Tax Court denies motions to strike expert declarations in Airbnb transfer pricing discovery dispute: Implications for protective orders and expert witness opinions

Case Background

The underlying case involves a Section 482 transfer pricing dispute in which the IRS increased Airbnb’s income by approximately $4.2 billion with respect to resources, capabilities, and rights that Airbnb made available to a foreign affiliate. The deficiency notice asserted a $1.33 billion tax deficiency and approximately $570 million in penalties.

Both parties filed competing Motions for Discovery Protective Order pursuant to Tax Court Rule 103. As relevant here, Airbnb sought a protective order requiring that its source code and technical materials be reviewed in a “clean room”¹ located at the offices of Airbnb or its counsel in California. The IRS proposed that the clean room instead be established in Austin, Texas, where the Declarant was based, and that the scope of materials subject to clean room procedures be narrower than proposed by Airbnb.

In support of its motion and in response to Airbnb’s motion, the IRS submitted two Declarations from the Declarant. The Declarations set out the Declarant’s views on how the clean room should operate and what materials it should include. The Declarations criticized Airbnb’s proposed terms as “generally unreasonable and … onerous and inefficient relative to numerous other Federal Court protective orders” that the Declarant had worked under in more than 100 software-related cases over the past 20 years. The Declarations also characterized the proposed terms as “onerous” and opined that they “hinder discovery” and “create[] significant opportunities for disagreement” between the parties. The Declarations also stated the Declarant’s opinion that protective orders “have been generally weaponized to the point of substantially undermining reasonable processes and efficiency in software and technology litigation.” The first Declaration was at least 17 pages long; the second Declaration was at least 10 pages long.

In response, Airbnb filed two Motions to Strike the Declarations, arguing they: (1) functioned as improper expert reports; (2) violated the requirements of Rule 143(g); (3) offered impermissible legal opinions and advocacy under Federal Rule of Evidence 702; and (4) relied on orders from inapposite cases.

The Tax Court noted as a preliminary matter that motions to strike are generally disfavored by federal courts and should be granted only when the allegations have no possible relation to the controversy and there is a showing of prejudice to the moving party. The Court declined to strike the Declarations.

Expert Witness Legal Opinions: The Rule 143(g) Issue of First Impression

The Tax Court addressed as an issue of first impression whether Rule 143(g)’s expert witness report requirements apply to declarations submitted in support of pretrial discovery motions. Rule 143(g) requires that any party who calls an expert witness must cause that witness to prepare a written report containing: a complete statement of all opinions and their bases; the facts or data considered; any supporting exhibits; the witness’s qualifications; a list of prior cases in which the witness testified; and a statement of compensation.

The court held that Rule 143(g) does not apply to declarations submitted in support of pretrial discovery motions for three reasons:

1. Rule 143 provides evidentiary rules for trials before the Tax Court, is found in Title XIV of the Tax Court Rules of Practice and Procedure, titled “Trials,” and explains how “trials before the Court will be conducted”;
2. Rule 143(g) by its terms applies to “any party who calls an expert witness,” and there had been no trial in this case, nor has the IRS yet firmly identified its trial expert witnesses; and
3. The Declarations focused on pretrial procedural matters, including the proper scope of a discovery protective order, not the underlying substantive questions at issue in the case.

The court also noted in dicta that even if Rule 143(g) applied, the Declarations might be accepted under Rule 143(g)(3), which permits expert testimony without a written report when the expert testifies only with respect to industry practice. The court noted that the bulk of the Declarant’s statements “appear to concern his view of standard protective order practices in the expert witness industry,” so they might be acceptable without a written report under Rule 143(g)(3).

Expert Witness Legal Opinions: Limits Under Federal Rule of Evidence 702

Airbnb also argued the Declarations should be stricken because they provided “legal conclusions and advocacy, not proper expert testimony to assist the trier of fact.” 

Judge Toro found it was “not evident that the Declarations should be read as offering legal conclusions,” noting that the declarations related only to the proper scope of a discovery protective order governing technology issues and did not appear to offer conclusions on any ultimate issues of law in the case. Even if portions could be viewed as offering legal conclusions, the court stated it would “decline to rely on those portions without striking them.” The court noted it was the expert in legal matters and would disregard any improper legal opinions or advocacy in deciding the pending motions for protective order.

The court also found that Airbnb had not demonstrated the type of prejudice sufficient to justify striking the declarations given the nature of trial procedures in US Tax Court. Because the Court only conducts bench trials without a jury, the court is free to place no weight on any statements that improperly provide legal conclusions. Judge Toro quoted the Eleventh Circuit in United States v. Brown, in the opinion to state: “There is less need for the gatekeeper to keep the gate when the gatekeeper is keeping the gate only for himself.” 415 F.3d 1257, 1269 (11th Cir. 2005). The general rule is well established that an expert witness cannot give an opinion as to a legal conclusion, that is, an opinion on an ultimate issue of law. As the Ninth Circuit stated in Nationwide Transport Finance v. Cass Information Systems, Inc., 523 F.3d 1051, 1058–59 (9th Cir. 2008) (cited in the Airbnb opinion): “Resolving doubtful questions of law is the distinct and exclusive province of the trial judge.”

Rule 702 of the Federal Rules of Evidence permits expert testimony only when it will “help the trier of fact to understand the evidence or to determine a fact in issue.” By contrast, expert testimony that interprets legal standards or draws legal conclusions by applying law to the facts is generally inadmissible at trial. As one court put it: “To allow anyone other than the judge to state the law would violate the basic concept” of the judge as sole spokesman of the law. Specht v. Jensen, 853 F.2d 805, 807 (10th Cir. 1988). Where a case involves complex areas of the law, courts have allowed the admission of experts to opine on the statutory or regulatory framework of such applicable law to better understand the facts in the context of this broader framework. See Antrim Pharmaceuticals LLC v. Bio-Pharm, Inc., 950 F.3d 423 (7th Cir. 2020).

The Court’s decision highlights how the line between permissible factual opinions and impermissible legal conclusions is not always clear. As cited in the opinion, courts have acknowledged that “a district court does not abuse its discretion in allowing experts to use legal terminology” when it helps the jury understand the facts. The Sixth Circuit in Torres v. County of Oakland, also cited in the Airbnb opinion, provides a useful test: the key inquiry is “whether the terms used by the witness have a separate, distinct and specialized meaning in the law different from that present in the vernacular.” 758 F.2d 147, 151 (6th Cir. 1985).

Finally, the court noted that a party who views declarations as lacking a factual foundation, as Airbnb set forth in its motions, is not without remedy: it may submit its own declarations or request an evidentiary hearing at which the declarant can be cross-examined. Significantly, Judge Toro’s opinion indicates that by submitting the Declarations the IRS waived privilege and work product protections that may otherwise have applied to the Declarant as a consulting expert under Tax Court Rule 70(c)(4)(C).

Motions for Protective Order: Purpose and Use

The Court’s decision also highlights the use of protective orders to shape various aspects of discovery in litigation, especially confidential or sensitive information.

Under Tax Court Rule 103, the court may issue protective orders “for good cause” to protect a party from “annoyance, embarrassment, oppression, or undue burden or expense.” This parallels Federal Rule of Civil Procedure 26(c)(1), which empowers courts to issue a wide variety of orders to protect parties and witnesses in the discovery process.

Protective orders serve as a safeguard for parties considering the broad reach of discovery. Courts have discretionary authority to limit the scope and manner of discovery by issuing a protective order. This includes, among other aspects of discovery:

• Specifying or forbidding particular discovery methods to be used;
• Specifying terms and conditions used throughout discovery;
• Specifying the time and place to conduct discovery;
• Limiting the subject matter for which discovery may be had; and
• Sealing certain discovery containing confidential information or trade secrets and requiring such information be disclosed in a specific way.

To obtain a protective order, the moving party must show “good cause” by making a clear showing of a particular and specific need for the order. The court must then balance the interests in allowing discovery against the relative burdens imposed.

In the Airbnb case, the disputed protective orders concerned the protection of Airbnb’s source code and technical materials—quintessential trade secrets and confidential business information. The competing proposals about the clean room’s physical location and the scope of materials subject to restricted access reflect the significant strategic stakes that protective order disputes can carry, particularly in technology-intensive litigation.

The use of expert declarations to support or oppose protective order motions, as the IRS did in this case with Mr. Myers’s Declarations regarding standard protective order practices in software litigation, is an emerging practice that may become more common following this ruling’s confirmation that such declarations are not subject to the formal expert report requirements of Rule 143(g).

Broader Implications for Tax Litigation

The Airbnb ruling provides important guidance for practitioners in several respects.

First, the decision clarifies that declarations from a presumptive expert, submitted in connection with pretrial discovery motions, such as motions for protective order, are not subject to the formal expert report requirements of Rule 143(g). This may encourage parties in large Tax Court cases to more freely deploy such declarations in discovery disputes without concern about compliance with Rule 143(g)’s requirements for trial expert reports.

Second, the opinion is a reminder of the long-standing limits on expert witness legal opinions. While experts may provide factual opinions and discuss industry practices, they may not state legal conclusions or instruct the court on the applicable law. Practitioners should carefully review expert declarations and reports to ensure they remain within permissible bounds, focusing on factual and industry-practice testimony rather than legal conclusions. It is important to note that this rule remains context specific and can provide broader opportunities for experts to opine on the statutory or regulatory framework in complex cases.

Third, the ruling highlights the growing importance of protective order disputes in technology-intensive tax cases. As transfer pricing cases often involve intellectual property, including proprietary technology and trade secrets, disputes about the scope and terms of discovery, and particularly clean room procedures and other protective measures are likely to remain a significant pretrial battleground.

Finally, although the IRS had not yet identified the Declarant as an expert witness who would testify at trial in the case, the Declarations could carry consequences if the IRS subsequently designates him as a trial expert. Statements made in pretrial declarations could be used to cross-examine or impeach the expert at trial, challenge the consistency of his opinions, or probe the factual foundations of his testimony. Practitioners should be mindful that expert declarations filed in support of discovery motions, while not subject to Rule 143(g), may nonetheless create a body of prior statements that an opposing party can exploit if the declarant is later called to testify on the merits.

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_{1 As the parties used the term, a “clean room” is a secured room to which access is limited and from which removal of documents or materials is permitted only in certain circumstances.}