A well-seasoned and highly educated CPA walked into federal court to present a lost profits analysis. He walked out of the courthouse completely excluded from testifying. This article recounts why he was excluded and lists a number of lessons one can glean from the case because having one or more credentials will not save one from exclusion.
A CPA with more than 25 years of experience walked into federal court to present a lost profits analysis. He held the ABV, ASA, and CFP designations. In addition, he held a master’s degree in taxation and had decades of experience at major accounting firms. He walked out of the courthouse completely excluded from testifying.
The case offers a stark reminder that even well-credentialed experts can face total exclusion when their assumptions do not hold up under scrutiny, when their methodology relies too heavily on other experts who may themselves be challenged, and when the facts underlying their analysis diverge from the actual terms of the disputed agreement.
The Underlying Dispute
The litigation centered on two championship cutting horses with the potential to generate millions of dollars in future breeding revenue. The Plaintiff, a third-generation cutting horse rider and breeder, alleged he had formed an oral partnership with the Defendant, a ranch owner from a neighboring state. The Defendant would purchase the horses and pay veterinary bills; the Plaintiff would identify genetically superior animals, manage their care and training, ride them in competition, and build their brand.
The alleged profit-sharing structure had two tiers. Event winnings would be split 50-50. Stud fees, sales, and operational profits would be split 75 percent to the Defendant and 25 percent to the Plaintiff for the lifetime of the horses. A critical term: the horses would remain in the Plaintiff’s possession until their death.
The arrangement allegedly operated for years until the Defendant unilaterally removed both stallions from the Plaintiff’s facility. The Plaintiff sued for breach of fiduciary duty, breach of contract, and conversion, seeking damages exceeding one million dollars.
The Expert and His Two Opinions
The Plaintiff retained an experienced forensic accountant (“the expert”) to provide testimony on two issues. The first addressed the absence of a partnership tax return: no Form 1065 had ever been filed, and the Defendant pointed to that fact as evidence that no partnership existed. The expert opined that the failure to file a partnership return does not, under state law, mean an enterprise is not a partnership, since tax reporting rules differ from partnership formation rules.
The second opinion was a lost profits calculation. Using a discounted cash flow model, the expert projected breeding income for one stallion over 13 years and the other over 15 years, subtracted projected expenses, discounted to present value, and applied the Plaintiff’s alleged 25 percent share.
Both opinions came under attack. The second collapsed.
The Lost Profits Analysis: Built on the Wrong Agreement
The Defendant’s most damaging argument struck at the foundation of the damages model: it analysed the wrong deal.
In his deposition, the Plaintiff testified that his arrangement entitled him to 25 percent of gross breeding fees collected; not a percentage of profits. He confirmed his payment was calculated “off the gross number that came in the door.” The Defendant cited the state Supreme Court’s definition of profits as the excess of revenues over expenditures and argued that a share of gross revenue is legally distinct from a share of profits.
This was a fundamental problem. The expert had built an elaborate discounted cash flow model to calculate lost profits when the Plaintiff’s own testimony suggested he was entitled to a share of gross revenue. However sophisticated, the model was answering the wrong question; and arguably undermining the legal theory of partnership formation, since under state law, sharing profits is a key indicator of a partnership while sharing gross revenue is not.
Assumptions Divorced from the Record
Even setting aside the gross-versus-net issue, the expert’s projections faced a systematic challenge.
The expert assumed each stallion would breed exactly 125 mares per year for the entire forecast period. Historical data told a different story. One stallion’s breeding had declined every year since he stood at stud, dropping from 324 to 179 over five years. The other had declined from 226 to 123 over three years. A static projection ignored a clear downward trend.
The expert assumed 100 percent of breeding fees would be charged and collected. The Defendant pointed to historical inflation of breeding numbers caused by complimentary breeding the Plaintiff had given away. Treating every breeding as a paying customer overstated projected revenue.
The expert assumed demand would remain unchanged for 13 to 15 years. The Defendant argued this ignored the well-known dependence of stallion demand on offspring performance, market conditions, competition, and changing industry preferences.
The expert assumed the horses would remain healthy with productive fertility through age 23. The Defendant argued he failed to account for conception rates, rebreeds, outstanding rebreeds owed, or documented veterinary issues including lameness complications.
The expert also assumed breeding fees would remain static for over a decade. And on the expense side, the Defendant argued the expert had not analysed the reasonableness of his expense assumptions, did not appear to have reviewed supporting documents, and failed to account for veterinary care, dental work, supplements, farrier expenses, hay price increases, or general inflation.
Dependency on Another Expert
A separate vulnerability emerged from the expert’s reliance on a second expert retained by the Plaintiff—an appraiser designated to value the stallions. The 13- and 15-year breeding life projections came from the appraiser’s work.
The Defendant filed a separate motion to strike the appraiser. If that motion succeeded, the argument went, the damages opinion should fall with it. The expert’s report also referenced certain documents prepared by the appraiser that had not been produced in discovery, raising the possibility of exclusion under federal disclosure rules.
This cascading risk is one valuation professionals should weigh carefully. When one expert’s analysis depends on another’s findings, an attack on the foundation expert can collapse the entire structure.
The Tax Return Opinion
The first opinion drew different objections. The Defendant argued the expert was a non-lawyer opining on legal matters, and that the opinion was misleading because it ignored how income had been reported. The Defendant had reported income from the horses on his personal return, including breeding commissions paid to the Plaintiff. The Plaintiff deposited those commissions into his company’s account and reported them as commission income; treatment the Defendant argued was inconsistent with a partnership.
The Plaintiff responded that the expert had expressly disclaimed offering a legal conclusion and was simply rebutting the Defendant’s anticipated expert testimony that a partnership necessarily produces federally mandated tax reporting. If the Defendant could offer that opinion, the Plaintiff should be permitted to rebut it.
The Plaintiff’s Defense and the Court’s Ruling
The Plaintiff mounted a vigorous defense rooted in well-worn doctrine—under Federal Rule of Evidence 702, questions about the bases and sources of an expert’s opinion go to weight, not admissibility, and are properly addressed through cross-examination rather than exclusion.
Rejection of expert testimony, the response argued, is the exception rather than the rule.
The magistrate judge was unpersuaded. After a hearing of nearly two and a half hours, the Court granted the motion to strike in its entirety. The expert was completely excluded from offering any opinions in the case. The Plaintiff lost his ability to present expert testimony on both the tax return question and the lost profits damages; in a case potentially worth more than a million dollars.
Lessons for Valuation Professionals
Match your analysis to the actual agreement. The expert built a profit-sharing model when the Plaintiff’s own testimony described a gross-revenue arrangement. Before constructing any damages model, confirm the precise terms of the deal with counsel and review the testimony about how the parties understood it. If the client describes one structure and your model assumes another, you have a credibility problem that no methodology can repair.
Understand the legal elements your analysis must support. The damages theory and the liability theory must be coherent. A model that calculates profits in a case where the underlying claim depends on profit-sharing—but the evidence shows gross-revenue sharing—works against the client on both fronts.
Test assumptions against historical data. Static projections in the face of clear downward trends invite the argument that the analysis is divorced from reality. When historical patterns contradict your assumptions, either adjust the projections or be prepared with a compelling explanation for why the future will differ from the past.
Account for variability in long-term projections. Projecting more than a decade of activity with constant inputs—constant volumes, constant prices, constant collection rates, constant health—looks unrealistic on its face. Sensitivity analyses and explicit discussion of risk factors strengthen credibility.
Document the basis for every assumption. Each contested input becomes a battleground. Contemporaneous documentation showing why each figure was chosen, and what independent verification was performed, is essential.
Understand the risks of inter-expert dependency. When your work borrows key inputs from another expert, an attack on that expert is an attack on you. Consider whether you can independently verify the assumptions you adopt and be prepared to defend them on their own merits.
Ensure complete document production. Anything referenced in your report should have been produced in discovery. Failures here can result in exclusion regardless of the substantive merit of the work.
Be cautious near legal conclusions. When your subject matter brushes against legal questions, state explicitly what you are and are not opining on, and limit your testimony to matters within your professional competence.
Credentials alone will not save a flawed analysis. The expert in this case had three relevant designations, a graduate degree in his field, and decades of experience. None of it prevented exclusion. Courts evaluate methodology and reliability, not résumés.
Conclusion
Methodology matters more than credentials. Assumptions must be grounded in evidence. And when the entire damages theory depends on characterizing an agreement in a particular way, the parties themselves had better describe it the same way. The horses at the center of this dispute were champions. The expert analysis meant to quantify what was lost when they were taken away never reached the jury.
Sohini Chakraborty is a Digital Content Executive and Legal Researcher with Exlitem, a firm that helps attorneys find legal experts.
Ms. Chakraborty can be contacted at (866) 955-4836 or by e-mail to sohini@exlitem.com.
