Stuller et al v. USA

Filing 57

OPINION (See Written Opinion): The Motion of Defendant United States of America to Exclude any Expert Testimony from Mack Motes on the issue of whether the Plaintiffs carried on their Horse-Breeding Operation with the Intent of Earning a Profit [d/e 30 ] is ALLOWED. The Parties' other evidentiary Objections have been addressed as provided in this Order. Entered by Judge Richard Mills on 7/10/2014. (VM, ilcd)

E-FILED

Friday, 11 July, 2014 08:30:59 AM
Clerk, U.S. District Court, ILCD

IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
ESTATE OF HAROLD STULLER,
deceased, WILMA STULLER, named
executor, WILMA STULLER and
L.S.A., INC.,

)
)
)
)
)
Plaintiffs,
)
)
v.
)
)
UNITED STATES OF AMERICA and )
its Agency, Secretary, Treasury
)
Department, Internal Revenue
)
Service,
)
)
Defendants.
)

NO. 11-3080

OPINION
RICHARD MILLS, U.S. District Judge:
The Plaintiffs filed this action seeking a refund of income taxes paid
for the years 2003, 2004 and 2005. The case was tried at bench in April
of 2013.
The Court deferred until after the trial bench trial consideration of
the Defendant’s Motion in Limine to preclude Mack Motes from testifying
as an expert on the issue of whether the Plaintiffs carried on their horse-

breeding operation with the intent of earning a profit. Pending before the
Court is the Defendant’s Motion to Exclude any such Expert Testimony.
Pending also are several other evidentiary issues.
I.
In its previous Order, the Court determined that although there were
“serious questions regarding whether Mack Motes’s testimony is sufficiently
reliable to be admissible as expert testimony,” it would reserve ruling on the
question of whether Mr. Motes could testify as an expert witness on the
issue of whether the Plaintiffs’ horse-breeding operation was conducted for
profit.
The Defendant alleges that based on the standards of Federal Rule of
Evidence 702, Mack Motes is not qualified to offer and opinion on the
issue of whether the Harold and Wilma Stuller’s horse-breeding operation
was carried on with the intent to earn a profit. Accordingly, the Defendant
contends Mr. Motes’s opinion testimony at trial on whether the Stullers’
horse-breeding operation was carried out with the intent of earning a profit
should be disregarded because (1) he was not qualified to testify as an

2

expert at trial on that subject; and (2) he did not use a reliable methodology
to establish such opinion.
In support of its assertion, the Defendant notes Mr. Motes testified
at trial that he had never before testified as an expert in a legal proceeding.
He stated that he completed his sophomore year of high school and has not
taken any business classes. Mr. Motes has not published any papers or
taught classes on horse breeding. Although he testified he has bred horses
all of his life, Mr. Motes did not breed to make money and most of the
income from his activities was derived from training horses. He stated it
had been “years” since he sold a horse that he had bred. Mr. Motes
sometimes earned a small profit because he performed all of the labor. He
testified that someone else did the taxes for his horse training operation.
The Plaintiffs point out that Mr. Motes has over 50 years of
experience as a breeder, seller, purchaser, and trainer of the types of horses
that were owned by the Plaintiffs. He has received awards associated with
horse training and breeding. Mr. Motes has worked for the Plaintiffs for
over 20 years and was manager of their horse farm business at the time at

3

issue from 2003-2005.
The Defendant further alleges that Mack Motes is biased as to the
outcome of this case. He is married to Wilma Stuller and he began training
horses for the Stullers more than 40 years ago. Mr. Motes testified they
were among his best customers.
Prior to trial, Mr. Motes reviewed only his affidavit and his
deposition. He testified that he did not review any of the accounting
records or tax returns for L.S.A., Inc. (LSA) or analyze LSA’s financial
information prior to testifying at trial. Significantly, Mr. Motes testified he
did not analyze the facts of this case in accordance with the nine factors set
forth in 26 C.F.R. § 1.183-2(b) to determine whether the LSA horsebreeding operation was carried on with the intent of earning a profit.
Rather, Mr. Motes testified his opinion that Ms. Stuller runs her horse
breeding operation for profit was based off his observations and the
agreement the two had that they would develop and sell horses for profit.
Rule 702 provides:
A witness who is qualified as an expert by knowledge, skill,
experience, training, or education may testify in the form of an
4

opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the evidence
or to determine a fact in issue;
(b) the testimony is based on sufficient facts or data;
(c) the testimony is the product of reliable principles and
methods; and
(d) the expert has reliably applied the principles and
methods to the facts of the case.
Fed. R. Evid. 702.

“In analyzing the reliability of proposed expert

testimony, the role of the court is to determine whether the expert is
qualified in the relevant field and to examine the methodology the expert
has used in reaching his conclusions.” Smith v. Ford Motor Co., 215 F.3d
713, 718 (7th Cir. 2000). The Court concludes Mr. Motes is not qualified
to testify as an expert on whether LSA’s horse-breeding activities were
carried on with the intent to make a profit within the meaning of 26 C.F.R.
§ 1.183-2.
Given his more than 50 years experience training and breeding horses,
Mr. Motes may well qualify as an expert on certain aspects of those
activities. An expert may testify based on his experience rather than data.
See Metavante Corp. v. Emigrant Savings Bank, 619 F.3d 748, 760 (7th

5

Cir. 2010).

In so doing, however, the expert must explain the

“methodologies and principles” on which he relies and cannot simply
provide a “bottom line.”

Id. (citations omitted).

“Mere conclusions,

without a ‘hint of an inferential process,’ are useless to the court.”
Zamecnik v. Indian Prairie School Dist. No. 204, 636 F.3d 874, 881 (7th
Cir. 2011). Moreover, expert testimony may not be based on subjective
belief or speculation. See Metavante Corp., 619 F.3d at 761.
Based on his own testimony, however, Mr. Motes’s expertise does not
extend to the financial or business aspects of a horse-breeding operation.
Perhaps most significantly, Mr. Motes did not consider the facts of this case
in connection with the nine relevant factors listed in 26 C.F.R. § 1.1832(b). The section provides in relevant part:
In determining whether an activity is engaged in for profit,
all facts and circumstances with respect to the activity are to be
taken into account. No one factor is determinative in making
this determination. In addition, it is not intended that only the
factors described in this paragraph are to be taken into account
in making the determination, or that a determination is to be
made on the basis that a number of factors (whether or not
listed in this paragraph) indicating a lack of profit objective
exceeds the number of factors indicating a profit objective, or
vice versa.
6

26 C.F.R. § 1.183-2(b). Although the above passage makes clear that the
nine factors are not an exhaustive list, the listed factors should at the very
least be a starting point in making the determination. The Court rejects the
Plaintiffs’ contention that an expert need not be familiar with these factors
before offering an opinion on profit. An expert must be familiar with and
consider the enumerated factors in order to determine if they apply or if
other factors may be more probative. The listed factors are as follows:
(1) the manner in which the taxpayers carry on the activity;
(2) the expertise of the taxpayers or their advisors;
(3) the time and effort expended by the taxpayers in carrying on the
activity;
(4) an expectation that the assets used in the activity may appreciate
in value;
(5) the success of the taxpayers in carrying on other similar or
dissimilar activities;
(6) the taxpayers’ history of income or losses with respect to the
activity;
(7) the amount of the occasional profits, if any, that are earned;
(8) the financial status of the taxpayers; and
(9) the personal pleasure or recreation derived from the activity.
26 C.F.R. 1.183-2(b).

An expert opining on whether an activity was

engaged in for profit must consider these nine factors. Some may be
significant while others are not. An expert might determine that a factor
7

which is not listed is more probative to the determination. At a minimum,
however, an expert must give some consideration to the enumerated factors,
in addition to any other relevant factors.
It is worth noting that the Plaintiffs’ (and the Defendant’s) post-trial
brief focuses primarily on these nine factors, which is further reason why an
expert who is offering an opinion on whether the Plaintiffs had an intent
to earn a profit would have had to consider these factors.
Mr. Motes did not use a reliable methodology to establish his
opinions as is required under Rule 702. Rather, he rendered a conclusion
which was based on his observations and an alleged agreement with Ms.
Stuller. Mr. Motes did not examine any business or financial records of
LSA. A witness who offers a bare conclusion, without any analysis, does
not meet the reliability requirement of Rule 702. See McMahon v. BunnO-Matic Corp., 150 F.3d 651, 657-58 (7th Cir. 1998).
Because Mr. Motes did not consider any of the nine factors set forth
in 26 C.F.R. § 1.183-2(b) or any other factor determined to be relevant, the
Court concludes he is not qualified as an expert to render an opinion as to

8

whether the LSA horse-breeding operation was carried on with the intent
of earning a profit. Accordingly, the Court will not consider any opinion
testimony of Mr. Motes regarding whether LSA’s horse-breeding operation
was carried on with the intent to earn a profit. The Defendant’s Motion
to Exclude such testimony will be ALLOWED.
II.
The Plaintiffs filed a post-trial brief asserting a number of evidentiary
objections. They object to the admission of Defendant’s Exhibits 4, 5, and
6 which are, respectively, the 1994, 1995 and 1996 Income Tax Returns for
L.S.A., Inc. The Plaintiffs further object to the introduction of Defendants’
Exhibits 7, 8, 9 and 10 which are, respectively, the 2006, 2007, 2008 and
2009 Income Tax Returns for L.S.A., Inc.
The Plaintiffs also object to Defendants’ Exhibits 11, 12, 13, 14 and
15 which are, respectively, the 2006, 2007, 2008, 2009 and 2010 Income
Tax Returns for Wilma Stuller.
The Plaintiffs object to each of the exhibits on the basis that none are
relevant under Rules 401 and 402 of the Federal Rules of Evidence to the

9

tax years at issue, those years being 2003, 2004 and 2005. They further
contend that exhibits which relate to the years 1994, 1995 and 1996 are
not relevant because they fall outside the time frame set forth in 26 U.S.C.
§ 183(d), given that they exceed by at least seven years the first tax year at
issue, that being 2003. According to the Plaintiffs, the Taxpayers’ intent
during the foregoing years cannot be relevant for the case at bar. Section
183(d) provides:
If the gross income derived from an activity for 3 or more
of the taxable years in the period of 5 consecutive taxable years
which ends with the taxable year exceeds the deductions
attributable to such activity (determined without regard to
whether or not such activity is engaged in for profit), then,
unless the Secretary establishes to the contrary such activity
shall be presumed for purposes of this chapter for such taxable
year to be an activity engaged in for profit. In the case of an
activity which consists in major part of the breeding, training,
showing, or racing of the horses, the preceding sentence shall be
applied by substituting “2" for “3" and “7" for “5.”
26 U.S.C. § 183(d).
The Defendant alleges that evidence from tax years other than those
immediately at issue in a refund case may be relevant to whether a
taxpayer’s operation is carried on with the intent to earn a profit. The

10

applicable regulation provides, in part, that “all facts and circumstances
with respect to the activity are to be taken into account.” See 26 C.F.R. §
1.183-2(b). Moreover, factors which the Court must ultimately consider
include the Stullers’ history of income or losses and the amount of
occasional profits, if any, with respect to their horse-breeding operation. See
26 C.F.R. § 1.183-2(b)(6).

When a taxpayer’s “lengthy period of

substantial losses is not attributable to fortuitous circumstances or their
being in the startup phase of an activity, their loss history tends to indicate
a lack of profit motive.” See Bronson v. Commissioner, 103 T.C.M. (CCH)
1112, at *10 (2012). Because “[a] history of losses over an extended period
of time” may be probative of a lack of a profit objective, see Dirkse v.
Commissioner, 80 T.C.M. (CCH) 717, at *7 (2000), courts have looked to
tax years more than seven years removed from the tax years in question to
determine whether an activity was engaged in with the intent to earn a
profit. See, e.g., Giles v. Commissioner, 91 T.C.M. (CCH) 684, at *15-16
(2006) (considering 13 year period prior to the first tax year at issue);
Tamms v. Commissioner, 82 T.C.M. (CCH) 363, at *5 (2001) (examining

11

11 years prior to years at issue in considering profit motive).
The Defendant contends that the information on the L.S.A. tax
returns for 1994, 1995 and 1996 is relevant to the Stullers’ profit motive
or lack thereof in regard to their horse-breeding operation in general and is
thus relevant to their profit motive for the tax years at issue. Based on the
case law referenced above, the Court agrees with the Defendant’s position
on relevancy. Moreover, there is nothing in 26 U.S.C. 183(d) which
supports the Plaintiffs’ assertion that the Court may not go back that far
in considering whether an enterprise was carried out with the intent to earn
a profit.
Having determined that the tax return records from 1994, 1995 and
1996 are potentially relevant to the issue of profit motive, the Court will
Overrule the Plaintiffs’ objections to Defendant’s Exhibits 4-6.
Similarly, the Plaintiffs assert that the years 2006, 2007, 2008, 2009
and 2010 are not relevant to because they are subsequent to the last year
at issue, that being 2005. It is the Plaintiffs’ intent in 2003, 2004 and
2005 that is at issue.

12

The Plaintiffs’ assertion is incorrect. “Evidence from years after the
years in issue is relevant to the extent it creates inferences regarding the
taxpayer’s requisite profit objective in earlier years.”

Dodds v.

Commissioner, 105 T.C.M. (CCH) 1472, at *4 (2013). The Defendant
asserts these LSA tax returns from 2006-2009 were introduced in order to
demonstrate a continuing pattern of losses in the Plaintiffs’ horse-breeding
activities, which are relevant factors pursuant to 26 C.F.R. § 1.183-2(b)(6),
(7). Moreover, Ms. Stuller’s tax returns for years subsequent to 2005 show
the overall success she had in carrying on other activities in addition to her
overall financial status, which also are relevant factors pursuant to 26
C.F.R. § 1.183-2(b)(5), (8). The Court concludes the evidence of these tax
returns from years subsequent to 2005 for those purposes is potentially
relevant to the extent they are probative of the taxpayers’ profit objective
from 2003-2005. Accordingly, the Plaintiffs’ Objections to Defendant’s
Exhibits 7-15 are DENIED.
The Plaintiffs also object to the Defendant’s Exhibits 26 and 27,
being the Interrogatory attachments for colts born and horses sold and

13

Depreciation Schedules, respectively. The Plaintiffs contend these exhibits
are not the best evidence because of the trial testimony of Ms. Stuller and
the production of other exhibits in this case. Moreover, these Answers to
Interrogatories were prepared at an early stage of discovery and were
supplemented during the trial.
Exhibits 26 and 27 are the Plaintiffs’ own Interrogatory responses.
The Plaintiffs cite no authority that they should be excluded pursuant to
the best evidence rule. “The so-called ‘best evidence rule,’ codified . . . in
Fed. R. Evid. 1001 through 1004, requires only that a party seeking to
prove the contents of a document introduce the original document or
explain why it cannot be produced.” United States v. Rose, 590 F.2d 232,
237 (7th Cir. 1978). The best evidence rule does not mean that certain
evidence must be excluded when other evidence on the same matter is
offered. See id. The Court concludes there is no basis to exclude Exhibits
26 and 27. Accordingly, the Plaintiffs’ Objections to the Exhibits are
DENIED.
The Plaintiffs also object to Court’s Exhibit 1, which was a

14

Government exhibit that was not disclosed to the Plaintiffs and intended
to be used to impeach Mack Motes, the Plaintiffs’ purported expert witness.
Because the Defendant does not oppose the request to exclude this item of
evidence, the Plaintiffs’ Evidentiary Objection as to Exhibit 1 is
ALLOWED. The Court will not consider this Exhibit.
III.
At the conclusion of its post-trial brief, the Defendant makes a
number of objections to certain questions and testimony presented at trial.
The objections are directed at the testimony of the following individuals:
Wilma Stuller; Mario Perrino; Mack Motes; Todd Howe; Hartzel Bruno;
Denise Sherwood and Wayne Hipsley.
The Defendant advances a number of reasons for the many objections
to portions of testimony, including: (1) improper opinion; (2) speculation;
(3) relevance; (4) hearsay; (5) argumentative/misstating evidence; (6)
improper character testimony/evidence; (7) vagueness; (8) lack of
foundation; (9) leading/improper characterization; (10) outside scope of
direct; (11) bolstering/improper question; and (12) mis-characterizing an

15

exhibit.
The Court declines to specifically rule on each and every objection to
the various questions and answers. Because the case was tried at bench, the
parties were given significant leeway on certain matters–such as regarding
the form of the question. Accordingly, the Court will not strike testimony
on that basis.
There are many objections on the basis of improper opinion evidence.
The Federal Rules of Evidence allow for opinion testimony by fact witnesses
in limited circumstances, if the testimony is:
(a) rationally based on the witness’s perception;
(b) helpful to clearly understanding the witness’s testimony or
to determining a fact in issue; and
(c) not based on scientific, technical, or other specialized
knowledge within the scope of Rule 702.
Fed. R. Evid. 701. In considering the objections on the basis of improper
opinion testimony, the Court has determined the admissibility under Rule
701 of any opinion testimony.
Rules 401 and 402 of the Federal Rules of Evidence provide for a
broad standard of what constitutes relevant and admissible evidence. In

16

considering the record, the Court concluded that a few of the questions or
testimony that were the subject of relevance objections were in fact
irrelevant. Based on the broad language of the applicable regulation, the
Court found that the majority of the testimony was relevant.
The Defendant has made a several objections based on hearsay. In
determining whether the testimony or evidence was admissible, the Court
examined whether the testimony was excluded from hearsay under Rule
801 or met one of the exceptions listed in Rule 803 of the Federal Rules of
Evidence.
The Defendant has made several objections on the basis that Plaintiff
presented testimony of the character and/or reputation of Ms. Stuller. The
Plaintiff cites Rule 803(21), Federal Rules of Evidence, in alleging such
evidence may be considered. However, that rule addresses only the hearsay
aspect of reputation evidence, while other rules govern the general
admissibility of such evidence. See Fed. R. Evid. 803 advisory committee’s
note.
Rule 608 pertains to reputation or opinion evidence and states:

17

A witness’s credibility may be attacked or supported by
testimony about the witness’s reputation for having a character
for truthfulness or untruthfulness, or by testimony in the form
of an opinion about that character. But evidence of truthful
character is admissible only after the witness’s character for
truthfulness has been attacked.
Fed. R. Evid. 608(a). Because Ms. Stuller’s character for truthfulness was
not attacked by the Government or any Government witness, the Court is
unable to consider any witness’s opinion as to her reputation or character
for truthfulness.
The Defendant has made a number of evidentiary objections with
respect to public records and reports. To the extent that Defendant made
hearsay and relevancy objections to the introduction of U.S. Census Bureau
records, World Almanac and Book of Facts and Consumer Prices Index
records and witness testimony with respect to general economic conditions
during the years at issue, the Court will Deny those objections.
Ergo, the Motion of Defendant United States of America to Exclude
any Expert Testimony from Mack Motes on the issue of whether the
Plaintiffs’ carried on their Horse-Breeding Operation with the Intent of
Earning a Profit [d/e 30] is ALLOWED.
18

The Parties’ other evidentiary Objections have been addressed as
provided in this Order.
Enter: July 10, 2014
FOR THE COURT:
s/Richard Mills
Richard Mills
United States District Judge

19