Further thoughts on the usefulness of litigation risk assessments for the management of tax controversies.

• Author: Miller, Craig D.

A year ago I had the opportunity to share with readers of The Tax Executive some thoughts about the usefulness of litigation risk assessments for the management of tax controversies in an article entitled "A Systematic Approach to Tax Controversy Management." 49 Tax Executive 223. (May-June 1997). This article, which is being published in two parts, elaborates on the value that litigation risk assessment can bring to the process of resolving tax controversies. The first part discusses two circumstances in which companies used litigation risk assessments to achieve settlements. The second part discusses the use of litigation risk assessments as a tool for effective and cost-efficient management of disputes that are not settled, including the establishment of a common information base from which a company and its outside counsel can negotiate an alternative fee agreement.

Background

Before discussing the role of assessments for achieving settlements, it is useful to review some of the basics. The management of a tax dispute depends on a series of predictions about uncertain future events, which must be made on the basis of incomplete information. You must identify each of the uncertain, relevant issues, analyze how each of them will be resolved, and trace the resolution of the various issues through to the ultimate outcomes. Two of the assessment tools -- decision trees and influence diagrams -- are invaluable for this process. They help ensure that you conduct the analysis in an orderly and logical manner. They increase your ability to identify the important issues and understand their relationships.

Further, you identify each of the potential outcomes of litigation and obtain valuable information and insights about each of the potential outcomes. You know the probability, stated as a percentage, and present dollar value of each potential outcome. You know the overall "expected value" of litigating the dispute. Expected value is most usefully described in the context of a tax controversy as "a weighted average of' possible results that reflects one's knowledge and judgment." Marshall & Oliver, Decision Making and Forecasting 35. It is the mathematically weighted average of the probabilities and present dollar values of the potential litigation outcomes. The expected value from litigating can be compared with other uncertain events or amounts. It is also helpful in comparing the uncertain litigation result with a certain alternative, such as...