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Smith v. United States

July 13, 2006


The opinion of the court was delivered by: McLAUGHLIN, Sean J.


Presently pending before the Court are the following post-trial motions filed by the Defendant, United States of America: Motion for a New Trial (Dkt. #99), and Motion to Alter or Amend the Judgment (Dkt. #97).


This case involves a gift tax refund, the amount of which the government and the Plaintiffs disputed. The gifts in question were fractional interests in the Smith Family Limited Partnership ("Smith FLP"), formed by the late Sydney E. Smith, Jr. ("Smith") and the Plaintiffs, Sydney E. Smith III ("Smith III") and Jill P. Smith (collectively, "Plaintiffs"), on December 29, 1997. The sole asset of the Smith FLP was 100% of the common stock of an operating company known as Erie Navigation Company, Inc. ("ENC"), which, until then, had been owned by Mr. Smith.

When it was formed, the Smith FLP had two general partners: Mr. Smith, who owned a 2% general partner interest, and Plaintiff Sidney E. Smith, III, who owned a 1% general partner interest. In addition, Mr. Smith owned a 95.15 % limited partner interest, while Plaintiff Sidney E. Smith, III, owned a 0.90 % limited partner interest, and Plaintiff Jill P. Smith owned a 0.95 % limited partner interest.

On January 5, 1998, Mr. Smith gave each Plaintiff a 6.865 % limited partner interest in the Smith FLP, and on December 31, 1998, each Plaintiff received an additional gift of a 13.37 % limited partner interest in the Smith FLP. On or about February 1999, Mr. Smith filed a Form 709, 1998 United States Gift Tax Return, on which he reported that the total value of the limited partner interests he gifted to the Plaintiffs in 1998 was $1,025,392.00. (See Complaint at ¶ 7 and Exhibit A). Based on this value, Mr. Smith paid gift tax in the amount of $262,243.00. (See Complaint at ¶ 5).

On or about December 4, 2001, Defendant issued Mr. Smith an Assessment in which it increased the total value of the gifts reported on Mr. Smith's 1998 Gift Tax Return to $1,828,598.00. (See Complaint at ¶ 7 and Exhibits C and D). As a result, Mr. Smith was assessed additional gift tax totaling $360,803.00, which he paid to the Internal Revenue Service on or about December 26, 2001. (See Complaint at ¶ 7 and Exhibits B and C). With his payment of the additional gift tax, Mr. Smith filed a Form 843, Claim for Refund and Request for Abatement, claiming that he was wrongfully assessed and requesting a refund of the additional gift tax. (See Complaint at ¶ 11 and Exhibit E). After six months passed without receiving a response to his refund request from Defendant, Mr. Smith filed the instant refund suit pursuant to 26 U.S.C. § 6532. (See Complaint at ¶ 12).

On September 28, 2005, following a jury trial, the jury returned a verdict finding that the Commissioner of the Internal Revenue Service had erred in setting a value that was greater than fair market value for gifts given in 1998 by the late Sydney E. Smith, Jr. to his children. The jury also determined the actual fair market value for each of the gifts. Following the verdict, the parties conferred and stipulated that the values established by the jury resulted in a refund due Mr. Smith's estate in the amount of $648,171.68, including interest.

In Defendant's motion for a new trial, it contends that this court erred in allowing Sydney E. Smith, III to offer a lay opinion at trial as to the value of a 1% limited partnership interest in the Smith FLP. Defendant's motion to alter or amend the judgment argues that the jury award in this case should be amended so as not to exceed the amount demanded by Plaintiffs before the Commissioner of the Internal Revenue Service and in the Complaint filed with this Court. For the reasons stated below, each of these motions is denied.


A. Motion for New Trial

Rule 59(a) of the Federal Rules of Civil Procedure allows a party to seek relief from a judgment by filing a motion for a new trial. Grounds upon which a new trial may be granted include:

1) that the verdict is against the weight of the evidence, 2) that the damages are excessive, or 3) that the district court made substantial errors in the admission or rejection of evidence or in its instructions to the jury. See Montgomery Ward & Co. v. Duncan, 311 U.S. 243, 251 (1940). Generally, the decision whether or not to grant a new trial is "committed to the sound discretion of the district court." Bonjorno v. Kaiser Aluminum & Chem. Corp., 752 F.2d 802, 812 (3rd Cir. 1984).

Here, the government argues that this Court erred by admitting the lay opinion testimony of Sidney E. Smith, III, a general and limited partner in the Smith FLP, as to the value of a 1% limited partnership interest in the limited partnership. The admission of lay opinion testimony is governed by Fed. R. Evid. 701:

Rule 701. Opinion Testimony by Lay Witnesses

If the witness is not testifying as an expert, the witness' testimony in the form of opinions or inferences is limited to those opinions or inferences which are (a) rationally based on the perception of the witness, and (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702.

Prior to trial, the United States objected to the admission of Smith III's proposed testimony as to the value of a 1% limited partnership interest, contending that it would have to be based on specialized knowledge and that Smith III had not been qualified as an expert witness. In overruling the objection, we relied upon Robinson v. Watts Detective Agency, 685 F.2d 729 (1st Cir. 1982), as well as the Third Circuit's decision in Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153 (3rd Cir. 1993):

Here's the bottom line. This is Robinson v. Watts Detective Agency, 685 F.2d 729 (1st Cir. 1982). And the court says: "An owner of a business is competent to give his opinion as to the value of his property." Citing cases. Whether [or] not his opinion is accurate goes to the weight of the testimony and not its admissibility. Just as an aside, that principle as to the owner's ability to testify is under 701.

Let the record reflect that the Advisory Committee Notes 2002 Amendments provide in part, for example, "most courts have permitted the owner or officer of a business to testify as to the value of projected profits of the business, without the necessity of qualifying the witness as an accountant, appraiser, or similar expert." Citing Lightning Lube, Inc. v. Witco, Third Circuit case. (Transcript, In Chambers Proceeding, September 26, 2005, pp. 10-11).

In Lightning Lube, the Third Circuit affirmed a trial court's decision to allow the owner of a business to provide testimony as to the company's lost profits, as such testimony was based on his knowledge and participation in the day-to-day affairs of the business. As noted above, when passing the 2000 amendments to Rule 701, the drafting committee specifically cited Lightning Lube with approval. Moreover, the committee explained that:

[s]uch opinion testimony is admitted not because of experience, training, or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his or her position in the business. The amendment does not purport to change this analysis.

Federal R. Evid 701, 28 U.S.C.A. Advisory Committee Notes, 2000 Amendments.

The government argues that Lifewise Master Funding v. Telebank, 374 F.3d 917, 929-30 (10th Cir. 2004), stands for the proposition that only an expert could properly testify as to the matters addressed by Smith III. We do not agree that Lifewise is supportive of the government's position. In that case, the Court precluded the testimony of a company president as to lost profits only because the witness attempted to rely upon a complicated damages model in offering his opinion. The Court observed that the witness "could have testified solely as a businessperson based on his personal knowledge and his experience as president of the company. He could have given a straightforward opinion as to the lost profits using conventional methods based on Lifewise's actual operating history." Id. at 930. Here, as discussed more fully below, Smith III's opinions were based on personal knowledge of and experience with the operations of his company. See also Asplundh Manuf. Div. v. Benton Harbor, 57 F.3d 1190, 1201 (3rd Cir. 1995) (emphasizing that lay opinion testimony on matters of a technical nature must derive from the rational perceptions of the witness, but allowing that such perceptions could be based upon either specialized knowledge or experience).

In the alternative, the government contends that Smith III's testimony should have been excluded because "the plaintiffs in this case did not establish the foundational predicates set forth in Lightning Lube [and] the Court erred in relying on that case to permit the lay opinion testimony of Smith III." (Memorandum in Support of Motion for a New Trial, Dkt. #100, p. 3).

Contrary to the government's contention, a careful review of the record reveals that a sufficient foundation was laid to establish Smith III's "particularized knowledge" concerning his role as vice-president of Erie Navigation, his knowledge as to each of the ships and other assets of the company in detail, including value, workload, income stream, and operations, as well as his involvement in the company's finances. He described the competitors of Erie Navigation Company and the impact these competitors had on the shipping operations of Erie Navigation, and the existence of several asbestos lawsuits pending against the Company. Finally, Smith III testified extensively as to his understanding of the Smith FLP and the meaning of fair market value in terms of a limited partnership interest:

Q: Do you understand that fair market value talks about a hypothetical buyer and a hypothetical seller?

A: Yes.

Q: And it's not Smith family members, do you ...

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