The Tax Court ruled that its formal requirements for expert reports do not extend to declarations submitted in connection with a pretrial discovery motion, which means that the IRS declarations can stay in the record as the dispute between Airbnb and the amount of $4.2 billion over transfer pricing continues.
Holding
The Tax Court rejected Airbnb's applications to exclude two declarations provided by an IRS software expert in relation to the competing discovery protective orders. The Court, considering this to be a question of first impression, ruled that Tax Court Rule 143(g), which deals with reports from experts who are called at trial, does not extend to declarations that are submitted merely in support of pretrial discovery motions.
The Court did not determine whether each statement in the declarations was appropriate, but stated that it would disregard any legal opinions or advocacy when deciding the underlying discovery dispute.
Why It Matters
The ruling defines the reach of the Tax Court’s expert-report rules. Rule 143(g) governs expert witnesses at trial. The Court declined to extend those requirements to declarations supporting pretrial discovery motions.
The decision gives parties more flexibility to use technical experts during discovery. A party may submit a declaration from an expert or consultant to explain technical discovery issues without first satisfying the formal report requirements that would apply if that person later testified as an expert witness at trial.
The ruling is procedural, not a decision on Airbnb’s transfer pricing liability. The Court did not decide whether the IRS may increase Airbnb’s income by approximately $4.2 billion under §482. It also did not resolve the parties’ competing proposals regarding the protection of Airbnb’s source code and other technical information.
The Court preserved limits on expert declarations. Keeping a declaration in the record does not require the Court to accept its legal conclusions, factual assumptions, or reasoning. The Court may disregard improper portions and assign little or no weight to unsupported statements.
Key Facts
Airbnb is challenging an IRS determination that increased its income by $4,195,858,428 under §482.
The adjustment concerns resources, capabilities, and rights that Airbnb made available on December 31, 2013, to an affiliated company organized in Ireland and tax resident in Jersey.
Airbnb’s software and related technology are central to the underlying transfer pricing dispute.
During discovery, Airbnb sought a protective order governing access to its source code and other technical materials. Airbnb proposed that sensitive information be reviewed in a secure clean room located at Airbnb’s offices or at the offices of its counsel.
The IRS filed its own proposed protective order. Among other differences, the IRS wanted the clean room in Austin, Texas, where its software consultant, Monty G. Myers, was based. The IRS also proposed placing a narrower category of information under clean-room restrictions.
Myers has decades of software development experience and has worked as an expert witness or consultant in more than 100 software-related matters. The IRS retained him to provide technical consulting and analysis in the Airbnb dispute.
The IRS submitted two declarations from Myers in support of its proposed protective order and in opposition to Airbnb’s proposal.
The declarations addressed how the clean room should operate, what information should be subject to its restrictions, and how Airbnb’s proposed procedures compared with procedures Myers had encountered in other technology litigation.
Airbnb moved to strike both declarations.
Statutory and Procedural Framework
Section 482 allows the IRS to allocate income, deductions, credits, and other tax items among commonly controlled businesses when necessary to prevent tax avoidance or clearly reflect income. The underlying Airbnb case concerns an IRS adjustment under that provision, but the Court did not address the merits of the §482 determination in this opinion.
Tax Court Rule 103 allows the Court to issue protective orders governing discovery.
Rule 143 governs evidence at Tax Court trials. Rule 143(g) imposes disclosure and reporting requirements on a party that calls an expert witness.
Rule 52 permits the Court to strike redundant, immaterial, impertinent, frivolous, or scandalous material from documents filed with the Court.
Federal Rule of Evidence 702 governs testimony from expert witnesses whose specialized knowledge may help the trier of fact understand evidence or decide a factual issue.
Arguments
Taxpayer argued:
Myers’s declarations effectively operated as expert witness reports.
Because the declarations functioned as expert reports, they had to comply with Rule 143(g).
The declarations did not satisfy Rule 143(g)’s requirements and therefore should be removed from the record.
Portions of the declarations contained legal conclusions and advocacy rather than permissible technical opinions.
Myers relied on protective orders from other cases that Airbnb considered insufficiently similar to its case.
Government argued:
Rule 143 did not apply because the declarations were submitted for a pretrial discovery dispute rather than as trial evidence.
Federal Rule of Evidence 702 likewise did not provide a basis for striking the declarations at this stage.
Myers’s statements concerned technical discovery procedures and did not constitute improper legal opinions requiring removal from the record.
Court’s Reasoning
Rule 143 applies to trials. The Court emphasized both the placement and wording of the rule. Rule 143 appears in the portion of the Tax Court Rules governing trials, is titled “Evidence,” and addresses how trials before the Court are conducted.
Rule 143(g) specifically addresses experts who are called as witnesses. The provision applies to a party that “calls an expert witness.” No trial had occurred, and the IRS had not yet firmly identified the experts it intended to call at trial.
Myers’s declarations addressed discovery rather than the merits. The declarations concerned the operation and scope of a proposed clean room for sensitive technological material. They did not address the substantive transfer-pricing questions that the Court ultimately must decide.
The Court therefore rejected Airbnb’s Rule 143(g) theory. Because the declarations served a pretrial procedural purpose, the formal expert-report requirements did not apply to them.
Possible legal conclusions did not require striking the declarations. Experts generally cannot instruct a Court on ultimate questions of law. But the Court concluded that even if portions of Myers’s declarations crossed that line, it could simply disregard those portions rather than remove the declarations entirely.
Airbnb had not shown sufficient prejudice. Motions to strike are generally disfavored. Because the judge can independently determine the law and disregard improper opinions, the continued presence of the declarations in the record did not create the type of prejudice that would justify striking them.
Challenges to the declarations can be handled through other procedures. Airbnb remains free to submit competing declarations, challenge the factual basis of Myers’s opinions, or request an evidentiary hearing at which Myers could potentially be cross-examined. Questions about reliability and weight, therefore, did not require striking the documents at the discovery stage.
Limits of the Decision
The ruling does not determine whether Myers will qualify as an expert witness at trial.
It does not excuse the IRS from complying with Rule 143(g) if it later calls an expert witness under circumstances where the rule applies.
It does not establish that the Court will rely on Myers’s declarations when deciding the protective-order dispute.
It also does not decide where the clean room will be located, which materials will be subject to its restrictions, or which party’s proposed discovery procedures the Court will adopt.
Most importantly, the decision says nothing about whether the IRS’s $4.195 billion transfer pricing adjustment is correct.
Result
The Tax Court rejected Airbnb's two motions to strike and kept the IRS expert's declarations in the record as the discovery dispute continues.
The Takeaway
For tax practitioners, the decision establishes a helpful distinction between technical declarations made to settle pretrial discovery issues and formal expert testimony given at trial. Although the ruling itself is procedural, the Court's initial interpretation of Rule 143(g) offers guidance in complex cases where the parties rely on specialists to handle discovery before trial.
List of Citations
I.R.C. §482: Authorizes allocations among controlled taxpayers to prevent tax avoidance or clearly reflect income and forms the basis of the underlying Airbnb adjustment.
Tax Court Rule 52: Authorizes the Court to strike certain improper material from filings and supplies the procedural basis for Airbnb’s motions.
Tax Court Rule 103 governs protective orders in discovery and provides the framework for the parties’ competing clean-room proposals.
Tax Court Rule 143(g): Establishes report and disclosure requirements for expert witnesses called at trial. The Court held that it does not apply to declarations supporting pretrial discovery motions.
Fed. R. Evid. 702: Governs admissibility of expert testimony based on specialized knowledge.
Fed. R. Evid. 704: Addresses opinion testimony on ultimate issues and informs the Court’s discussion of expert use of legal terminology.
Clay v. Commissioner, 152 T.C. 223 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021): Explains that motions to strike are disfavored and generally require material unrelated to the controversy or prejudice to the moving party.
Estate of Jephson v. Commissioner, 81 T.C. 999 (1983): Provides the Tax Court’s standard for evaluating motions to strike.
Nationwide Transportation Finance v. Cass Information Systems, Inc., 523 F.3d 1051 (9th Cir. 2008): Addresses the distinction between impermissible expert legal conclusions and permissible use of legal terminology.
Hangarter v. Provident Life & Accident Insurance Co., 373 F.3d 998 (9th Cir. 2004): Supports the rule that an expert may not give an opinion resolving an ultimate question of law.
Sunoco, Inc. & Subsidiaries v. Commissioner, 118 T.C. 181 (2002): Addresses limits on expert testimony concerning legal conclusions.
Dynamo Holdings Limited Partnership v. Commissioner, 143 T.C. 183 (2014): Illustrates the Court’s ability to conduct an evidentiary hearing and permit examination of declarants in a pretrial dispute.
Airbnb, Inc. & Subsidiaries v. Commissioner, U.S. Tax Court, filed September 2, 2026: Holds that Rule 143(g) does not apply to declarations submitted in support of pretrial discovery motions.