Interview with Tax Court Judge David Laro

I had the honor and privilege of having Judge David Laro as one of my professors for Tax Policy and Valuation courses during my LL.M. studies at the University of San Diego. When I learned that I would be the guest editor for the Contra Costa Lawyer’s tax and business issue, my immediate thought was that I would like to interview Judge Laro To my extreme honor and delight, Judge Laro agreed to let me interview him.

During my LL.M. studies I remembered that Judge Laro had traveled to other countries to discuss tax policy, to share knowledge and to learn. During my interview with Judge Laro, I learned that he does not shy away from using new strategies and techniques, even learning from other countries in some instances, in order to get to the right result in many of his cases. Judge Laro is often on the cutting edge when it comes to employing new techniques in his court room in order to be efficient and get to the heart of the issues. A U.S. Tax Court judge has never been interviewed for the Contra Costa Lawyer before, but Judge Laro is accustomed to being a pioneer.

Weed: Thanks for agreeing to let me interview you. How are you doing today?

Laro: I’m doing well. Thank you. It’s nice to talk to you.

Weed: My first question is about when you were first appointed to be a Tax Court judge in 1992, what did your appointment entail and what was the process?

Laro: Let me explain what happened to me, and for the most part it’s applicable to others as well. In order to be appointed to the Tax Court, you need to be nominated by the President of the United States, and confirmed by the U.S. Senate. How do you come to the attention of the President of the United States if you don’t happen to know the President personally? Traditionally, what happens is that your name is known to or identified by the Senator who represents your state, and that Senator will bring it to the President’s attention, who in turn will decide whether or not he wants to go forward with you. That is a very common avenue, but in my case, that’s not the way it worked. I was practicing law in Michigan, and I received a phone call from somebody at the United States Treasury Department who told me that there was a vacancy on the Court and asked me whether I had any interest in that vacancy. But there are other ways as well. Very often the American Bar Association might be interested in a particular individual filling a vacancy, and they will offer up the name. In short, a name can come from various sources, but ultimately it has to go to the White House for approval.

Weed: Is there a set number of tax judges who can serve at one time?

Laro: The Tax Court presently consists of 19 presidentially-appointed judges, and that’s set by statute. Historically the number at times has been lower than 19, but today it’s 19. In addition to the 19 presidentially-appointed judges, there are also a few whom we call special trial judges, similar to magistrates in federal court. The special trial judges assist as well, but they’re not presidentially appointed; they’re appointed by the Court itself.

Weed: Do you have any advice for someone who’s interested in becoming a Tax Court judge?

Laro: First of all, being on the court is a wonderful position. It’s a wonderful professional opportunity for someone who’s interested in the law and tax law specifically. There are a couple avenues to get onto the court. One way is to practice tax law for a number of years and get some experience being a tax lawyer before you express an interest in being on the court. I think that is quite helpful. Many others have gotten on the Tax Court through government service. An individual may have been a staff member of the Senate Finance Committee or the House Committee on House Ways and Means or an attorney with the Justice Department’s Tax Division. Among our 19 judges on the court, about half come from private practice and half come from the government. I believe having a decade, or two, or three, of experience before coming to the court is vital.

Weed: In your opinion, are there currently any challenges facing the Tax Court?
Laro: There are all sorts. Some of the challenges are in finding ways to handle the 30,000-case docket that presents itself every year, making sure you have the right resources and the right people allocated to them and making sure that each judge has appropriate staffing, including clerks. The cases themselves are interesting. Some are international. Challenges with international cases occur where there are witnesses or evidence outside of the United States.

One challenge we recently had was a case involving $3.5 B in adjustments. There were going to be over 100 witnesses, and the trial itself was going to last on-and-off for four months. The taxpayer wanted to discover some documents that the government argued were privileged. Traditionally, if the parties cannot work out how to handle privileged documents, they create what is called a privilege log, and the documents are turned over to the judge in chambers for review. When the documents are voluminous, however, that’s not practicable. In this particular case there were over 4,000 documents.

We ended up using a procedure called “quick peek.” Quick peek follows FRE 502. Opposing counsel is permitted to look at your privileged documents under the court’s guidance. The privilege is not waived, but the documents are exchanged in the hope that counsel will be able to resolve their dispute as to all or most of the documents. When the parties in this case were done with quick peek, we were able to get the 4,200 documents down to 26.

Weed: That’s great! That is such an interesting way to handle that challenge. I understand you have been able to use other methods to overcome certain challenges. Can you describe a little bit about what “hot tubbing” is? And what are some good practices or tactics for lawyers before the court?

Laro: Anyone taking a case before any court, and the Tax Court especially, needs to be prepared. You prepare by not only fully understanding the law and the facts of your case, but you need to ready your witnesses, you need to prepare your presentation ahead of time, you need to understand your evidence, and you need to be able to tell the court a story about your client’s case. Preparation is critical. Another important thing is collegiality and courtesy. Some people look upon going to court as a form of warfare and belligerency, but that’s not the way the Tax Court functions. Tax Court is a collegial environment, and we expect that you’ll not only be courteous to the Court but that you’ll be collegial to opposing counsel. Finally, you must know the rules. There are two sets of rules in the Tax Court. One is the Court’s Rules of Practice and Procedure, which parallel the Rules of Civil Procedure, albeit with some variations. The second set of rules that the litigant needs to know are the Federal Rules of Evidence.

Now, in terms of hot tubbing [laughter], hot tubbing is a fairly new development that originated in Australia. It involves a technique where the court interacts with expert witnesses. Let’s look at the traditional utilization of an expert witness. Somebody will call an expert witness, ask that that witness be qualified, and directly examine the witness. Then opposing counsel will cross examine the witness. Good lawyers learn to cross examine an expert vigorously because one of their objectives is to try to convince the court or the trier of fact that the witness is not an expert, is using weak theories, or is just not convincing. At the end of a trial, you can imagine that the court often is left with an expert who has been vigorously cross examined and disparaged, and the credibility of that witness is in question. The trier of fact is now left with a record where the witnesses have been weakened and their credibility assailed. Why was the expert called in the first place? Because the court needs the expert witness’s testimony to aid the trier of fact in resolving the case. Yet here we have a witness who has been soundly criticized and disparaged.

I have employed hot tubbing in approximately eight or nine cases – and I believe I may have been the first federal judge in the United States to use it – as follows: after the witnesses have testified, I invite them to sit with me informally, but still on the record, in the middle of the courtroom without the attorneys’ involvement. We discuss the witnesses’ testimony. I invite them to talk to me directly without being asked formal questions and without having attorneys looking to trip them up and make them look bad. The witnesses are having an informal discussion with me and, most importantly, with each other in front of me. Consider the difference. Suppose that you want to have a conversation with somebody, and the only way you can have a conversation is when they ask you questions, and they are asking you questions to make you look bad. Now, contrast that with a discussion where you’re sitting in a more relaxed environment, talking with a colleague and with a judge about your case. You might discuss why you did what you did, why you believe what you did is correct. You likely will talk to your adversary, the other expert, in a professional and collegial manner. That is the essence of hot tubbing. Another name for it, less sexy but nevertheless accurate, is “concurrent witness testimony.” Since we have begun to use the procedure, the American Bar Association has had several national meetings in which they discussed hot tubbing. The AICPA, the American Institute of Certified Public Accountants, is beginning to train their CPAs to become experts in hot tubbing. Hot tubbing is hot right now.

Weed: That sounds like a very useful technique, and so interesting. Thank you for explaining that to me. I do not want to take up too much of your time, but I wanted to ask are there any areas of tax law that are particularly interesting to you right now?

Laro: There are a few kinds of cases that I enjoy especially, for instance those involving valuation. I teach valuation, as you recall from your time at the University of San Diego, and I have written a book on the subject. There are about 20 different events and circumstances in the law involving valuation. Valuation issues arise in matters involving estate planning, gift planning, and mergers and acquisitions. And valuation touches many other areas: ESOPs, stock options, real property, condemnations. Beyond valuation, I also enjoy corporate and international tax and transfer pricing. Transfer pricing cases in particular can be enormous. They might involve billions of dollars and require significant factual development, sometimes taking weeks or months to try.

Weed: Thank you so much for letting me interview you. I really appreciate this. I know you’re very busy and I was very excited when you said that you could let me interview you.

Laro: I’m happy to do it, Christina. Thank you.