Expert witnesses can be critical to defending a tax position—but what happens when an expert must maintain confidentiality over information that is important to their analysis? Preserving this confidentiality while ensuring a fair and transparent legal process requires a delicate balance of the parties’ interests. Raising confidentiality as a sword and a shield in the context of expert testimony is a fact pattern many courts have yet to address. This Insight discusses the need for courts to apply a consistent framework around non-disclosure of facts or data by expert witnesses based on a contention that the information is protected by confidentiality—regardless of how that confidential protection arises.
In a multi-million-dollar tax dispute, selecting the right expert witness is critical. What impact does hiring an expert that is limited by “confidentiality” restrictions have on the persuasiveness of an expert’s testimony or opinion? Will the report be accepted by a fact finder or court? If a tax department is looking to engage an expert to support a transfer pricing position, the extent of the “confidentiality” restrictions may hamper the effectiveness of the opinion (thereby limiting the effectiveness of the transfer pricing defense).
Case law in this area establishes a framework to evaluate how “important” the “confidential” information is to the opinion—the more important the confidential information, the more limited an expert’s opinion may be viewed by the court or fact finder (if the opinion is allowed to be used to support the transfer pricing position at all).
Courts have limited certain expert opinions based on information being withheld as confidential because the integrity of expert testimony in legal proceedings relies on the opposing party’s ability to effectively challenge the expert’s opinions. If an expert refuses to provide facts or data to the opposing party, it thwarts that party’s ability to rebut the expert—or test the expert’s opinions—as required by the Federal Rules of Civil Procedure and Federal Rules of Evidence.
There are various reasons an expert might—or might want to—withhold certain facts or data from an opposing party. This Insight examines one reason that arose in a tax litigation: contentions of confidentiality under Section 6103. [1] In McGowan v. United States, the District Court for the Northern District of Ohio examined a scenario where the government argued an expert should not be required to disclose aspects of his experience and expertise based on the confidentiality provisions in Section 6103. Section 6103(a) requires that tax returns and return information be confidential and may not be disclosed by officers, employees, or agents of the United States.
In McGowan, the court, however, did not answer the ultimate question: could an expert testify, without limit, if certain information forming the basis of the expert’s opinion was withheld based on Section 6103. Other courts have not addressed this scenario under Section 6103, but they have dealt with similar scenarios where the asserted bases of confidentiality was in common law, such as other (non-tax) statutes or regulations, or contractual provisions.
We are of the view that the same principles should apply in handling both contractual and statutory “confidentiality” restrictions. Because the touchstones of allowing an adversary to test expert witness testimony are the Federal Rules of Civil Procedure and Federal Rules of Evidence, their underlying rationale arguably should apply equally regardless of the asserted basis of confidentiality.
Below, we explore relevant case law and legal precedents highlighting the inherent tension between preserving confidentiality and ensuring a fair and transparent legal process—the latter being paramount in the adversarial process. Thus, a tax department contemplating engaging an expert that cannot disclose all facts that support their opinion—regardless of why the information is confidential—should consider the framework addressed below.
The Federal Rules of Evidence provide that a witness who is qualified as an expert by knowledge, skill, experience, training, or education may provide opinion testimony if (1) the expert’s specialized knowledge will help the trier of fact to understand the evidence or determine a fact at issue, (2) the testimony is based on sufficient facts or data, (3) the testimony is the product of reliable principles or methods, and (4) the expert has reliably applied the principles and methods to the facts. [2]
The adversarial nature of the US legal system requires that expert’s opinions be subject to challenge. To enable the parties to effectively challenge an expert’s opinion—such as by offering rebuttal testimony or through cross-examination—parties are required to disclose the expert’s opinions sufficiently in advance of trial. [3] This disclosure is generally provided through the submission of an expert report, which must contain, in part, the expert’s qualifications and a complete statement of all opinions the witness will express and the basis and reasons for all of those opinions. [4] These rules are designed to aid the court in its fact-finding mission by allowing both parties to prepare their cases adequately and efficiently and to prevent the tactic of surprise.
A witness may be qualified as an expert based on their observation and “experience.” [5] The issue with regard to expert testimony, however, is not the qualifications of a witness in the abstract, but whether the qualifications provide a foundation for a witness to answer specific questions. [6]
After a witness is qualified, that witness may rely on their observations and past recollections to support opinions. If an expert relies on an expert’s recollection of their work experience to support an opinion, then the opposing party ought to be able to dig into the factual foundation for the recollection. [7]
Situations may arise, though, where a witness may not answer certain questions because the answer may implicate information that the witness is required to keep confidential. When a witness refuses to answer questions on the basis of confidentiality, the adversarial nature of the system is hindered. In such a situation, a party may not be able to effectively cross-examine an expert on these topics to determine if the witness is adequately qualified or if “the testimony is based on sufficient facts or data” and whether it is “the product of reliable principles or methods.” [8]
The cases cited below discuss two situations where “confidentiality” concerns may limit testimony: (1) when a prior consultant for the government is restricted from testifying about “return” or “tax return information” pursuant to Section 6103 and (2) when a witness is restricted from testifying about certain information based on a contractual agreement that contains “confidentiality” restrictions.
In McGowan v. United States, [9] the taxpayer filed a refund case with respect to adjustments related to its alleged “welfare benefit plan.” The government retained Charles DeWeese to provide testimony (1) as to the nature of various life insurance products and how such contracts operate and are administered and (2) as to employee welfare benefit plans and how such arrangements make use of life insurance products. DeWeese had testified for the government in various other welfare benefit plan cases (including a number of cases that were resolved by a trial and resulted in the US Tax Court issuing an opinion) and listed those cases in his expert report as reasons why he was qualified to testify.
On September 21, 2022, taxpayer’s counsel deposed DeWeese. On multiple occasions, taxpayer’s counsel sought to inquire about Mr. DeWeese’s former experience as an expert witness with respect to certain relevant “welfare benefit plans” and how those plans compare with the taxpayer’s plan. The government’s counsel objected to that particular line of questioning on Section 6103 grounds and instructed the witness not to answer those questions, as any answers would implicate taxpayer “return” or “return information.” The taxpayer moved to compel testimony on these subjects, or, in the alternative, sought to strike the report because, without the “confidential” testimony, the government would be unable to prove that DeWeese was qualified to testify about the relevant issues. The taxpayer attached a copy of DeWeese’s expert report identifying the sections that they proposed to strike.
The government argued that DeWeese based his opinions on his decades of experience as an actuary and insurance professional, and not on his prior US Tax Court work. However, “to resolve [the] dispute,” the United States agreed to “withdraw certain portions of Mr. DeWeese’s report that could be susceptible to the charge that they were animated in any sense by Mr. DeWeese’s Tax Court work.” [10] The government also noted that it would “consent to an order directing the parties not to elicit any testimony regarding Mr. DeWeese’s prior work for the IRS at trial.” [11]
The District Court, able to avoid the crux of the confidentiality issue under Section 6103, held that much of what the taxpayers sought was made public in the various prior Tax Court opinions and thus was no longer covered by Section 6103. [12]
The court thus allowed the taxpayer to take a supplemental deposition of DeWeese. [13] The court ruled that as long as the taxpayer did not elicit, and DeWeese did not reveal, factual information not already made public in the text of the cases, the taxpayer’s questioning about DeWeese’s impression and experience would not violate Section 6103 and would be permitted.
The court’s ruling, however, left open the question about what would happen if, after the supplemental deposition, there remained “confidential” information subject to Section 6103 that (1) was critical to establishing that DeWeese should be qualified as an expert or (2) that was critical to proving that his testimony was based on sufficient facts or data or the product of reliable principles or methods. We are not aware of any Section 6103 cases that have directly dealt with this issue.
There are a number of similar cases that have dealt with this issue when an expert is precluded from providing testimony based, not on Section 6103, but on a contractual confidentiality provision. We explore those cases next, and then contend that similar principles applied in cases where contractual confidentiality provisions are at issue should also apply to cases where information is withheld under Section 6103.
A number of cases have wrestled with how to deal with an expert witness when the experts or documents they rely upon are subject to valid “confidentiality” provisions. While the outcome of this issue will vary based on the unique facts and circumstances of every case, general principles emerge from the legal precedents: if the “confidential” information withheld is critical to establish that the witness should be qualified as an expert or the confidential information is critical to an opinion, the witness may not be allowed to testify; on the other hand, if the “confidential” information is not critical to qualifying a witness as an expert but is relevant to an opinion of the expert, then any qualification or opinions may not reference or be based on such undisclosed “confidential” information.
In In re Rail Freight Surcharge Antitrust Litigation, [14] the plaintiffs argued that their expert, Thomas Crowley, be allowed to testify about his experience with “hundreds” of negotiations as a basis for his expert opinion even though he did not disclose the underlying contracts or information related to the negotiations. The court noted that it would be difficult for the defendants to adequately prepare rebuttal reports, depose the expert, or prepare for cross examinations at trial without such information. [15]
The court also observed that plaintiffs and Crowley may raise concerns that certain of the contracts or negotiations were subject to confidentiality agreements, but that any confidentiality provisions would “give way” to expert disclosure requirements. [16]
The court concluded: “If Crowley believes that he is bound by the confidentiality of these negotiations and is unwilling to divulge needed details, then he should not serve as an expert witness; otherwise, he will be precluded from relying on what he has seen that no one else can.” [17]
In Allstate Insurance Company v. Electrolux Home Products, [18] the plaintiff’s expert, William R. Keefe, testified that certain confidential information was part of his background knowledge but that he did not actively consider any confidential materials in forming his opinion in the current case. Keefe also noted if he did not have access to the confidential information, he would not have changed his report. The court held that the appropriate remedy was to strike any reference to those confidential documents from the expert’s report: “the Court orders Keefe to amend his expert report to eliminate any reference to the Confidential Documents and to reflect his testimony that he did not rely on the Confidential Documents in forming his opinion in this case.” [19]
Thus, generally, an expert witness will be allowed to testify at trial but will not be permitted to reference or use any confidential information as support for any opinions. However, if a district court determines that an expert cannot express an opinion without relying on the confidential information, the expert should be stricken. In the alternative, if the expert can express an opinion without relying on the confidential information, “any reference to the confidential information should be stricken from the expert’s report and the court should instruct the expert to disregard the confidential information.” [20]
Because the adversarial system requires that an expert’s opinions be subject to challenge, failing to fully disclose the basis of an expert’s opinions sufficiently in advance of trial may warrant limitations on the expert’s ability to testify. The reason why such information is withheld by an expert should be irrelevant given the core need for exploring an expert’s opinions.
To illustrate this, we apply other courts’ contractual confidentiality framework described above to a hypothetical based on McGowan. If DeWeese had continued to refuse to answer certain questions based on Section 6103 at his supplement deposition that the court determined were critical to his opinions, the district court may have been justified to limit or exclude DeWeese’s testimony. [21] If the court determined that DeWeese could be qualified as an expert and that he could support his opinions without relying on the confidential information, “any reference to the confidential information should be stricken from” his expert report, and he should not be able to testify about the confidential information on the stand. However, if DeWeese’s qualification as an expert was primarily based on experience that he refused to testify about based on Section 6103, [22] then the court would be within its right to refuse to qualify him as an expert.
This hypothetical demonstrates that the application of the contractual confidentiality framework to expert witness claims of confidentiality under Section 6103 aligns with the principles permitting a party to challenge the basis of an expert’s opinion under the Federal Rules of Civil Procedure and Federal Rules of Evidence. At bottom, the adversarial nature of our system requires that taxpayers be provided the facts and information necessary to challenge an expert, and if such information cannot be provided because of Section 6103, the expert “should not serve as an expert witness.”
Confidentiality assertions by an expert witness under contractual or statutory obligations should be treated the same regardless of how they arise. Thus, a tax department evaluating an expert witness should consider the importance of confidential information withheld from disclosure by an expert before deciding whether to engage such an expert to support a transfer pricing position before a fact finder or court.
[1] Unless otherwise indicated, all “Section” references are to the Internal Revenue Code of 1986, as amended, codified at 26 USC.
[2] See Fed. R. Evid. 702.
[3] See Fed. R. Civ. P. 26(a)(2)(D) requiring disclosure at least 90 days in advance of the start of trial unless otherwise stipulated by the parties or ordered by the court; see also Fed. R. Evid. 705 requiring disclosure of an expert’s underlying facts or data on cross examination.
[4] Fed. R. Civ. P. 26(a)(2)(B)(i), (iv); Tax Court Rule 143(g)(1)(A), (D).
[5] Berry v. City of Detroit, 25 F.3d 1342, 1352 (6th Cir. 1994).
[6] Berry, 25 F.3d at 1342.
[7] United States v. Bazaarvoice, Inc., 2013 WL 3784240 (N.D. Cal. July 18, 2013).
[8] See Fed. R. Evid. 702.
[9] Dkt. No. 19-cv-1073 (N.D. Ohio Dec. 15, 2022).
[10] The government attached a copy of DeWeese’s expert report with the sections that the government proposed were based on “confidential” Section 6103 information and that should be stricken.
[11] The taxpayer filed a reply that reiterated their prior arguments that DeWeese does not have sufficient experience to be qualified as an expert related to welfare benefit plans.
[12] There are certain exceptions to the disclosure of confidential taxpayer information, including disclosure in judicial proceedings under certain circumstances but the court did not find any of the listed exceptions applicable. See Section 6103(h)(4). Disclosure of taxpayer information in judicial proceedings is statutorily permitted (1) if the taxpayer is a party to the proceeding, (2) if the treatment of an item reflected on the return is directly related to an issue in the proceeding, (3) if the return directly relates to a transactional relationship between a party and the taxpayer which directly affects the resolution of the issue, or (4) the information should be released after due consideration is given to the congressional policy favoring the confidentiality of returns and return information.
[13] Order at 9. The Court noted that the information sought was a “legitimate effort to establish DeWeese’s qualifications as an expert.”
[14] 2013 WL 12384733 (D.C. 2013).
[15] 2013 WL 12384733 at *31.
[16] 2013 WL 12384733 at *32.
[17] Id.
[18] 840 F.Supp.2d 1072 (N.D. Ill. 2012).
[19] 840 F.Supp.2d at 1075.
[20] Coroles v. State, 349 P.3d 739, 745 (Utah Sup. Ct. 2015). In Elorac v. Sanofi-Aventis Canada, 2017 WL 3592775 (N.D. Ill. 2017), Elorac argued that the court should strike the expert’s deposition testimony because the expert claimed that confidentiality agreements with his former employers prevented him from divulging details of two launches he had helped to execute while he was with the companies. Elorac argued that since the expert relied on this experience in formulating his expert opinions, he was required to describe it in detail, or his testimony must be barred. The court found that the expert was not required to divulge every detail of every product launch, and the fact that some of the facts on which the expert relies are confidential did not disqualify the expert from testifying.
[21] For example, it is unclear from the record if the court was satisfied with the government’s proposed removal of certain paragraphs that the government agreed to withdraw that could be susceptible to the charge that they were animated in any sense by DeWeese’s prior Tax Court work.
[22] This hypothetical situation is more likely to occur in a case where the expert’s primarily qualification is from working on a tax case that does not have a public opinion or, if there is a public opinion, the expert’s opinion and analysis are not heavily featured. That is because once an opinion is made public, potentially enough information to support an expert’s qualification will be disclosable because it will no longer be covered by Section 6103.