Ninth Circuit Remands For In Camera Review in Sanmina

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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In its brief unpublished memorandum opinion, the court of appeals (Ninth Circuit Judges O’Scannlain and Rawlinson and district court Judge Watters from Montana sitting by designation)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 Ninth Circuit opinion

Sanmina – Reply Brief for Appellant

 

IRS Takes an Aggressive Position on Scope of Privilege and Waiver in Sanmina

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February 12, 2016

Opening briefs have been filed in the Ninth Circuit in United States v. Sanmina, where the IRS is appealing a decision by the U.S. District Court for the Northern District of California holding that the attorney-client privilege and work product doctrine protect two memoranda prepared by Sanmina’s in-house tax attorneys. In its opening brief, the IRS is advancing a narrow view of attorney-client privilege and an expansive view of waiver.

Sanmina claimed a $503 million worthless stock deduction on its return. To support its return position, Sanmina provided the IRS a valuation report prepared by outside counsel DLA Piper. The valuation report included a footnote stating that the authors reviewed the two in-house tax attorney memos. The district court held that both memos were protected by the attorney-client privilege and work product doctrine and that no waiver occurred when Sanmina gave the memos to DLA Piper or when DLA Piper referenced them in the valuation report.

On appeal, the IRS contests the threshold applicability of the attorney-client privilege and work product doctrine as to only one of the memos and argues waiver as to both. The IRS argues that the memo was not privileged because it was “to file” and there is no evidence that (1) the memo was reviewed by anyone else in the company, (2) the company sought legal advice from the in-house attorney; or (3) it contained confidential client communications. According to the IRS: “The attorney-client privilege does not extend to an unsolicited memorandum prepared by Sanmina’s in-house tax counsel for their own records.” The IRS also argues that the work product doctrine does not apply because there was insufficient evidence that the memo was prepared because of anticipated litigation. On the issue of waiver, the IRS claims there was a subject matter waiver when Sanmina disclosed the valuation report to the IRS. The IRS also takes the position that Sanmina waived the privilege earlier when it disclosed the memos to outside counsel. “Because DLA Piper was not acting as a lawyer in preparing the valuation report, Sanmina’s disclosures to DLA Piper were not protected by the attorney-client privilege.” As to work product, the IRS argues Sanmina waived that protection when it produced the memos to outside counsel, knowing they would provide the valuation report to the IRS.

In its answering brief, Sanmina asserts that the IRS waived its arguments about the privileged status of the memo by not raising them at the district court. Below, the IRS argued the memo constituted business not legal advice, but abandoned that argument on appeal. Sanmina also challenges the IRS’s factual characterization of the memo, as well as the IRS’s contention that the tax attorney was not anticipating litigation. On the waiver point, Sanmina argues that the valuation report did not disclose the contents of the privileged memos, nor was disclosure of the memos to outside counsel inconsistent with maintaining their confidentiality as to the IRS.

The IRS’s reply brief is due March 9.

Sanmina – District Court Decision

Sanmina – Appellant Brief in CA9

Sanmina – Appellee Brief in CA9