| In the Supreme Court of the United States October Term, 1998 ROBERT G. LESLIE and MARILYN B. LESLIE, Petitioners, -V- COMMISSIONER OF INTERNAL REVENUE, Respondent. On Petition for Writ of Certiorari to the United PETITION FOR A WRIT OF CERTIORARI
Questions Presented.
Citations of Opinions and Orders. The opinion of the United States Court of Appeals for the Ninth Circuit in Robert G. Leslie et al. v. Commissioner of Internal Revenue, - F-3d (9th Cir. 1998), is set forth in the Appendix hereto (App. la-20a). The memorandum decision of the United States Tax Court in Robert G. Leslie et al. v. Commissioner of Internal Revenue, 71 T.C.M. (CCH) 2233 (2/28/96) is set forth in the Appendix hereto (App. 2la-52a). The order of the United States Court of Appeals for the Ninth Circuit denying the petition of Robert G. Leslie et al. for rehearing is set forth in the Appendix hereto (App. 53a). Basis for Jurisdiction in this Court The final judgment of the United States Court of Appeals for the Ninth Circuit affirming the decision of the United States Tax Court was entered on July 30, 1998, in the wake of the court's denial of the Leslies' petition for rehearing (App. 53a). This petition for writ of certiorari is filed within 90 days of that date. 28 U.S.C. S.2101 (c). The jurisdiction of this Court is invoked pursuant to the provisions of 28 U.S.C. S.1254(l). Constitutional and Statutory Provisions Involved United States Constitution, Amendment V: No person shall ... be deprived of life, liberty or property, without due process of law... Federal Rule of Civil Procedure 52(a): In all actions tried upon the facts without a jury or with an advisory jury, the court shall find the facts specially and state. separately its conclusions of law thereon, and judgment shall be entered pursuant to Rule 51. . . . Findings of fact, whether based on oral or documentary evidence shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses.... Federal Rules of Evidence: Rule 403. Exclusion of Relevant Evidence on Grounds of Prejudice, Confusion, or Waste of Time. Although relevant, evidence may be excluded if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury, or by considerations of undue delay, waste of time, or needless presentation of cumulative evidence. Rule 702. Testimony by Experts. 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 of otherwise. Rule 703. Bases of Opinion Testimony by Experts. The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence. Statement of the Case. The petitioners Robert G. Leslie and Marilyn B. Leslie (collectively referred to as "Leslie") were at all relevant times husband and wife and residents of Santa Paula, California. Leslie is the owner of R & H Paving Company and, consistent with his goal to be financially independent in retirement, he required that all of his investments generate a positive cash flow. The cyclical nature of the construction business meant sporadic cash flow and these investments were intended to level the cash flow to a manageable degree. Leslie was therefore willing to invest in ventures which brought a considerable amount of risk, a situation not unlike Leslie's paving business which itself possessed significant risk. To this end, Leslie in the 1970's invested in such en, terprises as vacant land in Eureka, California; an Arkansas poultry farm; a cattle ranch in Oklahoma; and a restaurant, commercial property and apartment budding in Rogers, Arkansas.In making most of these investments, Leslie relied upon his accountant/business advisor (Roy Tolson) or his business associate Joe Rasey); but he personally reviewed the financing aspects of all these investments, making some of them outside of California for diversity and because of more favorable financing terms. Because Leslie's predominant motive with his investments was to generate a good cash flow, he declined to pursue any tax-advantaged investments in the 1970's which did not provide cash flow. In 1980, Leslie engaged one Donald Short as his investment advisor. Short was a CPA and Leslie relied upon him to carry out his investment philosophy, i.e., sound but not riskless business investments which would generate a positive cash flow. Short investigated commodity trading, decided it met Leslie's investment criteria and eventually contacted F.G. Hunter & Associates ("Hunter ") through which Leslie's trades could be implemented in Hunter's gold futures spread program. He talked to Russell Klein from Hunter on three occasions, Leslie attended one of these meetings. The principal topic of these discus- sions was the profit potential from gold spread transactions - not tax benefits; and Leslie eventually decided to invest $175,000.00 initially in the gold spread trading program. After Leslie made this decision, he and Short received a notebook containing several documents from Hunter, one of which was an Adcom. Trading letter summarizing the profit potential for trading gold spreads. Leslie was particularly influenced by this document's emphasis on the profit potential from this kind of commodity trading. He also relied upon FAX, Inc., an investment advisor associated with Hunter, to make commodity trades. In November of 1980, the gold market was extremely volatile and Hunter's Klein was repeatedly calling Leslie to establish a position so that he could maximize his profit from this volatility. On December 1, 1980, Leslie made his first investment in commodity trading in the amount of $178,500 to cover initial margin requirements and transaction costs. His first position in the gold futures market was a forward spread with a potential profit if interest rates or the price of gold declined. On December 10, 1980, Leslie upon Klein's recommendation repositioned himself in the market in order to create a better opportunity to profit from those market movements; neither Leslie nor Short was aware of the tax consequences of this repositioning. Leslie's new positions reversed the earlier forward spread positions and established backward spread positions which had a profit (or loss) potential approximately three times his original positions. This repositioning, however, resulted in a loss of 1,511,489.40 from the cancellations of the original long contracts. Upon Klein's further recommendation, Leslie made another repositioning on December 30, 1980, resulting in a total gain of $198,450. 00 from the sale (or offset) of long and short contracts. By February of 1981, however, Leslie had become dissatisfied with FAX, Inc.'s investment advice and successfully sought from Hunter a refund of the $35,000.00 management fee he had paid for this service. After further dissatisfaction with Hunter in early 1981, Leslie eventually retained Merrill Lynch for his commodity trading. Bill Kearney of Merrill Lynch recommended a number of investments; Leslie agreed to make an oil and gas investment but rejected several others because they presented an opportunity for return on in vestment only through tax benefits. Throughout the rest of 1981 and 1982, Leslie continued his commodity trading activity through Merrill Lynch and he also began trading in bonds and stock options as well as in gold and silver futures contracts but not spreads. On May 26, 1982, Leslie liquidated his final positions with Hunter. In the end, Leslie lost approximately $58,310.00 in his trading of gold futures contracts through Hunter. As Edward B. Horowitz, an experienced commodity trader later explained, the Hunter program of gold futures trading, like other such programs, includes a profit potential associated with spread transactions. A gold spread consists of a long position and a short position, with each position having a different delivery date and each of the two positions re, ferred to as a "leg." Traders who invest utilizing spread positions hope to profit by a favorable change in the price relationship or the dfference between their long and short positions. Since the price of gold futures contracts is a function of the interest cost of carrying this precious metal from one futures delivery month to another delivery month, the major forces affecting gold futures spreads are gold prices and shortterm interest rates. Horowitz further explained that Leslie's particular position in the gold futures market on December 1, 1980, had a profit potential if interest rates (or gold prices) declined. The position he established on December 10, 1980, had three times more profit potential and was positioned to capitalize on an increase in interest rates or the price of gold in this volatile market. The position which he established on December 30, 1980, had a profit or loss potential almost two times greater than the December 10th position and was at a point where it could profit from an increase in interest rates or the price of gold. That the position Leslie established on December 30, 1980, experienced an actual loss of $58,600.00 based purely upon market movement for the period between then and November 30, 1981, indicates a profit potential in that amount if he had taken the opposite positions. The unpredictability or volatility of the gold futures market carries with it such risk; but the profit potential was always present if gold prices or interest rates moved in the proper relationship to Leslie's spread positions. In 1980, Leslie prepared his Federal income tax returns using the cash receipts and disbursements method of accounting and reported ordinary losses from his gold futures straddle transactions in the amount of $1,530,268 and shortterm capital gains in the amount of $198,030. He also claimed as deductions $17,500 in fees paid to Hunter. In 1981, Leslie reported ordinary losses in the amount of $55,302 and long-term capital gains in the amount of $97,160. In 1982, he reported long-term capital gains from the Hunter transactions in the amount of $1,172,950. On February 20, 1987, the respondent Commissioner of Internal Revenue Service ("the Commissioner") issued to Leslie a notice of deficiency, disallowing deductions of straddle losses totaling approximately 1.5 million for 1980, 1981, and 1982. According to the Commissioner, Leslie's underpayment was attributable to "tax motivated transactions" instead of ones entered into for profit; and he was therefore liable for the underpayment of taxes pursuant to Section 6621(c) of the Internal Code (Title 26). On August 30, 1993, the Commissioner filed a motion for order to show cause why Leslie's case was different than the case of Ewing v. Commissioner, 91 T.C. 396 (1988), affd without published opinion, 940 F.2d 1534 (9th Cir. 1991). In Ewing, the Tax Court determined that none of the ten petitioners there had engaged in the Hunter program of gold futures straddle transactions primarily for profit but rather did so in order to obtain favorable tax benefits. Id. at 418-421. As such, their straddle loss deductions in 1980 and 1981 were not allowable under Section 165(c)(2) of the lnternal Revenue Code and Section 108 of the Deficit Reduction Act of 1984, as amended by the Tax Reform Act of 1986. Id. at 414; 420- 421. On October 18, 1993, Leslie responded to the Commissioner's motion by submitting that his primary motivation for engaging in gold futures transactions with Hunter was for profit and therefore was distinguishable from those taxpayers in Ewing. With the matter in this posture, a two-day trial was held in the United States Tax Court in January of 1995 in order to determine, among other things, whether these transactions by Leslie in gold futures were entered into for profit (App. 22a-23a). On February 28, 1996, the Tax Court, Fay, J., issued its Memorandum Findings of Fact and Opinion. Robert G. Leslie et al. v. Commissioner of Internal Revenue, 71 T.C.M. (CCH) 2233 (2/28/96) (App. 21a.52a). It determined inter alia that Leslie's primary motivation in entering into the Hunter transactions was to generate tax benefits and not to realize profits. Id. Invoking the jurisdiction of the United States Court of Appeals for the Ninth Circuit pursuant to 26 U.S.C. ?7482, Leslie challenged this ruling as unsupported by the evidence adduced below and argued that the overwhelming proof demonstrated that his Hunter investments were not tax motivated. He also contended, among other things, that the Tax Court had abused its discretion by admitting into evidence the unqualified, unfounded, biased and ultimately unhelpful opinion testimony of Dr. Richard J. Teweles, a supposed expert offered by the Commissioner to show that his participation in the Hunter spread transactions in 1980, 1981 and 1982 could not have been motivated by profit. In an opinion issued on May 27, 1998, the court of appeals affirmed the Tax Court's decision in all respects. It found that while the earlier decision in Ewing was not conclusive of Leslie's appeal, the appellate court nevertheless concluded that Ewing's reasoning was "highly relevant to Leslie's case and weighs in favor of affirming the 'tax Court's decision" (App. 51). But even apart from Ewing's result, the court saw uncontroverted objective evidence which amply supported the conclusion below that Leslie's primary motive in participating in the "Hunter straddle" was to realize tax benefits (Id.) Specifically, it identified the Hunter programs' use of the alternative liquidation techniques of "cancellation" and "assignment" in lieu of the more traditional "offset" procedure to close out a contract as designed to provide maximum tax savings instead of profit (Id. at 5a-6a). That is, the "cancellation" technique was devised so that Hunter program participants could claim ordinary loss treatment rather than capital loss treatment; "assignment" was contrived so that Hunter investors could characterize straddle gains as longterm capital gains, instead of short-term capital gains (Id. at 6a) . Besides Leslie's use of these close-out procedures, the court of appeals pointed to Leslie's review of Hunter's promotional materials which focused on these liquidation procedures and which demonstrated with graphs the pre, and post-tax profit potential and tax savings that could be achieved through the Hunter program (Id. at 6a-7a). According to the court (and the Commissioner), Leslie followed the instructions he had read in the promotional materials for obtaining tax benefits through the cancellation of loss contracts and the assignment of gain contracts (Id. at 7a). The court of appeals then somehow extracted from Leslie's reply brief the admission that his use of these close-out procedures was "lawful" and the "candid" concession that it was motivated by his desire to minimize his tax liability (Id. at 7a-8a). Finally, the court relied upon the "potent evidence" that Leslie paid more in commissions and fees than he would have incurred had he liquidated his gold futures contracts in the usual way (Id. at 8a). In conclusion, the court of appeals stated: We do not pretend that the evidence suggest. ing the primacy of a motivation other than profit is airtight. It is conceivable, we suppose, that [Leslie's) tax-savings motive, although significant, was no more significant than his profit motive. However, as an appellate court, we do not sit in de novo review of the Tax Court's decision regarding motivation. And it is certainly not inconceivable that [Leslies] concern for tax savings did predominate, as the Tax Court found. Indeed, we conclude that, on balance, the evidence supports the Tax Court's determination. At any rate, its decision assuredly was not clearly erroneous, and we therefore decline to disturb it. (Id. at 9a). In view of its disposition of Leslie's tax-law-based contentions, the court of appeals did not address the evidentiary issue of whether the Tax Court erred in ad mitting the report and testimony of the Commissioner's expert witness, Dr. Richard Teweles (App. 3a;19a). The decision of the court of appeals was issued on May 27,1998 (App. 1a). Leslie then petitioned pursuant to Fed. R. App. P. 40(a) for reconsideration of the court of appeals' ruling (App. 53a). His petition contended that the court had failed to address those objective facts which support and verifies his subjective intent to make a profit with his commodities trading. In addition, Leslie took particular exception to the court's use of statements contained in his reply brief to extract admissions and concessions from him that his primary motivation in making gold futures trades was to secure tax benefits. As Leslie put it, it was egregiously unfair and a violation of the Due Process Clause for the court to infer unilaterally from his reply brief crucial, damaging concessions about his investment motivations, the key issue in this case, without giving him an opportunity to respond to this critical inference at a meaningful time and in a meaningful manner. Finally, Leslie argued that the Tax Court could not possibly have found that his gold futures trading was tax motivated instead of motivated by profit without implicitly relying upon Teweles' opinion testimony, proof which should have been rejected out of hand because this witness lacked any qualifications, his testimony was without foundation, biased and ultimately unhelpful to the factfinder. On July 30,1998, the court of appeals denied Leslie's petition for rehearing (App. 53a). Leslie has duly filed this petition of writ of certiorari within ninety days of the entry of this latter ruling. Communist Party of Indiana v. Whitcomb, 414 U.S. 441, 445-446 (1974). FTC v. Colgate-Palmolive Co., 380 U.S. 374, 384 (1965). United States v. Healey, 376 U.S. 75, 77,78, 80 (1964). Reasons for Granting the Writ. 1. The Decision Below Misapplies And Emasculates The Decisions of This Court Which Define The Factfinding Function of The Trial Court And The Standard For Reviewing Those Findings Set Out in Fed.R.Civ. P.52(a). In Interstate Circuit v. U.S., 304 U.S. 55, 56-57 (1938), this Court clearly established the mandatory duty of a trial judge (under then Equity Rule 702) trying a civil matter without a jury to find the facts specially and to state separately his conclusions of law thereon. Id. Subsequent decisions by this Court in Kelley v. Everglades District, 319 U.S. 415, 420-422 (1943) and Commissioner v. Duberstein, 363 U.S. 278,292-293 (1960) have reinforced the affirmative and obligatory nature of Rule 52(a) 's language. The purposes of Rule 52(a)'s requirement in a non-jury case are (1) to aid the appellate court by affording it a clear understanding of the basis for the trial court's decision; (2) to make definite just what the civil action decided for purposes of applying res judicata and estoppel principles insubsequent actions; and (3) to evoke care on the part of the trial judge in ascertaining the facts. Featherstone v. Barash, 345 F.2d 246, 24M51 (10th Cir. 1965). A trial judge who has formulated and articulated his findings of fact and conclusions of law as part of his decisionmaking process has thus satisfied himself that he has dealt fully and properly with all of the issues in the case before he decides it. In the absence of such a process, there is no certainty that a full and fair consideration of all the evidence and issues has been provided by the nisi prius court. Moreover, without adequate findings or conclusions the reviewing tribunal is unable to determine whether the decision reached by the lower court follows as a matter of law from all the evidence adduced and whether any of the "facts" relied upon by the trial judge in making a decision have any substantial support in the evidence. The requirement of Rule 52(a) of express findings and separately stated conclusions is "thus far from a technicality [but] [oln the contrary, it is to insure against Star Chamber methods, to make certain that justice shall be as certained accordingly to facts and law." Saginaw Broadcasting Co. v. Federal Communications Commission, 68 App. D.C. 282,286; 96 F.2d 554,559 (1938). For this reason, these provisions of Rule 52(a) cannot be waived and any agreement between the parties that the trial judge need not enter findings of fact or conclusions of law is therefore ineffective. In re G.W. Giannini, Inc., 90 F.2d 445,447,448 (2d Cir.1937). United States v. One Assortment of 25 Firearms, 483 F.Supp-16,18-19 (E.D. Tenn.1980). See In re Scrap Disposal, Inc., 8 B.C.D.504, 505; 15 B.R. 296,297 (9th Cir. Bankruptcy App. 1981). Rule 52(a) imposes a corresponding duty on the appellate tribunal when reviewing such findings. As interpreted by this Court, the reviewing body is encouraged by the rule to examine the entire record because it states that a trial court's "finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Bose Corp. v. Consumers Union of U.S. Inc., 466 U.S. 485, 499 (1984) quoting United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948) (emphasis in original). See Concrete Pipe & Products of Cal. Inc. v. Construction Laborers Pension Trust for Southern Cal., 508 U.S. 602, 622-623 (1993); Salve Regina College v. Russell, 499 U.S. 225, 233 (1991). Even where a lower court's findings of fact depend on the credibility of a witness, a reviewing tribu, nal may still find a clear error if documentary or objective evidence contradicts the witness' story; or the story itself may be so internally inconsistent or implausible on its face that a reasonable factfinder would not credit it. Anderson v. Bessemer City, 470 U.S. 564,575 (1985). A fortiori an appellate court under Rule 52(a) must regard a finding of fact as clearly erroneous and therefore must set it aside when there is either inadequate or no evidentiary support in the record to warrant such a finding. Coalition to Save our Children v. Bd. of Educ., 90 F.3d 752, 759 (3rd. Cir. 1996). Zimmennan v. Sloss Equipment, Inc. 72 F.3d 822,825(10th Cir. 1995). Duty v. United States, 735 F.2d 1012, 1015 (6th Cir. 1984). Cannizzo v. Farrell Lines, Inc., 579 F.2d 682, 686 (2nd Cir. 1978). Instead of engaging here in a genuine, independent appraisal of the evidence before it showing Leslie's overall investment strategy and his subjective intent consistent with that strategy in trading in gold futures within the Hunter program, the Tax Court chose to adopt wholesale all of the central findings in Ewing v. Commissioner, 91 T.C. 396, affd without published opinion, 940 F-2d 1534 (9th Cir. 1991), the test case for the F.G. Hunter transactions," see Nolte v. Commissioner, 69 T.C.M. 1828, 1829 (1995), to conclude that Leslie's participation therein was primarily for tax benefits. That is, the trial court's findings focused not on Leslie's articulated intent in pursuing this particular investment opportunity but rather relied upon the investment opportunity itself as defined by its prior decision in Ewing involving different facts and different investors to conclude that his primary motivation was to secure tax benefits instead of profit. In its attempt to impress upon this case the logic and result of Ewing, the Tax Court violated its fundamental duty under Rule 52(a) to find facts which were supported by the evidence. Specifically, the trial court wrongly found that Leslie did not have a profit motive when he began his participation in the Hunter program (App. 34a). Yet it was uncontradicted that Leslie made the decision to invest $178,500 with Hunter before he understood or appreciated Hunter's trading techniques, how commodities sprea ds were established or what tax benefits could be obtained from Hunter trading losses. The Tax Court simply chose to ignore the evidence that Leslie, even at the time of trial, did not appreciate the difference between ordinary and capital losses, long and short-term capital gain or even how the closeout procedures actually worked. Secondly, the record explicitly states that although Leslie "ultimately" read the Hunter material "as part of his decision" to pay Hunter, Leslie had already decided to invest before receiving the Hunter material and before meeting with and learning from Hunter's Klein about any potential tax advantages. Furthermore, the evidence showed without contradiction that Leslie's decision to invest was profoundly impacted by his historic quest for substantial profits, the letter from Adcom Trading, Inc. as well as various substantive articles regarding commodities trading together with Klein's oral advice to take more aggressive, profit-minded positions in the volatile commodities market. Nowhere does the evidence reflect any basis for the Tax Court's conclusion that Klein recommended modifying Leslie's position strictly to "realize substantial tax losses. . . . " Thus while Leslie may have realized some tax benefits with his closeout procedures, he stood to gain much more taxable profit in the future as a result of these transactions. See Stoller v. Commissioner, T.C. Memo. 1990-659; rev'd on other grounds, 994, F.2d 855 (D.C. Cir. 1993). Leslie's proof therefore showed a bona fide profit motivation on his part for entering into the Hunter transactions; any tax benefits incident thereto were a welcome by-product, not an instigating force. Thirdly, the Tax Court is in clear error in finding that" [Leslie] decided to make his investment with Hunter in December 1980 based on the information Short obtained from his meetings and conversations with Klein and due to repeated calls from Klein urging him to make an investment with Hunter immediately. Klein's reason for wanting petitioner to invest at the time was that the volatility of the gold market presented an opportunity for immediate tax benefits. (App. 34a) - The trial testimony showed without any contradiction that Klein called so that Leslie could "take advantage of the volatile market movement;" any tax implications were only incidental to. the profit that could have been made in the market and the 25-50 percent profit which Leslie expected to make. In this way, the Tax Court has wrongly amended the evidence and confected findings in order to make Leslie's case come within Ewing's holding. The guide~ lines identified in Fox v. Commissioner, 82 T.C. 1001(1984) for determining motivation do not provide the Tax Court with the power to ignore unimpeached, credible cvidence simply because it comes from the taxpayer. Finally, the Tax Court chose to rely implicitly on the opinion of Dr. Richard Teweles, the same "expert" who testified on behalf of the Commissioner in Ewing, to buttress its finding that Leslie's investments were motivated by a desire to secure tax benefits rather than a profit. But any finding of fact based upon Teweles' testimony was clear error because his opinion evidence was unqualified, unfounded, biased and ultimately unhelpful to the fact finder. The primary shortcoming of this testimony is that it is unsupported by any evidence. Nothing in Teweles' report substantiates the Commissioner's claim that Leslie's use of cancellation and assignment violated any statute, rule or commodities procedure. Moreover, Teweles agreed with Leslie's own expert (Horowitz) that the Hunter positions established by Leslie proved a profit potential. Under cross-examination, Teweles further admitted that Leslie's profit of $58,000.00 was profit, just not enou gh of a profit for him to acknowledge. For these reasons, it was wrong for the Tax Court to import into these proceedings the holding embodied in Ewing, its "test case" for ' Hunter transactions, in order to assign to Leslie an intent to obtain tax benefits rather than to profit by participating in those transactions. Rule 52(a) imposed upon that court a positive duty to appraise independently the evidence and formulate findings based thereon. The Tax Court failed to perform that duty and faded to assess in any intelligent or coherent way Leslie's subjective motivation in making the investments that he did. The court of appeals compounded the error of the Tax Court by failing to measure the findings of fact against the "clearly erroneous" standard embodied in Rule 52(a). If it had done so irrespective of the Ewing decision, the court of appeals would have been compelled to conclude that the Tax Court committed plain error on this record in finding that Leslie had invested in the Hunter program for the purpose of obtaining tax benefits rather than realizing profit. In this regard, it is noteworthy that the court of appeals' decision adopts without adequate citation the Tax Court's decision in Fox v. Commissioner, supra. (App. 9a). The citation is incomplete because the appellate court never separates itself from the Ewing decision, one which cites Fox liberally throughout its text. In addition, not only is Teweles repeating here the testimony which he proffered in Ewing, he even refers in his testimony to Leslie as "Leavitt," one of the investors in Ewing (App- 341- 342). In short, neither the Tax Court nor the court of appeals ever considered the evidence in this case independent of the rationale or result in Ewing, the "test case" on the Hunter gold futures transactions. There was no independent analysis of Leslie's subjective intent or motivation in entering into the Hunter gold futures program, only a knee-jerk reaction to "a test case" decided in 1988. None of the proof in Ewing addressed Leslie's investment motivation; nor does that case speak for all time to every circumstance surrounding every investor who opted to participate in the Hunter program. Leslie's proof is unique; the circumstances of his investment were unique and he deserved to have that question decided fairly, impartially and apart from the conclusory force of a 1988 "test case" to which he was not a party. In view of the Ninth Circuit's historical disdain for appellate factfinding, Lundgren v. Freeman, 307 F.2d 104,113-114 (9th Cir. 1962); Panaview Door & Window Co. v. Reynolds Metals Co., 255 F.2d 920,922-923 (9th Cir. 1958), it was error to adopt the Tax Court's reasoning and thereby import into these proceedings Ewing's findings in order to control the most crucial fact question in this case. Imposing upon Leslie the force of the Ewing decision through the contrivance of "admissions" and "concessions" in his appellate brief in order to fill perceived gaps in the evidence adduced below presents further problems of constitutional proportions. "[Flairness can rarely be obtained by secret, one-sided determination of facts decisive of rights .... [A]nd no better instrument has been devised for arriving at truth than to give a person in jeopardy of serious loss notice of the case against him and opportunity to meet it." Connecticut V. Doehr, 501 U.S. 1. 14 (199 1) quoting Joint Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123,170-172 (1951) (Frankfurter, J., concurring). If the court of appeals wishes to extract crucial evidentiary admissions from Leslie, it should do so by providing him with fair notice of same and then by allowing him to be heard at a meaningful time and in a meaningful. manner. Matthews v. Eldridge, 424 U.S. 319,333 (1976). Gokiberg v. Kelly, 397 U.S. 254, 267(1970) and case cited. Absent these safeguards, none of which were provided Leslie, the court of appeals' reliance upon such alleged admis, sions or concessions must be utterly disregarded. 2. The Reliance by the Courts Below on Alleged Expert Opinion Addressing the Most Crucial Issue in this Case, i.e., Leslie's Investment Motivation, Conflicts with this Court's Decisions Setting Forth the Requirements For the Admission of Such Evidence. In Daubert v. Merrell Dow Phannaceuticals, Inc., 509 U.S. 579, 590-593 (1993), this Court adopted a new standard for the admissibility of scientific evidence based upon the Federal Rules of Evidence. It found that Rule 702 clearly anticipated some "gatekeeping" function for the trial judge in order to keep "junk science" out of the courtroom: {i}n order to qualify as "scientific knowledge," an inference or assertion must be derived by the scientific method. Proposed testimony must be supported by appropriate validation --i.e., "good grounds," based on what is known. In short, the requirement that an expert's testimony pertain to "scientific knowledge" establishes a standard of evidentiary reliability. 509 U.S. at 590. In the wake of Daubert, courts of appeals have read it as requiring a two-step inquiry: (1) does the expert's testimony pertain to scientific knowledge, i.e., does it relate to known facts or ideas which are grounded in the methods and procedures of science or is it merely subjective belief or unsupported speculation?; and (2) will the testimony assist the factfinder in determining a fact in issue? 509 U.S. at 590-591. See e.g., Berry v. City of Detroit, 25 F.3d 1342, 1349-1350 (6th Cir. 1994); O'Connor v. Comnwn wealth Edison Co., 13 F-3d 1090, 11006 (7th Cir. 1994). If Teweles' testimony concerning the nature, extent and characteristics of Leslies' gold futures commodities trading in the Hunter program can be termed "scientific evidence" within Daubert, see Berry v. City of Detroit, 25 F.3d at 1349-1350; Laureys v. Commissioner, 92 T.C. 101,126-129 (1989), it went well beyond the expertise of this particular witness and should have been authoritatively rejected out of hand by the Tax Court as well as by the court of appeals as it could not possibly have assisted the factfinder to determine any genuine fact issue. Under Daubert, if the trial judge is not persuaded that a so-called expert has genuine knowledge that can be genuinely helpful to the factfinder, he should not let him testify. 509 U.S. at 594-595. Wilson v. City of Chicago, 6 F-3d 1233, 1238-1239 (7th Cir. 1993). Here Teweles was never an employee of the Commodities Futures Trading Commission ("CFTC") and yet a major portion of his testimony was devoted to CFTC procedures, rules and regulations. In the one CFTC opinion which cites Teweles' testimony, the judge found that Teweles' "position in arbitration cases is contrary to Commission precedent." The only Tax Court case in which Teweles' testimony is cited was Michelson v. Commissioner, T.C. Memo 1990-27. In that case, the Tax Court disregarded Teweles' testimony based on his lack of understanding of the facts with regard to CFTC matters. Id. Moreover in Reed v. Sage Group. Inc., C.F.C.T. Docket No. 85,R312 (1986) Teweles' opinions on CFTC's procedures were disregarded and found to be in contradiction to actual CFTC procedures. Id. 1986 West Law 65815, P.4 (C.F.T.C.). Finally,. Teweles was banned from trading securities by the National Association of Securities Dealers by having his securities license revoked for sixteen (16) years, making his testimony regarding trading regul ations questionable at best. Teweles' opinion testimony concerning tax consequences, tax motivation and other tax issues surrounding Leslie's trading is similarly suspect. Teweles has never taught university level tax classes, does not possess a graduate degree in taxes, has never authored tax opinion letters and does not prepare tax returns. Yet he was allowed to cast an opinion that all of Leslie's gold futures trading within the Hunter program was motivated by tax benefits rather than by profit, an opinion which is contrary to Leslie's investment history (before and after Hunter) as well as to the demonstrated fact that Leslie did not have a capable enough understanding of tax and trading issues to have consciously formulated any motive to invest other than for profit. Finally, Teweles had testified for the Commissioner earlier in Ewing and had already made his mind up about the nature of the Hunter gold futures program and any investor who participated in it. As such, he clearly was a zealous advocate for the Commissioner's position here and lacked any of the objectivity needed to produce reliable testimony useful to the factfinder. See Perry v. United States, 755 F.2d 888, 890 (11th Cir. 1985); Laureys v. Commissioner, 92 T.C. at 129. All of these considerations surrounding Teweles' opinion testimony, whether characterized as scientific knowledge or not (see Berry v. City of Detroit, 25 F.3d at 1350-1351), rightly invoked the trial court's "gatekeeping" function recognized by this Court in Daubert "to insure that any and all ... testimony or evidence admitted is not only relevant, but reliable." 509 U.S. at 589. Because it was neither, Teweles' testimony should have supplied no foundation for the inference that Leslie's trading was motivated by tax benefits rather than by profit. Conclusion. For all of these reasons, a writ of certiorari should issue to review the opinion of the United States Court of Appeals for the Ninth Circuit and, ultimately, to vacate the judgment and remand the cause to the Tax Court for the en, try of a new judgment in Leslie's favor. Respectfully submitted, Dennis P. Derrick Kevin M. McGuire |
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