The use of litigation risk assessments to help make informed case management decisions.

• Author: Miller, Craig D.

Litigation risk assessments (LRA) use decision analysis tools to enhance the traditional approach to the evaluation and management of a tax controversy or other legal dispute. The end product of an LRA is a detailed analysis of the dispute in which all of the issues, their relationships, and the potential outcomes are identified. Percentage probabilities and present dollar values are used to describe the potential outcomes. The basics concerning LRAs and their usefulness for the evaluation and management of tax controversies are described in an article I published a little more than a year ago in The Tax Executive. "A Systematic Approach to Tax Controversy Management," 49 Tax Executive 223 (May-June 1997).

This article follows up on a second article entitled "Further Thoughts on the Usefulness of Litigation Risk Assessments for the Management of Tax Controversies," which appeared in the May-June 1998 issue of The Tax Executive (50 Tax Executive 187). That article discussed the different ways in which an LRA can add value for the settlement and management of a tax controversy, focusing on the use of an LRA to facilitate settlement. This article addresses the use of LRA data and tools for the tactical and resource allocation decisions that are at the core of litigation management.

Discussion

Through the preparation of an LRA, company management and counsel develop an understanding of the overall dispute and of the details. Those details, which can drive you to abstraction, are critical to success or failure. The key is paying careful attention to the details without losing sight of the overall strategy. Decision trees and the other litigation risk assessment tools assist you in doing just that.

The LRA tools offer the means to make informed tactical decisions involving the wide variety of factual and legal issues that can arise. Those decisions are important for both tactical and resource management purposes. For example, in a matter for which we recently provided assistance, the client had to decide whether to retain an expert to provide testimony on a complex, technical issue. As a result of preliminary discussions, the client was confident that the expert's testimony would be supportive of its case. The question was whether the support was sufficiently important to justify paying the projected six-figure fee of the expert. The LRA provided the client with the necessary tools to evaluate the importance of the expert's testimony to its case. With the testimony, the client had slightly more than a 60-percent chance of avoiding any liability. Without the testimony, the probability dropped to less than 50 percent. Many millions of tax and interest dollars were at issue. Not surprisingly, the client retained the expert. The more than 10-percent probability swing in the predicted outcome of the large dollar dispute made retention of the expert prudent.

That decision was consistent with the instinct of the management officials of most companies when faced with this type of choice. They are inclined to take...