres in conservation easements. 7

8 Clearly, the State of Colorado and other governmental agencies and charitable organizations within the State have devoted significant resources to the protection of open space and, as a result, has acquired many conservation easements and restricted many other properties from development, the action of which has resulted in the creation of a substantial record of sales of easements for open space. Because of this activity, pursuant to Treas. Reg A-14(h)(3), there exist substantial sales of conservation easements comparable to the donated easement, i.e., conservation easements created to protect open space. C. Because Defendant s Expert (1) Failed to Base His Valuation on the Sales Price of Comparable Easements and (2) Failed to Even Analyze in His Report Whether There Exists a Substantial Record of Marketplace Sales of Comparable Easements, His Testimony Uses the Wrong Methodology and is Irrelevant to This Case. Pursuant to Fed. R. Civ. P. 26(a)(2), Defendant has proffered a real estate appraisal report prepared by Timothy L. Walters dated January 15, 2009 that is defective and inadmissible, because it fails to use the methodology required by Treas. Reg A- 14(h)(3) and provides no reasoning or justification for deviating from the methodology. Mr. Walters begins his expert report as follows: See Exhibit C. The purpose of this appraisal is to establish the current market value of the fee simple estate of the subject property which is located within Archuletta County [sic]. After the establishment of the current market value of the fee simple estate, the reduction in value of the fee simple estate will be calculated after the easement is placed on the property. Consequently, the purpose is to develop a before and after value for this appraisal. (emphasis added). 8

9 In other words, Mr. Walters used the before and after method, skipping the prior methodology prescribed by regulation. This is the extent to which Mr. Walters went in appraising the property. He utilized the disfavored secondary test under the treasury regulation without even considering the preferred and mandatory first test. His use of the alternate before and after approach is further undermined by his failure to consider the factual predicate for resorting to the alternate test the lack of a substantial record of conservation easement sales. His report will be searched in vain for any discussion or analysis of this issue. CONCLUSION The testimony of Defendant s expert Timothy Walters does not meet the requirements of Daubert, Kumho Tire, and Rule 702. It is also irrelevant under Rules 401 and 402. Accordingly, Plaintiffs respectfully request that the Court exclude his testimony. th RESPECTFULLY SUBMITTED this 4 day of June, /s/ Larry D. Harvey Larry D. Harvey 5290 DTC Parkway, Suite 150 Englewood, Colorado (facsimile) Attorney for Plaintiff Isaacson Rosenbaum P.C. William M. Silberstein Chris Jensen th Street, Suite 2200 Denver, Colorado Attorneys for Plaintiffs 9

10 CERTIFICATE OF MAILING th I hereby certify that on the 4 day of May, 2009, I placed a true and correct copy of the foregoing PLAINTIFFS MOTION TO EXCLUDE TESTIMONY OF DEFENSE EXPERT ON EASEMENT VALUATION (SUBMITTED IN CONNECTION WITH SUMMARY JUDGMENT MOTION) in the United States Mail, postage prepaid, addressed to: Rick Watson Caroline Newman Civil Trial Section, Western Region P.O. Box 683 Ben Franklin Station Washington, DC /s/ Larry D. Harvey C:\Data\W ordperfect\conservationeasements\hill\hill-mtntoexcludetestimony-final.wpd 10