Written by Chris Walton, JDThe amended Federal Rule of Evidence 702, effective December 1, 2023, was supposed to be a “clarification,” not a substantive change. Courts were already gatekeepers for expert testimony under Daubert. The amendment simply emphasized what was already required: domain-specific qualifications, reliable methods, and sufficient factual basis — established to the court by a preponderance of evidence, not left to cross-examination.
Then the clarification started excluding experts. In Sullivan v. Loden (D. Haw. Oct. 2, 2024), a federal court applying the amended Rule 702 excluded a court-appointed special administrator entirely from testifying on the value of gifted shares in a closely held family business. The administrator had reviewed the attorney’s appraisals and found them deficient. The court found that the administrator lacked the specific expertise required to value closely held businesses for gift-tax purposes and hadn’t applied reliable valuation principles or methods. Attempts to admit his findings as lay opinion or under hearsay exceptions were also rejected. No expert testimony. No fallback.
For T&E counsel and valuation professionals, Sullivan is the clearest signal yet that the amended Rule 702 has teeth in valuation cases. The days of putting a generally qualified financial professional on the stand and letting cross-examination test the methodology are ending. Domain-specific expertise and demonstrably reliable methods are threshold requirements, not matters of weight.
The underlying facts make the case particularly instructive. Joanna Sullivan, together with her husband Sully, founded Foodland Super Market — the first modern grocery chain in Hawaii — in 1948. By the time of the disputed transactions, the Sullivan family businesses were worth approximately $192 million. Joanna had four children: Colleen, Jenai, Kitty, and Patrick. Only Jenai and Kitty were actively involved in the businesses.
In late 2011 and early 2012, Joanna transferred 221 shares of Foodland common stock to Jenai and Kitty through a family limited partnership. To support the gift tax returns (Forms 709), her longtime estate planning attorney, Elliot Loden, performed the appraisals himself — signing them as “Appraiser and Attorney-At-Law.” Loden valued the stock using a book value method, rejected a capitalization of earnings approach, and applied a 25% combined minority interest and lack of marketability discount. The reported total gift value: approximately $679,350 to each daughter. The IRS audited the returns and accepted them without adjustment.
After Joanna’s death in 2015, Colleen — who had not received Foodland stock — alleged that Loden’s appraisals dramatically understated the value of the gifted shares. If the stock was worth more than reported, Joanna’s estate plan (which was designed to equalize gifts among the children) had been distorted by faulty information. Colleen sued Loden for legal malpractice.
The probate court appointed a special administrator to investigate. That administrator reviewed Loden’s appraisals and published a report finding they were “not performed according to applicable standards” — specifically, IRS Revenue Ruling 59-60 and USPAP. Colleen sought to use the administrator’s report and testimony as expert evidence in the malpractice case. That’s where Rule 702 came in.
The court’s exclusion rested on the amended Rule 702’s requirements, applied with specificity to valuation testimony:
Lack of domain-specific qualifications. The special administrator may have had general financial or legal expertise, but the court found he lacked the specific qualifications required to value closely held businesses for gift-tax purposes. Valuing a family-owned grocery chain for Form 709 purposes requires knowledge of Rev. Rul. 59-60’s eight factors, familiarity with the methodologies accepted in gift-tax valuation (income, market, and asset approaches), experience with minority and marketability discounts for closely held stock, and an understanding of how the IRS evaluates these appraisals on examination. General financial knowledge doesn’t cover it.
Failure to apply reliable principles and methods. Even if the administrator had the right credentials, the court found he hadn’t applied reliable valuation principles or methods in reaching his conclusions. Under the amended Rule 702, this is an admissibility question, not a weight question. The court doesn’t admit the testimony and let cross-examination expose the methodological gaps. The court excludes it at the gate.
No fallback to lay opinion or hearsay. Colleen’s counsel tried alternative routes: admit the administrator’s findings as lay opinion testimony under Rule 701, or as a business record or other hearsay exception. The court rejected both. The administrator’s report was expert analysis — it opined on whether the appraisals met professional standards. You can’t relabel expert testimony as lay opinion to avoid Rule 702’s requirements. And a report prepared for litigation doesn’t qualify as a business record.
Before the December 2023 amendment, many courts treated the sufficiency of an expert’s factual basis and the reliability of their methodology as questions of weight — matters for cross-examination, not gatekeeping. The expert got in the door; the jury decided how much to credit. The amendment was designed to correct that practice. The Advisory Committee’s note states explicitly that the changes address courts that had “incorrectly” held that “the critical questions of the sufficiency of an expert’s basis, and the application of the expert’s methodology, are questions of weight and not admissibility.”
For valuation professionals, this shifts the threshold. It’s no longer enough to be a credentialed financial professional who applies “professional judgment.” The court must be satisfied — by a preponderance of evidence — that the expert’s opinion reflects a reliable application of reliable principles and methods to sufficient facts or data. In practice, that means:
Credentials must match the specific valuation task. A CPA who has never valued a closely held business for gift-tax purposes is not qualified to testify on whether a gift-tax appraisal meets Rev. Rul. 59-60 standards. A business appraiser who works exclusively with tech startups may not be qualified to value a grocery chain. The qualification must be domain-specific, not general.
The methodology must be identified, applied, and documented. “I reviewed the appraisal and found it deficient” is a conclusion, not a methodology. The expert must identify which valuation approach they would have applied, demonstrate how they would have applied it to the subject company’s facts, and explain why the approach they selected is accepted in the relevant professional literature. Sullivan shows that a report finding another appraiser’s work “not performed according to applicable standards” doesn’t constitute a reliable methodology if the reviewer can’t demonstrate their own.
There is no fallback. If the expert doesn’t meet Rule 702’s requirements, the testimony is excluded. It can’t be recharacterized as lay opinion. It can’t come in through a hearsay exception. The gatekeeping function is dispositive.
Set aside the Rule 702 issue for a moment. The underlying facts in Sullivan present a scenario T&E counsel should recognize: the estate planning attorney valued the gifted stock himself. Loden signed the appraisals as “Appraiser and Attorney-At-Law.” He used a book value method, rejected the income approach, and applied a 25% combined discount. The IRS accepted the returns. The question of whether the valuation was accurate didn’t surface until years later, when a beneficiary challenged it.
This pattern — attorney-prepared appraisals for gift tax returns — is more common than the profession acknowledges, particularly for family businesses where the attorney has long-standing relationships with the family and a general understanding of the business. The problem isn’t that the attorney lacks intelligence or good faith. The problem is that valuing a closely held business for gift-tax purposes requires specific methodological expertise that legal training doesn’t provide. Rev. Rul. 59-60 lists eight factors the appraiser must consider. USPAP requires independence, competency, and a defined scope of work. ASA and NACVA standards impose additional methodological requirements. An attorney who doesn’t routinely perform these engagements may produce a defensible-looking appraisal that wouldn’t survive scrutiny from a qualified reviewer — or, after Sullivan, from a court applying the amended Rule 702.
Not every challenge to a gift-tax valuation requires your own expert. If the original appraisal was performed by someone without valuation credentials (as in Sullivan, where the attorney performed the appraisal), the process challenge may be sufficient to establish that the valuation wasn’t performed according to applicable standards. A review of the appraisal against Rev. Rul. 59-60’s eight factors, USPAP’s requirements, and the applicable professional standards can identify deficiencies that don’t require a competing valuation to establish.
But — and Sullivan illustrates this precisely — whoever conducts that review must themselves be qualified under Rule 702 to testify about it. A general financial professional, a special administrator, or an attorney who reviews the appraisal and finds it wanting may have reached the right conclusion. If they can’t demonstrate domain-specific qualifications and a reliable methodology for reaching that conclusion, the court won’t hear from them.
The practical advice: if you need to challenge a gift-tax valuation, retain someone who could have performed the valuation themselves. An ASA-, ABV-, or CVA-accredited appraiser with specific experience valuing closely held businesses for gift and estate tax purposes can both perform the review and survive a Rule 702 challenge. A reviewer who can identify what’s wrong with the appraisal but couldn’t have prepared a correct one is the expert Sullivan excluded.
Sullivan v. Loden is an early signal of how the amended Rule 702 will affect valuation cases. The amendment didn’t change the standard — it clarified that courts must enforce it at the admissibility stage, not defer to cross-examination. For valuation professionals: make sure your credentials match the specific engagement, your methodology is identified and documented, and your report could survive a Daubert challenge before you agree to testify. For T&E counsel: make sure the expert you retain to review or challenge a gift-tax appraisal has the domain-specific qualifications the court will demand. And if your client’s original appraisal was performed by the estate planning attorney rather than a credentialed appraiser, the vulnerability isn’t just methodological — after Sullivan, it’s admissibility.
If you need to review or challenge a gift-tax valuation and want to make sure the expert you retain will survive a Rule 702 admissibility challenge, happy to discuss. The credentialing and methodology questions are easier to address before the engagement begins than after the motion to exclude is filed.
Schedule a free consultation meeting to discuss your valuation needs.
