Ninth Circuit Remands For In Camera Review in Sanmina
December 22, 2017
The Ninth Circuit has remanded the Sanmina case back to the U.S. District Court for the Northern District of California to conduct an in camera review of two in-house tax attorney memoranda to determine if the contents of those memos were disclosed in a DLA Piper valuation report provided to the IRS to support Sanmina’s $503 million worthless stock deduction. The IRS had previously asked the district court to conduct an in camera review, and the district court had declined to do so.
As noted in our previous coverage, the DLA Piper valuation report cited the in-house memos in a footnote The district court concluded that there was no waiver, holding that “DLA Piper’s mere mention of the existence of the memoranda did not summarize or disclose the contents of the memoranda.” On appeal, the IRS argued that the valuation report went beyond simply mentioning the in-house memos and, in fact, expressly relied on the memos. According to the IRS, the reliance resulted in a waiver even if the substance of the advice was not disclosed. Alternatively, the IRS argued that at least some of the substance appeared to have been disclosed.
In contrast, Sanmina argued that there is no waiver absent a disclosure of the substance of the advice, which had not occurred. At oral argument, the presiding judge pressed Sanmina’s attorney to identify particular cases supporting that legal position. The panel also struggled with how to resolve the waiver issue without knowing the contents of the in-house memos.
In its brief unpublished memorandum opinion, the court of appeals (Ninth Circuit Judges O’Scannlain and Rawlinson and district court Judge Watters from Montana sitting by designation) stated: “Our resolution of this case would be greatly facilitated by a more informed analysis from the district court. More specifically, we prefer the district court review the documents in camera and reconsider its ruling on the asserted privileges following its review of the pertinent documents.” The court of appeals cited United States v. Richey, 632 F.3d 559 (9th Cir. 2011), an IRS summons enforcement case, which both sides highlighted in briefs and at oral argument, in which a similar remand for in camera review occurred. The remand is framed as a directive that the district court “determine whether the documents requested by the government are privileged to any degree,” but the focus of oral argument was the waiver issue, and the IRS has conceded that one of the two memos is privileged. The in camera review therefore likely will focus on the extent to which the substance of the memos was ultimately disclosed or expressly relied on in the DLA Piper valuation report.
As an unpublished opinion, the decision is not binding circuit precedent. Even so, one practical takeaway from the decision is that both sides should consider encouraging the trial court to conduct an in camera review where an appeal of the privilege issue is likely and the resolution of the appeal turns on the content of the documents. The parties did not agree to do that here and now, 2-1/2 years after the district court issued its decision in favor of Sanmina, the parties are back to square one.
Sanmina – Reply Brief for Appellant
