Free Motion in Limine - District Court of Federal Claims - federal

Case 1:06-cv-00245-EJD

Document 42-7

Filed 03/07/2008

Page 1 of 51

Page 1
IN THE UNITED STATES COURT OF FEDERAL CLAIMS Nos. 06-245T, 06-246T, and 06-247T (Consolidated) MURFAM FARMS, LLC, ) By and Through Wendell H. Murphy, Jr., ) a Partner Other Than Tax Matters Partner, ) ) PSM FARMS, LLC, ) By and Through Stratton K. Murphy, ) a Partner Other Than Tax Matters Partner, ) ) MURPHY PORK PARTNERS, LLC, ) By and Through Wendell H. Murphy, Jr., ) a Partner Other Than Tax Matters Partner, ) ) Plaintiffs, ) ) V. ) ) UNITED STATES OF AMERICA, ) ) Defendant. )

and

IN THE UNITED STATES DISTRICT COURT IN THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION GARY V. WOODS, as Tax Matters Partner of TESORO DRIVE PARTNERS, a Texas General Partnership, Plaintiff, V. UNITED STATES OF AMERICA, Defendant. ) ) ) ) ) ) ) ) ) ) )

Case No. SA-05-CA-0216-XR

Gov. App. 26
Electronically signed by Dana Taylor (401-213-825-2798)

2

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 2

Filed 03/07/2008

Page 2 of 51
Page 4

1 Consolidated with 2 GARY V. WOODS, as Tax Matters Partner ) 3 of SA TESORO INVESTMENT PARTNERS, ) a Texas General Partnership, ) 4 ) Plaintiff, ) 5 ) V. ) Case No. 6 ) SA-05-CA-0217-XR UNITED STATES OF AMERICA, ) 7 ) Defendant. ) 8 9 10 ************************************************ 11 VIDEOTAPED ORAL DEPOSITION OF 12 STUART A. SMITH 13 AUGUST 30, 2007 14 VOLUME 1 ************************************************* 15 16 17 18 ORAL DEPOSITION OF STUART A. SMITH, produced as a 19 witness at the instance of the Defendant, and duly sworn, was 20 taken in the above-styled and numbered cause on the 30th day 21 of August, 2007, from 9:59 a.m. to 4:08 p.m., before Dana 22 Taylor, CSR in and for the State of Texas, reported by 23 machine shorthand, at the offices of Mr. Anthony Daddino, 24 Meadows Collier, 901 Main Street, Suite 3700, Dallas, Texas 25 75202, pursuant to the Federal Rules of Civil Procedure.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
1 2

INDEX Appearances Stipulations STUART A. SMITH Examination by Mr. Donohue Signature and Changes Reporter's Certificate 195 196 2 6 6

Page 3
1 2 3 4 5

Page 5
EXHIBITS NO.
3

APPEARANCES FOR THE PLAINTIFFS: MR. ANTHONY DADDINO MEADOWS COLLIER 901 Main Street Suite 3700 Dallas, Texas 75202 (214)744-3700

DESCRIPTION

PAGE

6 7 8 9 FOR THE DEFENDANT: 10 MR. DENNIS M. DONOHUE U.S. DEPARTMENT OF JUSTICE 11 TAX DIVISION P.O. Box 403 12 Washington, DC 20044 (202)307-6492 13 14 15 16 17 18 19 20 21 22 23 24 25

2408 Plaintiffs' Expert Report of 4 Stuart A. Smith 7 5 2409 Plaintiff's Expert Report of Stuart A. Smith 7 6 2836 Expert Report of Stuart A. Smith 20 7 2351 Correspondence dated 9/16/99 41 8 2325 Agreement 43 9 2353 Correspondence dated 10/25/99 46 10 155 COBRA Action Work Plan 50 11 2846 Memorandum dated 10/1999 55 12 2868 Correspondence dated 2/17/00 56 13 159 Correspondence dated 11/1999 68 14 2837 Petitioners'/Plaintiffs' Expert 15 Report of Stuart A. Smith 73 16 2867 Correspondence dated 3/9/00 91 17 2847 Correspondence dated 11/12/99 95 18 2834 152 Federal Reporter, 3d Series 106 19 2833 Chamberlain v. C.I.R. 108 20 2827 Definitions and Special Rules 138 21 2850 Correspondence dated 1/17/00 166 22 2843 Correspondence dated 10/8/99 176 23 2864 Declaration of Robert B. Coplan 177 24 2656 Memorandum dated 11/17/99 178 25 2859 Correspondence dated 12/5/99 182

Gov. App. 27
Electronically signed by Dana Taylor (401-213-825-2798)

2 (Pages 2 to 5)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 6

Filed 03/07/2008

Page 3 of 51
Page 8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

PROCEEDINGS MR. DONOHUE: Let me state that this deposition is being taken pursuant to an agreement of the parties as to the time, place, and date, and also being taken pursuant to the Federal Rules of Civil Procedure. STUART A. SMITH, having been first duly sworn, testified as follows: EXAMINATION BY MR. DONOHUE: Q Mr. Smith, would you state your full name and spell your last name for the court reporter? A Stuart A. Smith, S-m-i-t-h. Q And where do you reside? A In New York City. Q And I know you had a deposition taken of yourself at least once. How many times has your deposition been taken in the past? A Just that once. Q Okay. And just in case sort of the ground rules were not explained to you, I'm going to take the time to explain that there is, as you know, right here a court reporter. She will take down my questions and your answers. You need to wait obviously until I finish my question before you give your answer. And if for any reason my questions are not clear, please let me know, and I'll do

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

questions on the Tesoro report. And even though there's a different legal opinion that you're opining on in connection with the Murphy case, unless you feel that the questions I ask somehow would be answered differently with respect to your Murphy report, then let me know, and I'll take the time to specifically inquire about any differences between the two reports. Do you understand that? A I do. Q Okay. So if there are no differences, then we can then simply ultimately finish with the Tesoro report, and then I can end the deposition. A Uh-huh. Q Is that clear? A I do. Q Okay. A I am. Q You understand? A I do. Q All right. Now, this is just a formality. You're not under any type of drugs or anything else that would impair your ability to give full and complete answers today, are you? A No. Q All right. Let's begin. Could you tell me,

Page 7
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 9
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

my best within my abilities to restate the question. Is that clear? A Yes. (Exhibit Nos. 2408 and 2409 were marked.) BY MR. DONOHUE: Q Okay. Now, as I mentioned, the goal here is to finish today. And so what I'm going to do is pursue certain efficiencies. What we'll start off with is your Tesoro report, and that's been put right in front of you. It's been marked as an exhibit. It is deposition Exhibit 2409. Do You see that exhibit in front of you? A I do. Q And is that the report you wrote in connection with the Tesoro report? A It is. Q And what you'll notice is is that right underneath that there is another report you wrote, which is the report in the Murphy case. That is Exhibit 2408. Do you see that report? A I do. Q And is that the report that you wrote in connection with the Murphy case? A It is. Q Now, what I'm going to do is start off with

for purposes of your reports, what do you consider your field of expertise? A Well, my field -- I consider my field of expertise to be taxation. That's what I've focused my entire career on that area of law with an emphasis in federal tax matters. I had government service that -- and a law clerkship on the tax court that focused me in that direction, and my government work involved federal tax matters. I have also some state tax expertise because I have taught state taxation at Georgetown Law School, and I have represented people in state tax matters after I left the government that were not only focused on the law of the particular state involved but also involved what I would call broader constitutional objections to the imposition of a particular state tax. I've done a lot of tax litigation, both on the government side and on the private side, so I -- and I've also reviewed, over the course of my private career, many tax opinions for clients who want to inquire as to whether the opinion warrants reliance for purposes of making an investment. Q Would it be fair to sort of summarize what you just said is your field of expertise would be federal tax law? A Correct. The only part of federal tax law

Gov. App. 28
Electronically signed by Dana Taylor (401-213-825-2798)

3 (Pages 6 to 9)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 10

Filed 03/07/2008

Page 4 of 51
Page 12

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

that I don't consider myself an expert or involved in is employee benefits because that -- that field has become so technical and so collateral that -- and so detailed that I don't really involve myself in the employee benefits work. Q And more specifically with respect to this case -- and when I say this case, I'm really referring collectively to the COBRA litigation. Do you understand that? A Uh-huh. Q With respect to this litigation, what part of the federal tax law would you say lends itself to your particular field of expertise for purposes of testifying? A Well -- well, I suppose this transaction precedes with an analysis of the provisions of Subchapter K, the partnership provisions, and I've had experience in dealing with that and giving advice and navigating the various provisions of Subchapter K. And generally they -- I've also had experience in just appraising the quality of tax opinions of the sort that I have addressed in my reports. Q And do you -- for purposes of your -- your expertise as a federal tax lawyer, do you also consider your ability to understand and interpret the case law, federal tax case law -A Yes.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

litigation over the tax benefits of a -- of a recycling machine. I'm hard pressed to remember exactly what his -- he must have been an engineer. That's just my recollection. This was a long time ago. This was probably 20 years ago. So I -- so the answer to that is -- is yes. Q And did this witness ultimately testify at trial? A Yes, or he had a report and testified at trial, I believe. It's going back a long ways, so... Q Of the cases that you tried, how many ultimately went to trial? MR. DADDINO: Objection, form. Go ahead; you can answer. A I can't answer that question. I just know that in the '80s and '90s, I had a whole bunch of cases in the United States tax court that dealt with the litigating over the application of penalties in connection with this plastics recycling investment because a lot of people who ultimately paid the taxes and the interest litigated the applicability of what was then the negligence penalty under Section 6653(b), (a) or (b). The old penalties provision. BY MR. DONOHUE: Q Before the accuracy-related penalty provision?
Page 13

Page 11
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q -- is -- you have to wait. A Oh, sorry. Q -- is relevant to your experience? A Yes. Q Okay. You mentioned that you have tried some cases. Were these tax cases that you tried? A Yes. Q Could you tell us approximately how many cases you tried? A I've tried a lot of cases in the tax court. It's hard to recall how many. I've tried some cases in the -- what is now called the court of federal claims, which used to be called the claims court, and I've tried some cases in the federal district courts. I've also argued tax cases in the courts of appeals, both on the government side and on the private side, and I've also argued cases in the United States Supreme Court on the government side. Q Have you ever retained expert witnesses yourself in connection with cases that you have tried? A No. Q Is there some reason for that? A Well, actually, let me think about that. Let me revise my question -- my answer. I -- I did retain an expert witness once, I believe, in connection with some

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Right, long before that, when it was just a five percent penalty. Q But my question was -A It may have been -- you want to -- you want to know the number? Q Well, an approximation. A It's got to be in the nature of 15 to 20, something like that, I think. Q Are you familiar with Daubert motion? A Yes. Q What to your understanding is a Daubert motion? A Well, the Daubert -- the Daubert motion is a -- it's, I think, named after a supreme court case. And what it basically says -- holds is that an expert witness can't -- is -- is not permitted to provide the court with his understanding of the law; that that is for the court to decide. But that he can give his expert opinion with respect to certain facts. Let me revise my -- going back, I think you once asked -- I think you earlier asked me whether I ever was an expert witness, and I think I said no. Well, now that I think about it, I was an expert witness in a tax case that was tried in the United States bankruptcy court. No. I take that back.

Gov. App. 29
Electronically signed by Dana Taylor (401-213-825-2798)

4 (Pages 10 to 13)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 14

Filed 03/07/2008

Page 5 of 51
Page 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

I was not an expert witness. I hired an expert witness in that case. I was the lawyer. And I had -I had -- the reason -- the reason your question about Daubert stimulated this recollection was that I remember that I had Daubert opposition to an accountant that I had hired as an expert witness. The government -- the government was represented by the United States attorney in the Southern District of New York, and they objected to the testimony that my expert witness gave in connection with the taxpayer's treatment of something. The court said that he had taken tax cases in law school, and he could, you know, figure out the tax consequences. He would not, you know, admit that -- you know, that testimony. Q He would admit that testimony? A He would not; he would not. Q He would not admit that testimony? A Would not. Q Do you recall the name of that case? A Yeah, it's called Becker versus -- it went through the United States bankruptcy court, then I appealed the -- the adverse decision to the United States district court. If the district court affirmed the bankruptcy court, then I appealed it to the second circuit, and I lost two to one.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

another arbitration proceeding that did involve -- it was a confidential arbitration proceeding that did involve a transaction like this. Q That did involve? A That did involve. And then I have prepared an expert witness report in another pending litigation, which I think -- I think all in total -- just to -- just to be succinct, I think probably four or five to date. Q Well, let's go back to that confidential arbitration proceeding that you said involved a transaction like this. When you say involved a transaction like this, what are you referring to? A I'm referring to this COBRA transaction. Q Okay. A I don't remember the -- I -- it may have -- I don't remember the details of it because it was many months ago. But it was a transaction that I would just say, you know, without elaborating, that it was comparable to a transaction like this. The -- the taxpayer had brought an action against the -- the advisor. So I -- I prepared an expert witness report about the advisor's conduct. Q And, more specifically, are you referring to a transaction involving options?

Page 15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 17
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. DADDINO: I think you answered his question. THE WITNESS: Okay. BY MR. DONOHUE: Q Now, you mentioned that you had your deposition taken in the Klamath case; am I correct? A Correct. Q Okay. And you prepared an expert witness report in the Klamath case; correct? A I did. Q And you prepared two expert witness reports in connection with the COBRA litigation; am I correct? A Yes, the -- the ones that are sitting on the table here, 2408 and 2409. Q Okay. Have you prepared any other expert witness reports in your career? A Yes, I have. I prepared an expert witness report in an -- in a private arbitration proceeding that was -- I mean the proceeding was confidential. Although the proceeding did not involve taxation as such, it raised certain tax questions. And as a result, the lawyer for one of the parties engaged me to render a report in that case, which I did do. Q Any other reports? A I also prepared an expert witness report in

A It was -- I think it was an options transaction. Q And is that -- is your report that was submitted in that proceeding, is it still confidential? A Yes, I think so. I think the whole proceeding is confidential. Q Are you permitted to provide information regarding who the counsel was that retained you in connection with that? A You know, I tell you, quite frankly, I would be happy to tell you, but I think before I did, I would have to ask permission because the whole thing -- these -- these arbitration proceedings are by their very nature sort of confidential. And I think before I gave you any information about it, I would want to ask him. Q All right. Why don't we do this. Ultimately when we complete the deposition, you'll have an opportunity to read the transcript. And if at that point in time that you're able to speak to counsel and he does permit you to provide his name or her name, then if you would, just put that information in the errata sheet of the deposition? A Fine; fine. Q Now, you mentioned about four or five reports. Any reports other than in -- other than Klamath in confidential arbitration proceedings?

Gov. App. 30
Electronically signed by Dana Taylor (401-213-825-2798)

5 (Pages 14 to 17)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 18

Filed 03/07/2008

Page 6 of 51
Page 20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A I'm working on one now, which is also a confidential arbitration proceeding, but it -- but I haven't completed it yet. Q Any others? A I have some -- I have some other -- when I said four or five, they included the ones that -- I have some others that have been -- that are in -- that are in court cases that I believe -- I think one of them has been filed or maybe -- but some of them are just prepared, but they're not filed yet because the deadline for filing them hasn't arrived. Q How many are these? A Well, I think that's part of the four or five that I -- number that I gave you. I think that's -- that's a good faith estimate. Q Well, let's -- let's separate out the Klamath and the confidential arbitration proceedings. Now, with respect to those that you either have completed your report or in the process of preparing a report, how many -- how many reports have you prepared? A I think five. Q Now, of those five reports, how many of them involve a transaction like the COBRA transaction in the sense that they involved options, pairs with option transactions? A I think one or two.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

that you have prepared in connection with court cases, to your knowledge, none of them -- as of yet none of your reports have been exchanged with the other side? A I think one -- I think one of them has, but I would just want to check because, you know, I prepare these things, and then since I'm not the lawyer in charge of the litigation, I don't really pay close attention to, you know, when and if they get filed. But if -- if -- I assume that if they're exchanged with the government -- I don't mean to run on like this -- that -- that it's something that -- that you're entitled to see. Q And so, again, what I'm going to ask you to do is to consult with counsel for these other cases, and to the extent, find out if the report has been exchanged. And if it has been exchanged, to make an indication in the errata sheet as to what the name of the report is and who your -- what counsel -A In fact, let me just revise my -- I just thought of another one that I hadn't thought of in my mental, you know, senses. So -- so probably the answer is six and not five. Q Six. All right. (Exhibit No. 2836 was marked.) BY MR. DONOHUE:

Page 19
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 21
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q And could you give me the names of those? A Well, since they haven't been filed yet, I'm -- you know, I would have to consult with counsel about whether I could give you those names. Q Who is the -- I assume in these cases that the government is a party? A Yes. Q And of the two, when you say it has not been filed, what specifically are you referring to? A My report. Q But when you say filed, are you talking about filed with the court or exchanged with -A Exchanged with the -- with the other side. Q The other side? A Right. I think -- and then I have -- and then I have another one, but I think it's part of the five I mentioned, which is one I did in a tax court case, but -- but there's not even a trial date. So that -- that one hasn't been filed either. Q But when you say filed, even though there has been no trial date set, you're aware that the parties usually have a date for the exchanging of the -A Yeah, I know, and I don't think that date has come yet. Q Okay. Now, to your knowledge, the reports

Q Let me show you what's been marked as Exhibit 2836. Does this report look familiar? A Yeah, that was the one that I just thought of because -- and that's one that I -- that I worked on. And I believe that that has been exchanged -- obviously, it's been exchanged with the government because -- yes, I prepared this report. Q Okay. And in connection with that report, that, am I correct, also does have a feature of that report, or at least a feature of the transaction offsetting options? A Yes. Q Can you estimate as to -- since I'm going to receive your bills later, about approximately how much time you spent in connection with the preparation of your reports? A Well, I think it's easy to figure out by dividing my hourly rate by the amount of the bill. I mean I -Q Would you have any rough estimate before we receive the bills as to -A I haven't actually -- it's -MR. DADDINO: Just to clarify, counselor, I presume you mean across both the Tesoro cases and the Murphy cases collectively?

Gov. App. 31
Electronically signed by Dana Taylor (401-213-825-2798)

6 (Pages 18 to 21)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 22

Filed 03/07/2008

Page 7 of 51
Page 24

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. DONOHUE: That's correct. MR. DADDINO: Thank you. A This Tesoro case -- I'm just rounding because I don't do long division all that well in my head. This looks like it took me -- the Tesoro case looks like it took me about 40 hours to do. BY MR. DONOHUE: Q 40? A 40. Q Okay. A And the MurFam one, 32, thereabouts. Q Turn to Page 3 of your Tesoro report. You make reference there to the materials that you considered and relied upon in preparing your report. Could you just briefly summarize for me what materials that you considered and relied upon for purposes of preparing your report? A Well, as -- as Page 3 -- as I say on Page 3, I -- there were two -- there were two opinions in this case. One issued by Jenkens & Gilchrist, and one issued by Brown & Wood. So I read all of those -- I read those. I read the -- the authorities -- I reviewed the authorities that were cited in those opinions. I read the expert reports just for background of Dr. Hess and Dr. Chance. And then I read the expert reports of Dr. Hess in a related case in which I have filed another report in a

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q Are you aware that there is a huge separate record in this case involving documents that were obtained either formally or informally from a variety of different third parties? Are you aware of that? A Well, I was not aware of it until I saw the expert report of Dr. -- of Professor LaRue. I mean he filed a rebuttal to my report, which counsel gave me, and so I read that report. And then as a result of -- none of this is listed here because it was after my -- my filing -- my giving of my report. And then in order to satisfy myself about some of the points Professor LaRue made in his rebuttal report because he had some cross references to his original report, so I read his original report to -- or at least I remember reading the references that he made because he made them succinctly in footnotes. So that's how I became aware that there is another record -- I don't mean another record, but that the record has other things in it that -- that I was not aware about -- aware of when I rendered my report. Q Do you recall as to what the size of that record is? MR. DADDINO: Objection to the use of the word record. MR. DONOHUE: Objection as to form.

Page 23
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 25
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

case called JZ Buckingham just to enhance my understanding of the economist prospective. And then I -- I -- I reviewed the Treasury Circular 230, particularly Section Paragraph 1033 which establishes the Treasury's standards for issuing tax opinions, you know, for people who are enrolled as -- you know, to be able to practice before the Treasury. Q You mentioned you read the authorities. Did you read each of the authorities -A Yes. Q -- and the legal opinions? A Yes. Q Or had you already read some of them, and you read the ones that you -A Well -Q You have to wait until I finish my question. A Oh, sorry. Q -- had already read some of them, and you read the authorities only that you had not previously read? A No. It's my practice when I -- you know, because it's my practice when I approach an assignment like this is to re-read things because -- and not to rely on my recollections of -- of what the authorities say because they're so -- they involve such detail that it's better to have a fresh, you know, prospective.

BY MR. DONOHUE: Q Are you aware of the size of that record? A No. Q You're not aware that that record comprises a multi-million page database of documents? MR. DADDINO: Objection, form. A I'm not -- I'm not aware of the size of the record, as I said. BY MR. DONOHUE: Q You mentioned that you read Dr. LaRue's rebuttal report, and then you read his opening report. As a result of that, did you at that point in time have occasion to review any of the documents in the record of this case? MR. DADDINO: Objection, form; vague and ambiguous. A No. What I did was simply -- I mean Dr. -Dr. LaRue from -- his report would every once in a while quote from something that was in the record with an appropriate Bates stamp, I assumed, just the way I would, that those references were accurate. And I just -- I didn't feel the need to actually read, you know, an e-mail to see whether he was quoting it accurately. I just -- I took it as -- I accepted it on its face. BY MR. DONOHUE: Q Do you recall when you were retained in this

Gov. App. 32
Electronically signed by Dana Taylor (401-213-825-2798)

7 (Pages 22 to 25)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 26

Filed 03/07/2008

Page 8 of 51
Page 28

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

case? A The answer is -- to that is no. Although, I would -- the answer is no. I mean I could -- I could -- I must -- I am sure I signed a retention agreement, but I don't have it with me. And I don't remember -- I don't like to speculate on -- and tell -- and make a guess. Q All right. Who did you meet with, if anyone, in connection with your retention in this case? A I met with Mr. Welty of the Meadows firm. Q And was anyone else present at your meeting besides Mr. Welty? A No. Q And what at that meeting happened? A Well, we discussed, you know -- you know, my background and what I might be able to -- to -- what kind of report I might be able to render. He may have -- but I don't remember for sure. But he may have sent me the opinions that I would be asked to review so that I could review them -review them in advance of the meeting. I don't remember whether he did or not. If he did, I reviewed them. If he didn't do it before, he certainly did it immediately thereafter and I read them. Q And when you refer to opinions, I assume you're referring to --

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

tax grant -- return preparer could reasonably rely on. Q But you ultimately -- am I correct you rendered opinions in these cases that are very similar to the opinions you rendered in Klamath? A Well, when you say similar, that's sort of -I mean that's kind of a vague word. I mean -- I mean it's similar to the extent that they involve this intellectual process that I described. They're similar insofar as they involve the examination of a -- of opinions of counsel and -- and measured them for adequacy and quality and character in accordance with professional standards and the Treasury standards. And I suppose they're similar insofar as they reached the -- a similar conclusion that they were, like the opinions in the Klamath case, opinions that were of the character and quality that -- and were objectively reasonable so that the taxpayer and his preparer could -- return preparer could reasonably rely upon. Q Getting back to Mr. -- your conversations with Mr. Welty at this first meeting, at that meeting did you indicate to Mr. Welty that you could provide an analysis that's similar to your analysis that you did in the Klamath case? A Well, let me say this. That at that -- at

Page 27
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 29
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

The -- the law firm -MR. DADDINO: Let him finish. THE WITNESS: Oh, sorry. BY MR. DONOHUE: Q -- the opinions of Jenkens & Gilchrist, Brown & Wood, and Proskauer & Rose? A Correct. Q At that meeting did Mr. Welty indicate to you as to what he wanted you to do? A Well, what -- I don't remember specifically that he said what I want you to do is this. But I think what he was interested in -- my recollection was that he was interested in determining -- finding out from me whether I could prepare a report about these opinions in the same manner as my report that I prepared in the Klamath case. Q And in Klamath you prepared, am I correct, a very similar report to the reports that you prepared in this case? A When you say similar, in the Klamath case, it was -- it was a slightly different transaction. But when you say similar, it was similar to the extent that it preceded with an examination of an opinion of counsel that reached certain conclusions, and I -- and I prepared a report that addressed the question as to whether the -- whether the opinion was objectively reasonable and it was one that the

A

that meeting with Mr. Welty, to the extent that I looked at the opinions, I may have given him some preliminary observations about what I thought of them. But until I actually dug into them, I would not have told him that I could reach the same conclusion that I reached in the Klamath case because the Klamath case involved different opinions. Q Did you have -- subsequent to that first meeting, did you have any other meetings with Mr. Welty? A We talked on the phone. But the answer to that is I don't think I met him physically -- maybe I met him once more. I -- I really don't remember. Q Where was your first meeting? Was that here in Dallas? A No, it was in -- in my office. Q In New York? A Yes. Q After this first meeting, at what point in time did you communicate to Mr. Welty that you could provide an opinion that's ultimately the opinions in your report? A I don't remember when that was. I mean all I can do is -- you know, this -- this opinion -- my report is dated May 30th I think in both of these cases, yes. And so it took some time to -- to -- to write this report. I can't tell you -- it had to be in advance -it had to be before May 30th. When before May 30th I told

Gov. App. 33
Electronically signed by Dana Taylor (401-213-825-2798)

8 (Pages 26 to 29)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 30

Filed 03/07/2008

Page 9 of 51
Page 32

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

him I could do it, I -- I really don't remember. Perhaps let me put it to you this way. I wouldn't have started the report without telling him that I thought I could do it. When I started the report, I don't remember. Q But your bills should reflect that; correct? A Well, my bill -- my bill simply says for work done within a range of time, you know, from X. So the beginning part of the bill would probably say when I started working on it. My diary would probably tell you or tell me when I started writing the report. So at or around that time or slightly before, I must have reached the conclusion that, based on my review, I could render the report that I did render. Q Did you share your drafts with Mr. Welty? A No. Q You just gave him a final report? A Well, we talked -- I talked to him on the phone several times about, you know, the details and the status, you know, the -- the shape that the report would take, the organization. I may have mentioned to him various little points that I was going to include in the report. But the answer to the sharing drafts is no. Q Did Mr. Welty discuss with you at all the stage of discovery in the case?

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

There is no privilege with respect to communications by an expert witness and the attorney who retains them. That is not attorney-client. So I'm going to ask the question again. BY MR. DONOHUE: Q My question is did Mr. Welty discuss with you that there were any pending criminal investigations of the promoters in connection with any of this litigation? A You're going to have to pin that down in terms of time. Q At any point in time. A Well, I think -- my recollection is no. Although, you know, I read the Trade Press, and I read newspapers, and I've become -- I've been aware of the fact that there are some criminal investigations of various people and who have been connected with these types of transactions, and I'm speaking very broadly. But to the extent -- conversations with Mr. Welty about any of this, I don't recall any. Q Are you aware of any of the individuals at either Ernst & Young, Jenkens & Gilchrist, Deutsche Bank that were involved in the COBRA transactions? A Only to the extent that I obtained this information from the public press that I -- was I aware of these investigations.

Page 31
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 33
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A No, I don't -- I don't recall that he did. I mean, I -- I mean, he had his job to do, and I had my job to do. Q Did he mention, for example, that the court in this case had permitted the parties to take 99 depositions? Did he mention that? A No. Q Did he mention the -A We're talking about Tesoro now; right? Q Tesoro and -A We're talking about both of them. Q Yes, we're talking about both sets of cases. A Okay. Okay. The answer is no. Q Did he discuss with you at all that there were pending criminal investigations of some of the promoters in this -- in this litigation? MR. DADDINO: Objection. I'm going to instruct the witness not to answer. I think that this is getting dangerously close to specific details of conversations between counsel and expert witness. MR. DONOHUE: There is no privilege in connection with a discussion with expert witness -MR. DADDINO: To the extent that those discussions might constitute work product. MR. DONOHUE: Counsel, let me finish.

(Discussion off the record.) BY MR. DONOHUE: Q In connection -- well, is it fair to say that you're rendering opinions regarding legal opinions which legal opinions discuss various tax benefits that are derived from a taxpayer entering into the COBRA transaction; is that a fair statement? A Yes. MR. DADDINO: Objection, form. BY MR. DONOHUE: Q In connection with your reports, did you feel that it was important in rendering your opinions that you have an understanding as to how the COBRA product was designed or developed? A Well, the answer to your question is yes, because if I was going to judge the adequacy and objective reasonableness of the report, which was -- I mean of the -of the opinion, which was addressing the tax consequences of the transaction, I felt the need to understand, you know, the nature of the transaction. So the answer to your question is yes. Q And what did you do to learn more about how the COBRA product was designed and developed? A I just read the -- I just read the opinion, and the opinion's fairly explicit in the way -- in describing

Gov. App. 34
Electronically signed by Dana Taylor (401-213-825-2798)

9 (Pages 30 to 33)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 34

Filed 03/07/2008

Page 10 of 51
Page 36

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

the factual circumstances that -- and not only did -- let me say this. Each opinion -- lawyers have different styles, and each -- reading each of the opinions was very helpful to me in enhancing my understanding of the transaction because each opinion, you know, constituted a different window of -of clarity as to exactly what happened and how it happened. Some of the opinions very handily list a summary of the facts after having written out the facts in prose form, which -- which is a fairly dense way in trying to absorb the transaction. Some -- some of them are just clear. So the answer is that's how I -- that's how I was able to, you know, enhance my understanding of the transaction. Q Is there anything in the legal opinions that you reviewed, the Jenkens & Gilchrist opinion or the Brown & Wood opinion, that discusses specifically how the COBRA product was designed and developed? A No; no. It's -- it just states the -- the facts that -- it states -- the answer is no. Q Okay. In rendering your opinions, did you feel important for you to have an understanding as to how the COBRA product was marketed? A No; no. I had a -- I had a narrow mission. My mission was as a tax lawyer who's seen lots of these

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

you? A It must have been Mr. Welty. Q Could it have been anyone else? A No. Q Did you have communications with anyone besides Mr. Welty in connection with the preparation of your reports? A Mr. Daddino. To the extent that Mr. Welty was unavailable and I needed to ask him something about something, I would ask -- I would speak to Mr. Daddino. Q Did you feel it relevant rendering your opinions that you were informed that Jenkens & Gilchrist was involved in the implementation of the COBRA filing? A Well, I think it's something I probably knew from the -- the press -- press reports of the -- of Jenkens & Gilchrist, and it's -- there was -- there's been a lot of publicity about Jenkens & Gilchrist. So I think it was something that I sort of just knew as an informed reader. But the answer to your question is no, I just -- what I did was take this Jenkens & Gilchrist opinion, as well as the other opinions, and looked at them for -- in order to appraise their adequacy, professionalism, technical soundness, that sort of thing. Q So then the answer to my question is even though you were informed that Jenkens & Gilchrist was

Page 35
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 37
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

opinions, who understand the standards that the Treasury -or that profession imposes and the more elaborate standards that the Treasury has in Circular 230 was to consider whether these opinions were objectively reasonable and were of the character and quality that the taxpayer could rely on. I -- I was not -- I was neither -- I was not aware of how the transaction was marketed, nor did I think it was necessary to become aware of that in order to render the kind of report that I was asked to render. Q In rendering your opinions, did you feel it was necessary to have an understanding as to how the COBRA product was implemented? And by that I mean what law firm or accounting firms actually prepared the underlying documents that ultimately were used for the -- for the transaction? A Well, I think one of -- you know, and I don't remember which o. E, but I think one of these opinions -maybe it was the Jenkens opinion, but don't hold me to that. But one of the opinions -- let me put it this way. In one of my reports, I think I was -- stated that I was advised that the X law firm prepared the transactional documents, and I stated that. Although -although, the opinion itself doesn't say we prepared the transactional documents. It's just what cites what the transactional documents provided. Q And when you say you were advised, who advised

involved in implementing the COBRA product, that was not relevant to any of the opinions you were rendering? MR. DADDINO: Objection, misstates prior testimony. A I'll answer it again. The answer is no, I didn't think it was relevant. BY MR. DONOHUE: Q Okay. And if you yourself, one of the taxpayers came to you personally and asked you to prepare a similar opinion as either the Jenkens & Gilchrist or the Brown & Wood opinion or Proskauer & Rose opinion, would you, in preparing such an opinion yourself, inquire about how the particular tax strategy was designed, developed, marketed, and implemented? Is that something you'd want to have knowledge of before writing such an opinion? MR. DADDINO: Objection, vague and ambiguous. A I'm not sure I understand -- I'm not I'm not sure I understand the question. Maybe you can just make it a little -BY MR. DONOHUE: Q All right. Do you understand what I'm asking you is you now are writing an opinion just like the Jenkens & Gilchrist and the Brown & Wood opinion -A Uh-huh. Q -- is that fair?

Gov. App. 35
Electronically signed by Dana Taylor (401-213-825-2798)

10 (Pages 34 to 37)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 38

Filed 03/07/2008

Page 11 of 51
Page 40

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Okay. You're putting me in their shoes? Q Yes. A Okay. Q And now I'm asking you now that you're in their shoes and a taxpayer comes to you and says can you prepare an independent opinion for me regarding this tax strategy, in connection with your work in preparing for to write such an opinion, would you consider it necessary to learn about how the tax strategy was designed, developed, marketed, and implemented? MR. DADDINO: Same objection; vague and ambiguous. A Well, let me -- let me answer it this way. Obviously the -- someone charged with the responsibility of writing one of these opinions is well advised to make the most far ranging inquiry possible in order to satisfy himself of all sorts of things. However, that having been said -- and I might -- I might well do that in connection with such an assignment. But whether it would be relevant in making a determination of the more-likely-than-not conclusion that the opinion is bottomed on, that's a -- that's a wholly different question. Let me -- let me suggest to you that if it came to my attention that this thing was being aggressively

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

what it was, I don't know. And I certainly -- I may have enhanced my understanding of E&Y's participation in just reading the public press, but that was after the -- after I rendered my report in this case. Q Do you know whether E&Y was involved in designing, developing, and marketing other tax strategies prior to the COBRA product? A Let me suggest to you again that the answer to that question is yes, but that I glean that information just from my reading of the -- of accounts and the Trade Press and the public press. Q Have you heard of product CVS or Contingent Ver- -A That -- that acronym has recently come to my attention in the course of some other work that I'm doing, but I never heard of it before. Q And this other work, is this in connection with an opinion which you either have prepared but it hasn't been exchanged yet or you're in the process of preparing? A It's in connection with sort of a confidential arbitration proceeding. Q Have you ever heard of a person by the name of Robert or Bob Coplan? A Again, I have heard of such a person. It --

Page 39
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 41
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

marketed or whatever, well, that's an interesting fact. But the real question for the tax professional is whether the code and the law, you know, justify the conclusion. So even though it's aggressively marketed, that doesn't necessarily mean that the conclusion -- that you can't reach a more-likely-than-not conclusion. So I hope I've answered your question, but that's about the best I can do because -- because without having a whole bunch of facts to -- to flesh out the hypothetical, it's difficult to give you a better answer. Q Do you know approximately when the COBRA product was developed? A No. Q Do you know what E&Y's role was in the development of the product? And so my question is clear for the record, when I refer to E&Y, I'm referring to Ernst & Young. A Uh-huh. Q And if I habitually resort to E&Y, let the record reflect I'm referring to Ernst & Young. So my question was do you know what E&Y's role was in the development of the product? A Not -- not -- not explicitly. I mean I know -- I know -- I know from just general reading that E&Y had a role in this strategy. But exactly when it was and

that name came to my attention in reading the Trade Press. Q What is your understanding as to Jenkens & Gilchrist's role in the development of the COBRA product? A Not terribly much, other than the fact that they, I think, were active in the -- in -- in writing opinions like this -- like the -- like this one I reviewed. And I'm aware of this -- you know, the status of Jenkens & Gilchrist from reading the public press. Q Do you know the current status of the firm of Jenkens & Gilchrist? A Well, they -- it's dissolved. Q Okay. A That I learned from the public press. (Exhibit No. 2351 was marked.) BY MR. DONOHUE: Q Let me hand you what's been marked as Deposition Exhibit 2351. And this is an exhibit I'm going to refer to from time to time, so you might keep it handy. This is an internal -- if you turn to the first page of the document -- the second page of the document. I'm sorry. It's Bates stamped -- I'll just read the last three numbers -- 898. This is an internal PowerPoint presentation for Ernst & Young. And my question -- my first question is have you ever seen this document before?

Gov. App. 36
Electronically signed by Dana Taylor (401-213-825-2798)

11 (Pages 38 to 41)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 42

Filed 03/07/2008

Page 12 of 51
Page 44

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A No. Q Turn to Page 902. It's entitled transaction team. Do you see that? A Uh-huh. Q And in the second diamond, it states Jenkens & Gilchrist provides tax opinion, consulting, previous knowledge of transaction, design assistance, oversees execution. Do you know what Jenkens & Gilchrist's previous knowledge of the COBRA transaction was? A Well, I only know that I think in this -- in the opinions that -- in the Jenkens & Gilchrist opinion that was rendered I suppose in the -- it was in the Tesoro case, I think I -- in my report I stated that they drafted the transaction documents. I -- I think it was Jenkens & Gilchrist. So I was aware that they had a certain expertise in implementation and execution of the transactional documents. Seemed to me that that enhanced the -- their -- you know, their understanding of how the transaction worked. Q Were you aware as to whether or not they were involved in marketing similar transactions prior to the COBRA transaction? A I was --

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

confidentiality agreement that Jenkens & Gilchrist -- on Jenkens & Gilchrist letterhead, and it was provided to COBRA clients or COBRA prospective clients. And you'll notice -- if you would, take a look at the first page, the second sentence. It makes reference to that confidential proprietary information involves certain financing structures developed by J&G and/or its clients, consultants or co-counsel, that provide economic, financial, business and tax advantages for individuals and companies through the use of the Structures. Were you aware that clients or prospective clients, by signing a J&G confidentiality agreement, were informed that J&G either developed or had the possibility of developing the product? MR. DADDINO: Objection, misleading question. A You want to try to -- try to just clarify that for me? BY MR. DONOHUE: Q Yes. You're aware that the document I handed you is a template of a J&G confidentiality agreement? A Well, it appears -- it appears to be. Q Okay. Yeah, I'm making that representation. A Okay. Q And that being said, in the second sentence of the document, it makes reference to the fact that the

Page 43
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 45
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

MR. DADDINO: Objection, vague and ambiguous. A I don't know what similar transactions means. I mean looking at -- looking at events through the comfortable lens of hindsight, you know, my reading of the public press suggests that they were active generally in these I'm going to say types of transactions in rendering opinions. But I don't know anything specific about what -- I have no specific knowledge of what they were doing. Q It also makes reference to Jenkens & Gilchrist providing design assistance. Do you know specifically what design assistance Jenkens & Gilchrist provided? A No, I don't. Q Do you know whether the taxpayers who purchased the COBRA transaction, do you know if they were informed as to whether Jenkens & Gilchrist was involved in the development of the transaction? A I don't know. (Exhibit No. 2325 was marked.) BY MR. DONOHUE: Q Let me hand you what's been marked as Government Exhibit 2325. And if you would, as I mentioned before, you might keep that document close by. A Okay. Q Now, this document is a template

confidential proprietary information was developed by J&G and/or, and it gives other references. And my only question is were you aware that clients in connection with -- or prospective clients in connection with their being provided information regarding the product was being told that J&G may have developed the product? MR. DADDINO: Objection, assumes facts. A Well, let me -- let me answer it this way. I am -- since this is a deposition in this case, I am not aware of any evidence in this case as to whether the -- the plaintiffs in these cases signed such a confidentiality agreement. That having been said, this kind of letter back in November 1999 was not unusual for people who felt that they had developed some propriety product. I'm just using that word. So I don't find anything in this letter to be, even assuming through the purposes of our discussion that the clients -- that the plaintiffs in these cases signed such a letter to be -- to undermine the objective, you know, quality and -- of the -- of the Jenkens & Gilchrist opinion. Q Okay. But that wasn't the question I asked you. A Oh.

Gov. App. 37
Electronically signed by Dana Taylor (401-213-825-2798)

12 (Pages 42 to 45)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 46

Filed 03/07/2008

Page 13 of 51
Page 48

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q Do you recall the question I asked you? A Probably not. Q The question I asked you was simply whether or not you were aware that clients or prospective clients were being informed that Jenkens & Gilchrist may have been involved in developing the product? That's my only question. MR. DADDINO: Objection, assumes facts. You can answer. A The answer is no. BY MR. DONOHUE: Q Okay. You mentioned that you have read the Chance and Hess reports of the plaintiffs in this case; am I correct? A A while back, yes. Q Were you also provided the information of the plaintiffs' expert reports of a Mr. Gruner or a Mr. Jayger? A No. Q Could you provide us with any information you may have regarding how the COBRA product was marketed? MR. DADDINO: Objection, vague and ambiguous. Answer it if you can. A I don't have any information about how it was marketed. Q Okay. (Exhibit No. 2353 was marked.)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A No. Q In the second paragraph, it makes reference to the fact that each of the various E&Y individuals from the 12 areas were to make decisions on their COBRA candidates, and e-mail or voice mail information such as the client name, source of income to be offset, estimated amount of desired losses, and whether they were capital or ordinary, and whether the target had expressed interest in a loss generator. Were you aware of that? A No. Q Do you know what a loss generator is? A Well, I've never heard that term, but I'm always happy to learn new things. It seems to me that a loss generator is some kind of strategy or mechanism that will, if implemented, provide the implementee with the tax laws. So I'm just interpreting it literally. Q In any of the materials that you reviewed, did you ever see a reference to the term desired loss? A No. Q What's your understanding of that term, desired loss? A Well, it's not a term that -- you know, that is part of my lingua franca. But let me -- let me just suggest that I think it must mean that somebody is

Page 47
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 49
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

BY MR. DONOHUE: Q Okay. Let me happened hand you what's been marked as Exhibit 2353. It's just like Julia Child; we have everything right at our fingertips. A You're not going to take a chicken out of there, are you? Q Now, you've been handed what's been marked as Government Exhibit 2353. This is an e-mail dated October 25th, 1999 by Mr. Coplan to a number of separate E&Y individuals. And if you would, just read to yourself the first paragraph and half of the second paragraph, and let me know when you're finished. A Okay. Q Now, my first question is were you aware that E&Y began to market the product sometime in the latter part of October of 1999? Were you aware of that? A No. Q In the first sentence of this e-mail, it makes reference to the fact that E&Y was going to allow two presentations of the COBRA strategy to eligible targets. And there's a reference that the various E&Y individuals should determine for each of their areas who the two most likely purchasers of the strategy would be. And there was going to be a limit then of a total of 24 sales of the product. Were you aware of that information?

approaching -- after examining his tax situation for a particular taxable year, determines that it might be desirable for him to have a loss of X amount that would serve to offset an income item of Y amount. So I think that's what desired loss must mean. Q Did you feel that anything that you read in Exhibit 2353 would be at all relevant to any of the opinions that you rendered? A No. Q Okay. Were you aware as to the type of client that Ernst & Young considered to be the most eligible for the COBRA product? MR. DADDINO: Objection, vague and ambiguous. A Well, the answer is no. I mean I really -- I approach -- my -- my mission, as I said before, was to judge the -- the adequacy and professionalism of these opinions of counsel. And what -- what happened in -- and I approached that project or -- or charge with an examination of the technical proficiency and soundness of its analysis and whether it, you know, justified the more-likely-than-not conclusion. How -- what was going on before all of this that was in the departments of marketing or design was nothing that I knew about or considered. BY MR. DONOHUE:

Gov. App. 38
Electronically signed by Dana Taylor (401-213-825-2798)

13 (Pages 46 to 49)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 50

Filed 03/07/2008

Page 14 of 51
Page 52

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q Take a look again at the document I said to keep that one aside, Exhibit 2351, and turn to Bates stamp 901. It states there, ideal client profile, and it refers to an individual that has previously recognized at least $50 million of ordinary and/or capital gain income, and you'll notice the third diamond says aggressive and willing to take economic and tax risks. Were you aware that E&Y considered the ideal client for purposes of purchasing the COBRA product was an individual that had $50 million of income to offset and also was an aggressive individual willing to take economic and tax risks. A No. Q Okay. I'm going to hand you what's been marked as Government Exhibit 155. (Exhibit No. 155 was marked.) MR. DADDINO: Actually, before we get started, Dennis, do you mind if we take a quick break. MR. DONOHUE: Oh, no; sure. MR. DADDINO: Thank you. (Break from 11:16 to 11:28.) BY MR. DONOHUE: Q And just for your information, I'm running quite a bit behind where I thought it would be at this point. My still goal is to finish today.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

this is an internal document of E&Y that it used regarding the completion of various steps that the marketing salesmen would indicate. And you'll notice on the first item, action item, there's a reference to qualify client. And you'll notice that that has been check marked, and it's been check marked with respect to McComb or McCombs. And there's a reference, among other things as I mentioned before, that the client was aggressive, willing to assume tax risk and had $50 million minimum income to be sheltered, ordinary preferable to capital. Were you aware that this COBRA action work plan was being used in connection -- by E&Y in connection with the marketing of a COBRA product? A No. Q Were you aware specifically that Mr. McCombs was qualified to have the various ideal client profile that is referred to in Exhibit 155? MR. DADDINO: Objection, foundation. A I'm not sure what you mean by the word qualified. Do you mean qualified as a verb, so that you are asking me whether E&Y qualified him? Or do you mean as an adjective, that he qualified under the standards that E&Y put out? BY MR. DONOHUE:

Page 51
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 53
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Okay. Q To the extent we can expedite this, it will certainly help. I asked you to look at what's been marked as Government Exhibit 155. This is entitled -MR. DADDINO: I'm sorry. 155? MR. DONOHUE: Yes. THE WITNESS: I don't think you gave me that. MR. DONOHUE: Oh. MR. DADDINO: I believe we took a break just as you were about to hand it to him. MR. DONOHUE: Okay. Are you sure. Well, let's see here. Maybe it's right here. Yeah, it's right here. You're absolutely correct, but we're missing the top page. I have extra copies. There you go. MR. DADDINO: Thank you. BY MR. DONOHUE: Q This is another document we're going to come back to, so if you would put it in a stack of documents that we're going to use again. You'll notice that this is entitled COBRA action work plan. A Uh-huh. Q And there's handwritten above it McCombs. And

Q Well, I don't understand your difference, but let me just say that I'm referring to that he qualified under the standards that E&Y put out. A I wasn't aware of the standards, and I wasn't aware that E&Y identified him as qualifying. I wasn't aware of it. Q Okay. Would that have been -- had you known that, would that have been relevant to any opinion you were rendering in your reports? A No. Q Now, you can put that document to the side. And take a look again at the Government Exhibit 2351, and if you would turn to Bates stamp No. 900. It's entitled marketing issues. And you'll notice the third diamond down it states, more-likely-than-not, MLTN, opinions from J&G and LS -- LL&S. And my question is were you aware that at the marketing stage, that E&Y was indicating to clients that the product came with two more-likely-than-not opinions? MR. DADDINO: Objection, assumes facts; vague and ambiguous. A No, I was not aware. BY MR. DONOHUE: Q There's a reference to LL&S. Do you know what law firm that is?

Gov. App. 39
Electronically signed by Dana Taylor (401-213-825-2798)

14 (Pages 50 to 53)

38894b34-4be0-477a-ae15-baf72ef5502b

Case 1:06-cv-00245-EJD

Document 42-7
Page 54

Filed 03/07/2008

Page 15 of 51
Page 56

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A Well, I did -- I would not have known but for the fact that I had seen it in one of these other pages. Some law firm that began with Locke. Q Okay. A But I -- but that's the first I've ever heard of that firm. Q Have you heard of the firm Locke Liddell & Sapp? A I never heard of them before looking at this document. Q You don't recall the Harriet Miers let's say -A I'm aware -- I'm aware of Harriet -Q -- controversy? A Is that her law firm? Q Yes. A Well, it's -- although I'm a newspaper reader, I'm not that careful a newspaper reader. And while I know about Harriet Miers, I don't know about her law firm. Q Okay. I assume you know ultimately that rather than Locke Liddell & Sapp, that Brown & Wood gave a second opinion in connection with the COBRA transaction. You're aware of that? A Well, I'm aware of that from this case because there is a Brown & Wood opinion.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

A I'm not directly aware. I mean the -- when I viewed the -- when I read the Jenkens & Gilchrist opinion in this case that was issued I think to McComb and Woods, I just viewed it as a Jenkens & Gilchrist product without associating it with any particular person in that firm. Q All right. Turn to the second page of the document. It's entitled memorandum. And just briefly take a look at that first page, in as much of what you see there, and tell me if any of that looks familiar to you. A Well, without lining it up, it -- this looks -- it looks like some of the material that wound up in the opinion that I reviewed. But whether it's precisely word for word the same or whether it just represents a core element of the analysis, I can't tell without, you know, a more detail comparison. Q When you say the opinion you reviewed, are you referring to the Jenkens & Gilchrist -A Yes. Q -- opinion? A Yes. (Exhibit No. 2868 was marked.) BY MR. DONOHUE: Q Let me hand you what's been marked as Government Exhibit 2868. And if you would -- first of all, is that the opinion that you reviewed in connection with the

Page 55
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Page 57
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Q Do you have any knowledge as to why it was that Locke Liddell & Sapp did not render a second opinion on this case? A No. Q Okay. Take a look on the same page. It states at the last diamond, J&G will provide technical memo if necessary; no draft opinion provided. Were you aware that in connection with the marketing of the product, J&G, Jenkens & Gilchrist, would provide, if it became necessary in marketing the product, a technical memo? A No. (Exhibit No. 2846 was marked.) BY MR. DONOHUE: Q I'm going to hand you what's been marked as Government Exhibit 2846. What you've been handed, 2846, is a fax cover page from Paul Daugerdas to three individuals including Bob Coplan. Do you know who Paul Daugerdas is? A I've heard of his name from the public press that he was a partner in Jenkens & Gilchrist actively involved in what I would call tax advantage transactions. Q Do you know what, if any, role he had in the preparing of the Jenkens & Gilchrist legal opinions in the COBRA strategy?

Tesoro product? A It looks like it. But, again, I would have to look at my copy and make sure that it's the same. But I think for -- but it looks -- it looks like the opinion I reviewed. Q Do you have your copy with you that you can make a comparison? A Yeah. Well, let me -- let me say that the one I'm looking at, which I pulled out of my briefcase, is the one to Mr. Woods, but it looks like it's the same. Q All right. MR. DADDINO: Are there particular sections that you're interested in, and that might be easier for us to get a comparison. MR. DONOHUE: Well, first -A Well, let me -- let me just -- I'll just take a few sample pages. I would say it was the same. BY MR. DONOHUE: Q Okay. If you recall, there were -- in the Tesoro case, there were four opinions; do you recall that? A Right. Q And two opinions were issued in connection with one partnership called Tesoro Drive, and two opinions were issued in connection with the second partnership called SA Tesoro; do you recall that?

Gov. App. 40
Electronically signed by Dana Taylor (401-213-825-2798)

15 (Pages 54 to 57)

38894b34-4be0-477a-ae15-baf72ef5502b